BILL ANALYSIS                                                                                                                                                                                                    



                                                                     AB 976


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          Date of Hearing:  May 18, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 976  
          Steinorth - As Amended May 7, 2015


          


          Majority vote.  Tax levy.  Fiscal committee.


          SUBJECT:  Personal income tax: deductions: qualified pet  
          adoption costs.


          SUMMARY:  Allows a deduction, not to exceed $100, for qualified  
          costs paid or incurred adopting a pet from a qualified animal  
          rescue organization.  Specifically, this bill: 


          1)Allows, for taxable years beginning on or after January 1,  
            2016, and before January 1, 2021, a deduction, under the  
            Personal Income Tax (PIT) Law, equal to the "qualified costs"  
            paid or incurred by a taxpayer for the adoption of a  
            "qualified pet" from a "qualified animal rescue organization."








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          2)Limits the deduction allowed for a taxable year to $100. 


          3)Defines a "qualified pet" as either of the following animals  
            adopted from a qualified animal rescue organization that is  
            not used by the taxpayer in a trade or business or for the  
            production of income:


             a)   A pet over that age of four, as determined by the  
               qualified animal rescue organization; or,


             b)   A cat.


          4)Defines a "qualified animal rescue organization" as a public  
            animal control agency or shelter, humane society shelter, or  
            rescue group. 


          5)Defines "qualified costs" as amounts paid or incurred to a  
            qualified animal rescue organization to adopt a pet, not to  
            exceed $100.  


          6)Defines "rescue group" as an organization exempt from federal  
            income taxation, pursuant to Internal Revenue Code (IRC)  
            Section 501(c)(3), whose primary purpose is the placement of  
            dogs, cats, or other animals that have been removed from a  
            public animal control agency or shelter, society for the  
            prevention of cruelty to animals shelter, or humane society,  
            or that have been surrendered or relinquished to the rescue  
            group by the previous owner.


          7)Repeals the statutory provision authorizing the deduction on  








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            December 1, 2021.


          8)Takes effect immediately as a tax levy.


          EXISTING LAW:  


          1)Allows, under the PIT, in modified conformity with federal  
            income tax laws various deductions in computing the income  
            that is subject to the taxes imposed by that law, including  
            miscellaneous itemized deductions that are allowed only to the  
            extent that the aggregate amount of those deductions exceed 2%  
            of adjusted gross income (AGI).  

          2)Allows for the deduction of certain expenses to arrive at a  
            taxpayer's AGI.  These expenses include certain trade and  
            business expenses, losses from the sale or exchange of certain  
            property, alimony, and moving expenses.  Thus, all taxpayers  
            with these types of expenses receive the benefit of a  
            deduction, regardless of whether the taxpayer itemizes  
            deductions or uses the standard deduction.  These deductions  
            are known as "above-the-line" deductions.    

          FISCAL EFFECT:  The Franchise Tax Board (FTB) estimates General  
          Fund revenue loss of $100,000 in fiscal year (FY) 2016-17, and  
          $100,000 in FY 2017-18, and $100,000 in FY 2018-19.


          COMMENTS:  


           1)Authors Statement  .  The author has provided the following  
            statement in support of this bill: 



               AB 976 represents a modest investment towards supporting  








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               our local governments and animal shelters.  California  
               taxpayers currently spend over $120 million to support  
               local animal shelters for the ~ 800,000 pets they serve  
               each year.  Overcrowding poses constant pressure upon  
               shelters to reduce their intake and holding time; the  
               simplest way to combat the problem is to increase adoption  
               rates.





               Shelters have testified that providing discounted prices  
               for adoption have effectively increased their adoption  
               rates.  While not an identical offer, it is reasonable to  
               infer that an ongoing financial incentive in the form of a  
               tax deduction will have a similarly positive effect in  
               increasing animal adoptions.





               Increasing animal adoptions will help to relieve local  
               governments of the substantial cost pressure placed upon  
               them to support shelters.  Rather than distributing  
               additional local government dollars to animal shelters, a  
               tax deduction places the power in the taxpayer's hands to  
               reduce their cost share.  It is critical that the state do  
               its part in encouraging animal adoptions in an effort to  
               both reduce the cost to the public and save lives.





           2)Arguments in Support  :   The Humane Society states that  
            "[w]hile the tax deduction provision that AB 976 would create  
            cannot address all that ails our state's homeless pets and the  








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            agencies vested with looking out for their interests, it is a  
            relatively inexpensive and efficient way to send a strong  
            message to California taxpayers:  that never before has their  
            compassion been more critical to improving the chances for  
            animals who have done nothing wrong other than prove too  
            expensive for their downtrodden owners.  AB 976 asks  
            Californians to help out, and by promoting the benefits - to  
            the animals and to the government and charitable sectors - of  
            adopting rather than purchasing dogs and cats, the deduction  
            would increase the ability of municipal and charitable animal  
            protection organizations to continue their life-saving work."   
            The Humane Society further states that "the cost associated  
            with AB 976's provisions is modest when compared to the  
            potential for increased economic activity, reduced animal  
            sheltering costs and improved agency revenues, and lower  
            health and welfare expenses.  Only very small increases in the  
            number of pet adoptions would be necessary to demonstrate the  
            investment value of providing this deduction."

