BILL ANALYSIS                                                                                                                                                                                                    ”



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          ASSEMBLY THIRD READING


          AB  
          976 (Steinorth)


          As Amended  May 7, 2015


          Majority vote.  Tax levy


           -------------------------------------------------------------------- 
          |Committee       |Votes |Ayes                   |Noes                |
          |                |      |                       |                    |
          |                |      |                       |                    |
          |----------------+------+-----------------------+--------------------|
          |Revenue &       |7-2   |Brough, Dababneh,      |Ting, Quirk         |
          |Taxation        |      |Gipson, Roger          |                    |
          |                |      |HernŠndez, Mullin,     |                    |
          |                |      |Patterson, Wagner      |                    |
          |                |      |                       |                    |
          |----------------+------+-----------------------+--------------------|
          |Appropriations  |15-1  |Gomez, Bigelow, Bonta, |Gordon              |
          |                |      |Calderon, Chang, Daly, |                    |
          |                |      |Eggman, Gallagher,     |                    |
          |                |      |                       |                    |
          |                |      |                       |                    |
          |                |      |Eduardo Garcia,        |                    |
          |                |      |Holden, Jones, Rendon, |                    |
          |                |      |Wagner, Weber, Wood    |                    |
          |                |      |                       |                    |
          |                |      |                       |                    |
           -------------------------------------------------------------------- 


          SUMMARY:  Allows a deduction, not to exceed $100, for qualified  
          costs paid or incurred adopting a pet from a qualified animal  








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          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."


          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 the 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,  








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            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  
            December 1, 2021.


          8)Takes effect immediately as a tax levy.


          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee, estimated annual General Fund revenue decrease of  
          approximately $100,000.


          COMMENTS:  


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


               AB 976 represents a modest investment towards  
               supporting our local governments and animal shelters.   
               California taxpayers currently spend over $120 million  
               to support local animal shelters for the approximately  
               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  








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               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 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,  








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            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, United States 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 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.









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          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 adjusted gross income (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 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  
            Legislature 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 General  








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            Fund revenue.








          8)Prior Legislation:
             a)   AB 2326 (Dickinson) of the 2013-14 Regular 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 Appropriations Committee's  
               Suspense File.


             b)   AB 233 (Smyth) of the 2009-10 Regular 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  
               Appropriations Committee's Suspense File.      




          Analysis Prepared by:                                               
                          Carlos Anguiano / REV. & TAX. / (916) 319-2098   
          FN: 0000541


















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