BILL ANALYSIS Ó
AB 1161
Page A
Date of Hearing: April 20, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 1161
(Olsen and Atkins) - As Introduced February 27, 2015
Majority Vote. Fiscal Committee.
SUBJECT: Preschool: privately funded pilot program: tax
credits
SUMMARY: Allows an income tax credit equal to 40% of the
amount contributed by a taxpayer to the newly established
California Preschool Investment Fund (Fund) and requires the
California Department of Education (CDE) to select five counties
to participate in the investor-funded preschool pilot program
(Program) for the purposes of subsidizing preschool services for
eligible families. Specifically, this bill:
1)Declares that, by providing an additional source of funding,
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California can expand the number of preschool slots and
subsidies needed to reduce the waitlist for parents seeking
prekindergarten childcare assistance.
2)Creates the Program, which is a five-county investor funded
preschool program to be administered by the CDE and allows a
county to apply to the CDE, no later than June 1, 2016, for
consideration of inclusion in the Program. Requires a
county's local child care and development planning council to
be responsible for making the application.
3)Requires a county selected to participate in the Program to
annually report to the CDE's Early Education and Support
Division. The report shall contain the county's assessment of
how the program is performing.
4)Creates the Fund in the State Treasury to receive monetary
contributions.
5)Authorizes the CDE to accept monetary contributions made by a
person to the Fund for purposes of funding the Program.
6)Requires the CDE to do all of the following:
a) Determine, no later than September 1, 2016, the five
counties to be included in the Program.
b) In making this determination, ensure that urban,
suburban, and rural counties are represented in the Program
and give priority to counties that meet any of the
following factors:
i) The length of the county's waitlist of individuals
seeking public child care assistance;
ii) The ability to increase the number of preschool
slots available to children in the county;
iii) Whether the county received federal Race to the Top
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funds authorized under the federal American Recovery and
Reinvestment Act of 2009 (Public Law 111-5), with
favorable consideration going to the counties that
received the funds.
c) Establish a procedure for making monetary contributions
to the Fund and obtaining a receipt from the CDE indicating
the amount of contributions made by the person. A receipt,
at a minimum, must contain the date of the monetary
contribution and the contributor's name.
d) Subject to the prescribed annual cap, allocate tax
credits to taxpayers on a first-come, first-served basis.
e) Notify the FTB of the credits allocated on at least a
monthly basis.
7)Requires that the money in the Fund be allocated as follows:
a) Be used first to reimburse the General Fund for the
aggregate amount of certified credits allowed;
b) Upon appropriation, to the CDE and Franchise Tax Board
(FTB) to reimburse administrative costs associated with the
Program;
c) Last, upon appropriation, to support state preschools
located in the five participating counties.
8)Provides that the Program shall remain in effect only until
January 1, 2021, and as of that date is repealed, unless a
later enacted statute deletes or extends that date.
9)Specifies that any moneys remaining in the Fund as of January
1, 2021, shall be transferred to any other state fund
identified by the CDE that provides funding for increased
access to preschool programs for low-income children.
10)Allows a tax credit for taxable years beginning on or after
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January 1, 2016, and before January 1, 2020, under either the
Personal Income Tax (PIT) or the Corporation Tax (CT) Law, in
an amount equal to 40% of the amount contributed by the
taxpayer during the taxable year to the Fund.
11)Allows the credit only if the taxpayer has:
a) Contributed to the Fund and received a receipt from the
CDE indicating that the taxpayer has made the contribution;
and,
b) Claimed the credit on a timely filed original return.
12)Requires the taxpayer to provide the receipt to the FTB, upon
request.
13)Allows a carryover of the credit to reduce the taxpayer's tax
in the following tax year, and the succeeding four years if
necessary, until the credit is exhausted.
14)Reduces the amount of the charitable deduction, otherwise
allowed to the taxpayer, for contributions made to the Fund by
the amount of the credit allowable for the same contribution.
15)Requires the FTB and CDE to place the information relating to
the tax credit on their respective web sites, as provided.