           3)Arguments in Opposition  :  The California Tax Reform  
            Association states that "[w]hile the intention of this bill is  
            reasonable, the legislature has previously rejected the use of  
            tax credits and deductions for animal adoption.  Promoting the  
            adoption of animals from animal rescue organizations through  
            the mechanism of a tax deduction is poor public policy."  The  
            California Tax Reform Association further states that the  
            deduction is poor public policy because the deduction is only  
            relevant to those who earn enough income to itemize, and the  
            choice of adopting a pet is properly motivated by compassion,  
            not finances.

           4)What is a "tax expenditure"  ?  Existing law provides various  
            credits, deductions, exclusions, and exemptions for particular  
            taxpayer groups.  In the late 1960s, U.S. Treasury officials  
            began arguing that these features of the tax law should be  
            referred to as "expenditures" since they are generally enacted  
            to accomplish some governmental purpose and there is a  
            determinable cost associated with each (in the form of  
            foregone revenues).  This bill enacts a new tax expenditure  








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            program, in the form of a PIT deduction, to encourage the  
            adoption of pets from qualified animal rescue organizations.  

           5)How is a tax expenditure different from a direct expenditure  ?   
            As the Department of Finance notes in its annual Tax  
            Expenditure Report, there are several key differences between  
            tax expenditures and direct expenditures.  First, tax  
            expenditures are reviewed less frequently than direct  
            expenditures once they are put in place.  This can offer  
            taxpayers greater certainty, but it can also result in tax  
            expenditures remaining a part of the tax code without  
            demonstrating any public benefit.  Second, there is generally  
            no control over the amount of revenue losses associated with  
            any given tax expenditure.  Finally, it should also be noted  
            that, once enacted, it takes a two-thirds vote to rescind an  
            existing tax expenditure absent a sunset date.  This  
            effectively results in a "one-way ratchet" whereby tax  
            expenditures can be conferred by majority vote, but cannot be  
            rescinded, irrespective of their efficacy, without a  
            supermajority vote.



           6)Above/Below the Line Deduction  :  An above-the-line deduction  
            is a deduction that allows a taxpayer to subtract amounts from  
            gross income when calculating their "adjusted gross income."   
            If the deduction is taken above the line, it is used to  
            determine the taxpayer's AGI.  An above-the-line deduction can  
            be taken by any taxpayer regardless of whether the taxpayer  
            itemizes.  Moreover, an above-the-line deduction reduces AGI,  
            and having a smaller AGI can lower many subsequent  
            calculations which will further reduce taxes.  As a result,  
            above-the-line deductions are more advantageous than those  
            taken below the line.  Once AGI is determined, a taxpayer can  
            either itemize deductions or take the standard deduction,  
            whichever is greater.  Once itemized deductions exceed the  
            standard deduction, other smaller deductions, such as  
            miscellaneous expenses, can be applied to increase tax  
            savings.  However, in order to take advantage of a  








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            miscellaneous deduction, total expenses must exceed 2% of AGI.  
             Other deductions provide their own AGI threshold.  

           7)Incentive or reward  ?  Generally, tax expenditures are enacted  
            to encourage socially beneficial behavior that would not take  
            place without a financial incentive.  As noted above, this  
            bill establishes a deduction to encourage the adoption of pets  
            from qualified animal rescue organizations.  It would be  
            difficult to find a person who did not consider this a worthy  
            goal.  At the same time, however, this bill limits the  
            deduction amount to $100 per taxable year.  Applying a  
            marginal tax rate of 9.3%, this would translate to a tax break  
            of less than $10.  The Committee may wish to consider whether  
            such an incentive is likely to encourage people to engage in  
            "new" behavior, or whether it would simply reward people who  
            would have adopted a pet in the absence of a deduction.   
            Additionally, given that less than one-half of individual  
            California taxpayers itemize their deductions; and given the  
            overall cap on total itemized deductions under the personal  
            income tax law, this clarification would result in many fewer  
            taxpayers being eligible to claim the deduction, and therefore  
            significantly lower impact to GF revenue.

           8)Prior Legislation  :

             a)   AB 2326 (Dickinson), of the 2013-14 Legislative Session,  
               would have allowed a deduction for qualified costs paid or  
               incurred adopting a pet from a qualified animal rescue  
               organization.  AB 2326 was held on the Assembly Committee  
               on Appropriations' Suspense File.


             b)   AB 233 (Smyth), of the 2009-10 Legislative Session,  
               would have allowed a deduction for qualified costs paid or  
               incurred by a taxpayer for the adoption of a pet from a  
               qualified animal rescue organization.  AB 233 was held on  
               the Assembly Committee on Appropriations' Suspense File.     
                 









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          REGISTERED SUPPORT / OPPOSITION:




          Support


          Humane Society of the United States




          Opposition


          American Federation of State, County, and Municipal Employees


          California Tax Reform Association




          Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)  
          319-2098




















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