BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 976 |Hearing |6/24/15 |
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|Author: |Steinorth |Tax Levy: |Yes |
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|Version: |5/7/15 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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PERSONAL INCOME TAX: DEDUCTIONS: QUALIFIED PET ADOPTION
COSTS
Allows a deduction, not to exceed $100, for qualified costs paid
or incurred adopting a pet from a qualified animal rescue
organization.
Background and Existing Law
California law allows various income tax credits, deductions,
and sales and use tax exemptions to provide incentives to
compensate taxpayers that incur certain expenses, such as child
adoption, or to influence behavior, including business practices
and decisions, such as research and development credits. The
Legislature typically enacts such tax incentives to encourage
taxpayers to do something that but for the tax credit, they
would not do. The Department of Finance is required to annually
publish a list of tax expenditures.
California law allows various deductions under the personal
income tax (PIT), in modified conformity with federal income tax
laws, 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). These
deductions are known as "below-the-line" deductions.
State law also allows for the deduction of certain expenses to
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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. 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.
Proposed Law
Assembly Bill 976 allows a below-the-line deduction equal to the
qualified costs paid or incurred during the taxable year by a
taxpayer for the adoption of a qualified pet from a qualified
animal rescue organization. The deduction would be claimed as a
miscellaneous itemized deduction and would be limited to $100
per taxable year.
AB 976 defines the following terms as follows:
"Qualified animal rescue organization" means a public
animal control agency or shelter, a humane society shelter,
or rescue group.
"Qualified costs" means amounts paid or incurred to a
qualified animal rescue organization to adopt a pet, not to
exceed one hundred dollars ($100).
"Qualified pet" means a pet over four years of age or a
cat, and that is not used by the taxpayer in a trade or
business or for the production of income.
"Rescue group" means an organization, exempt from
federal income taxation under Internal Revenue Code (IRC)
section 501(c) (3), whose primary purpose is to place dogs,
cats, or other animals 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.
AB 976 takes effect immediately as a tax levy, and applies to
taxable years beginning on or after January 1, 2016, and before
January 1, 2021.
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State Revenue Impact
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. Purpose of the bill. According to the author, "AB 976 takes a
modest step to help shelter animals most in need. By
establishing a tax deduction for the adoption of cats and older
dogs, we encourage persons interested in adoption to consider
pets which might otherwise be overlooked. Shelters throughout
the state have testified that offering any financial incentive
for adoption is effective. However, shelters are already
strapped for funds, and are limited in the number and size of
discounts they can provide. AB 976 allows us to do our part to
assist shelters, benefitting California's animals and taxpayers.
With over $120 million tax dollars directly supporting animal
shelters each year, reducing shelter overcrowding and lowering
euthanasia rates will reduce local government costs and save
lives."
2. Incentive? Generally, tax expenditures are enacted to
encourage socially beneficial behavior that would not take place
without a financial incentive. AB 976 establishes a deduction
to encourage the adoption of pets from qualified animal rescue
organizations. Yet, because this bill limits the deduction
amount to $100 per taxable year, applying a marginal tax rate of
9.3%, this bill would only translate to a tax break of less than
$10.
3. A new 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 would create a new tax expenditure,
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costing the general fund almost $100,000 dollars in foregone
revenue each year. The tradeoff for providing a new tax
expenditure, resulting in revenue losses, is higher taxes or
reductions to other services or programs.
4. 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, 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.
5. 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
below-the-line deductions, such as miscellaneous expenses, can
be applied to increase tax savings. However, in order to take
advantage of a miscellaneous below-the-line deduction, total
expenses must exceed 2% of AGI and all deductions in total must
exceed the standard deduction. Currently, less than one-half of
California individuals itemize their deductions.
6. Reverse nonconformity. California law does not automatically
conform to changes to federal tax law, except under specified
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circumstances. Instead, the Legislature must affirmatively
conform to federal changes. Generally, when the federal
government changes its tax laws, California catches up by
enacting its own legislation the following year to reduce
differences between the two codes, thereby easing the tax
preparation burden on taxpayers, tax preparers, and the
Franchise Tax Board. Currently, under federal tax law there is
no pet deduction. If AB 976 becomes law, taxpayers would be
entitled to a deduction for state tax purposes, but not for
federal tax purposes.
7. Kittens, but not puppies. The tax deduction allowed in AB
976 applies to all cats, but all other pets adopted must be over
4 years old to qualify. According to the author, in 2013 54% of
cats and 30% of dogs in shelter care were ultimately euthanized.
The bill seeks to mitigate the disparity by incentivizing the
adoption of cats over other pets.
Assembly Actions
Assembly Revenue and Taxation 7-2
Assembly Appropriations 15-1
Assembly Floor 66-8
Support and
Opposition (6/17/15)
Support : American Society for the Prevention of Cruelty to
Animals; Animal Rescue Media and Education; Humane Society of
the United States; State Humane Association of California.
Opposition : American Federation of State, County, and Municipal
Employees; California Tax Reform Association.
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