16)Authorizes the FTB to prescribe rules, guidelines, or
procedures necessary or appropriate to carry out the purposes
of this section.
17)Exempts the FTB administrative pronouncements regarding the
credit and its implementation from the requirements of the
Administrative Procedures Act (Chapter 3.5 (commencing with
Section 11340) of the Government Code.)
18)Limits the aggregate amount of credits that may be allowed
under both the PIT and CT laws to $250 million for each
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calendar year.
19)Specifies that, for purposes of Article XVI, Section 8(b) of
the California Constitution, the total annual amount of the
credit claimed shall be included in the definition of "the
General Fund revenues that are the proceeds of taxes," as
though they were proceeds of taxes.
EXISTING FEDERAL LAW treats contributions to a state government
fund, such as an educational special fund, as charitable
contributions. These contributions may be deducted as itemized
deductions.
EXISTING STATE LAW:
1)Allows various tax credits under both the PIT Law and the CT
Law. These credits are generally designed to provide relief
to taxpayers who incur specified expenses or to encourage
socially beneficial behavior.
2)Authorizes an individual taxpayer to deduct certain expenses
as itemized deductions, such as for example, medical expenses,
charitable contributions, interest, and taxes.
3)Authorizes a corporate taxpayer to deduct charitable
contributions but limits the amount of those deductions to 10%
of the taxpayer's net income. Allows contributions in excess
of 10% to be carried forward to the following five succeeding
taxable years.
4)Allows a tax credit for a specified percentage of cash
contributions made to the College Access Credit Fund upon the
receipt of certification from the California Educational
Facilities Authority. The specified percentage is 60% of the
amount contributed that is certified and allocated for the
2014 taxable year. The specified percentage declines by 5%
for each of the remaining two years the credit is available.
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The maximum aggregate amount of credit that may be allocated
and certified for each calendar year is $500 million plus any
previously unallocated and uncertified amounts.
5)Establishes eligibility for child care services and child
development programs administered by the CDE and requires the
Superintendent of Public Instruction to adopt rules and
regulations on eligibility, enrollment and priority of
services needed for implementation.
6)Establishes the California State Preschool Program (CSPP) and
provides that the programs shall include, but not be limited
to, part-day age and developmentally appropriate programs
designed to facilitate the transition to kindergarten for
three- and four-year-old children in educational development,
health services, social services, nutritional services, parent
education and parent participation, evaluation, and staff
development. (EC Section 8235).
7)Defines "income eligible" as a family whose adjusted monthly
income is at or below 70% of the state median income (SMI),
adjusted for family size, and adjusted annually. For the
2014-15 fiscal year, the income eligibility limits shall be
70% of the SMI that was in use for the 2007-08 fiscal year,
adjusted to family size. (EC Code Section 8263.1).
FISCAL EFFECT: The FTB staff estimates that this bill will
result in an annual revenue loss of $0.7 million in the fiscal
year (FY) 2015-16, $23 million in FY 2016-17, and $30 million in
FY 2017-18.
COMMENTS:
1)Author's Statement . The author has provided the following
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statement in support of this bill:
"The benefits of an early education are not only seen in
classrooms - students, businesses, and the entire communities
profit when children participate in a preschool education.
"Although the State does provide access to early education
programs, our counties are struggling to meet the demands of
current enrollment trends. Due to understandable budget
constraints on preschool programs, there are too many families
vying for too few spots for their children. Something needs
to be done to ensure that families seeking to take advantage
of the benefits of early education for their children are
access those opportunities.
"AB 1161 seeks to provide a creative answer to the need to
grow early education opportunities by harnessing the power of
the private sector. It would create a self-supporting,
public/private funding partnership that would increase access
to early education for low-income families in order to put our
students on the right path in school and in life by preparing
them for academic success, ultimately ensuring they are better
prepared for the workforce."
2)Arguments in Support . The proponent of this bill state that,
according to recent numbers, over 200,000 families in
California are currently waiting for the state preschool
slots. The proponent note that a "number of studies have
shown clear evidence of the substantial benefits of early
education" and argue that AB 1161 "will ensure increased
access to preschool that will ultimately lead to academic
success." The proponent argues that this bill will
"incentivize corporate America to invest into a newly
established state fund named the California Preschool
Investment Fund (CalPIF)" and "will ensure increased access to
preschool that will ultimately lead to academic success."
3)Arguments in Opposition . The opponent argues that AB 1161
"would not properly allocate funding to programs in need of
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aid and would unnecessarily subsidize programs that are
already being funded." The opponent also notes that "AB 1161
would add redundancies by giving taxpayers 40 percent tax
credits for contributions that they are already allowed to
make tax deductions on." And, while this bill "has noble
intentions," it fails "to properly target the populations that
would most benefit from such additional funding." The
opponent asserts that "there are more effective ways of
assisting Californian preschoolers."
4)What Would this Bill Do ? For years beginning on January 1,
2016, and before January 1, 2021, this bill would create the
California Preschool Investment Pilot Program, would establish
the Fund, and would authorize the CDE to administer the
Program and to accept monetary contributions made to the Fund.
This bill would also establish a process whereby an
individual, partnership, corporation, limited liability
company, association, or other group, however organized, may
donate to the Fund to subsidize preschool slots in five
counties. The moneys in the Fund would be disbursed by the
CDE to provide for the specific purpose of funding the
California state preschool programs and supporting state
preschools locating in one of the five counties selected by
the CDE to participate in the Program.
In addition, this bill would allow taxpayers, upon the issuance
of the receipt by the CDE, to claim a credit for contributions
made to the Fund. This bill would cap the total aggregate
amount of credit that may be claimed by the taxpayers to $250
million for each calendar year. The percentage used to
calculate the credit would be 40% of the amount contributed
during any of the taxable years beginning on or after January
1, 2016, and before January 1, 2020.
5)The Child Care and Development Services Act . The CDE
administers a child care and development system, maintaining
1,401 service contracts with approximately 758 public and
private agencies supporting and providing services to children
from birth through 12 years of age. The California State
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Preschool Program (CSPP) offers part-day and full-day
preschool programs through contracts with local educational
agencies, private contractors, and colleges. These programs
are required to comply with not just health and safety
standards under Title 22 regulations, but also higher
developmental and teacher qualification standards under Title
5 regulations adopted by the CDE. Priority for enrollment
goes to four- or three-year-old neglected or abused children
who are recipients of Child Protective Services or recipients
who are at risk of being neglected or abused, without regard
to income. Second priority goes to four-year-old children who
were enrolled in CSPP as a three-year-old, followed by
four-year-old children with the lowest income ranking.
Three-year-old children may be enrolled after four-year-olds
are enrolled. Income eligibility is 70% of the SMI ($46,896
for a family of four).
6)County Waitlist . This bill requires the CDE to give priority
to counties based on the length of the county's waitlist of
individuals seeking public child care assistance, the ability
to increase the number of preschool slots, and whether the
county received federal Race to the Top funds, with favorable
consideration given to counties that received the funds. With
regard to a waitlist, each contractor maintains a list, but
there is no longer a centralized list in each county. From
2005 to 2011, funds were provided to establish centralized
eligibility lists in each county, but were terminated in 2011.
It is unclear how CDE will determine the waitlist in each
county.
7)Annual Report . This bill requires a county selected to
participate in the program to annually report to the CDE
regarding the county's assessment of how the program is
performing. It is unclear who "county" is in reference to.
This bill directs local child care planning councils to submit
applications. The author may wish to consider amending the
bill to require planning councils to submit the report to the
CDE.
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8)An Innovative Tax Idea to Capture the Federal Dollars . This
bill is based on a very creative idea of "capturing" federal
dollars by enacting a state charitable tax credit. In 2013,
Phillip Blackman, Associate Director of Development at the
Penn State Dickinson School of Law, and Kirk Stark, Professor
and Vice Dean at the UCLA School of Law, outlined a roadmap
for states to capture federal moneys by creating a state tax
credit for cash contributions to a state entity, with very
little cost to the state. [Capturing Federal Dollars with
State Charitable Tax Credits, 139 Tax Notes 53 (2013).] The
authors relied on the Internal Revenue Service (IRS) memo
issued on October 27, 2010 in concluding that a state, by
providing a tax credit for charitable contributions to a state
fund, will be able to leverage federal dollars to generate new
revenues for the fund, without a substantial increase in state
costs. The idea hinges on the current IRS view that
charitable contributions not only to non-profits, but also to
a state, are eligible for the federal tax deduction if certain
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requirements are met.<1>
Thus, if the Legislature were to create the credit proposed by
this bill, a taxpayer who makes a $100 contribution to the
Fund would receive $40 back from the state via the state tax
credit and, depending on the taxpayer's federal tax rate,
could save as much as $28 in federal income taxes. In turn,
the CDE, which is a state agency, would keep $60 out of each
$100 contributed. The state, as a whole, will potentially
raise significant revenues. The taxpayer, on the hand, would
only incur a net out-of-pocket expense of $32.
9)Have We Seen this Idea Before ? This creative idea was
incorporated in SB 798 (De Leon), Chapter 367, Statutes of
2014, which established an income tax credit for cash
contributions made to a state fund with an aggregate credit
cap of $500 million per calendar year. Specifically, SB 798
created a California College Access Tax Fund (CCATF), in the
State Treasury, to receive cash contributions from taxpayers
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<1> Generally, to be deductible as a charitable contribution
under Internal Revenue Code (IRC) Section 170, a transfer to a
charitable organization or government unit must be a gift. The
IRS memo stated that a gift is a transfer of money or property
without receipt of adequate consideration, made with charitable
intent. A transfer is not made with charitable intent if the
transferor expects a direct or indirect return benefit
commensurate with the amount of the transfer. However, a
federal or state charitable contribution deduction is not
regarded as a return benefit that negates charitable intent,
reducing or eliminating the deduction itself. The IRS Chief
Counsel memo noted that a state or local tax benefit is treated
for federal tax purposes as a reduction, or potential reduction,
in tax liability. As such, it is reflected in a reduced
deduction for the payment of state or local tax under IRC
Section 164, and not as consideration that might constitute a
quid pro quo, for purposes of IRC Section 170. Accordingly, a
taxpayer may take a deduction under IRC Section 170 for the full
amount of their charitable contributions of cash, assuming the
requirements are otherwise met.
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and to allow taxpayers making the contributions to receive a
state income or franchise tax credit in a specified
percentage. The credit is effective for taxable years
beginning on or after January 1, 2014 and until January 1,
2017. The amounts contributed to the CCATF would be used
first to make the General Fund whole for each taxable year in
which the credit was allowed and then would have been awarded,
upon appropriation by the Legislature, to the California
Student Aid Commission for purposes of awarding Cal Grants to
students.
As noted by Professor Stark and Mr. Blackman, this type of a
state tax credit is very beneficial to taxpayers subject to
the federal Alternative Minimum Tax (AMT) and the tax savings
for that type of donation are far more than the tax savings
normally arising from charitable gifts.
It was suggested that the program could have been made even
more attractive to potential donors by either increasing the
credit percentage or making the credit transferrable or
allowable against the sales tax. The Legislature, however,
declined the invitation and kept the credit percentage at 60%
and below.<2>
10)How Different is this Bill ? While based on the same tax
concept as SB 798, this bill proposes to leverage federal
funds for a very different purpose - preschool education. The
credit percentage, while still very generous, would be lower -
40% versus 60%. Furthermore, similarly to SB 798, it would
compensate the General Fund for the lost revenues and
reimburse the CDE and the FTB for their administrative costs.
Finally, it appears that this bill is intended to alleviate a
negative impact on Proposition 98 funding guarantee by
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<2> In fact, a credit percentage greater than 72% would have
ensured that donors experience no out-of-pocket costs for their
donations. As noted in the Senate Governance and Finance
Committee analysis of SB 284, which was almost identical to SB
798, these changes would have created a significant precedent in
tax law that could have resulted in unintended consequences.
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providing that the annual amount of the credits claimed would
be counted as "proceeds of taxes" for purposes of Proposition
98 calculations.
11)New Money for Preschool Programs ? This bill encourages
taxpayers to make charitable donations to the state's
preschool program through a 40% income and franchise tax
credits. If enacted, this credit would be one the most
generous tax credits California allows. Such a credit is sure
to entice taxpayers to contribute to the Fund instead of a
regular non-profit organization. Under existing law,
taxpayers may only claim a charitable deduction for
contributions to qualified charitable organizations. A
deduction is generally more valuable to high-income taxpayers
because the "value" of a deduction varies with the marginal
tax rate (or tax bracket) of the taxpayer. For example, an
individual taxpayer in the 10% tax bracket would receive a tax
benefit of $10 on a $100 contribution. In contrast, a
taxpayer in the 25% tax bracket will save $25 in tax out of
every $100 contributed to a charitable entity. Thus, assuming
the same level of charitable contributions, high-income
taxpayers, presumably with a greater ability to pay taxes,
would receive a greater tax benefit from the charitable
deduction than the lower income taxpayer.
The value of a tax credit, on other hand, is the same,
regardless of the tax rate. Thus, it is generally more
appealing to taxpayers. Furthermore, charitable deductions
allowed to corporate taxpayers are limited to 10% of the
taxpayer's net income. As such, this bill would greatly
benefit corporate taxpayers willing to contribute to the Fund.
In fact, the credit proposed by this bill may be so great
that it would redirect contributions from charities that
currently receive them to the preschool program. Instead of
making a donation to a non-profit university or school, for
example, a taxpayer may choose to use this tax credit instead.
Furthermore, in light of the new program created by SB 798, it
is unclear how many taxpayers will forgo an opportunity to
receive a 60% tax credit in favor of a 40% tax credit offered
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by this bill. The Committee may wish to consider whether this
bill will result in new revenue or would simply redirect
charitable funds from other charities to the preschool
program.
12)The Sky is the Limit . While this bill attempts to limit the
total aggregate amount of the credit, it does not place any
limit on an amount that each taxpayer may claim. Hence, a few
contributions from large individual or corporate taxpayers may
easily reach the total cap, thereby discouraging other
taxpayers to contribute. The Committee may wish to consider
whether there should be a limit on the amount of the credit
claimed by a taxpayer.
13)Prior Legislation .
a) SB 798 (De Leon), Chapter 367, Statutes of 2014, created
the College Access Tax Credit program, a tax credit program
for cash contributions made to the California College
Access Tax Fund with an aggregated cap of $500 million per
calendar year. The tax credit is available to taxpayers
for taxable years beginning on or after January 1, 2014 and
until January 1, 2017.
b) SB 284 (De Leon), of the 2013-14 Legislative Session,
was similar to SB 798. SB 284 would have created the
California College Access Tax Fund program and would have
allowed a temporary tax credit for cash contributions made
to the Fund. SB 284 was vetoed.
c) AB 2107 (Gorell and Olsen), of the 2013-14 Legislative
Session, was similar to AB 1161. AB 2107 would have
created a temporary tax credit for cash contributions made
to the California Preschool Investment Fund. AB 2107 was
held on the Assembly Appropriations Committee's Suspense
File.
d) AB 1261 (Gorell), of the 2013-14 Legislative Session,
was similar to AB 1161. AB 1261 would have created a
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temporary tax credit for cash contributions made to the
California Preschool Investment Fund. AB 1261 was never
heard by this Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
Junior Leagues of California, the State Public Affairs Committee
Opposition
American Federation of State, County and Municipal Employees
(AFSCME), AFL-CIO
Analysis Prepared by: Sophia Kwong Kim / ED. /Oksana Jaffe /
REV. & TAX. / (916) 319-2098