BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 1161 |Hearing |7/1/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Olsen |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |2/27/15 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Bouaziz | |: | | ----------------------------------------------------------------- PRESCHOOL: PRIVATELY FUNDED PILOT PROGRAM: TAX CREDITS Establishes an income tax credit equal to 40% of the amount contributed by a taxpayer to the newly established California Preschool Investment Fund, and requires the California Department of Education to select five counties to participate in the investor-funded preschool pilot program. Background and Existing Law State law allows taxpayers to claim tax credits designed as incentives for taxpayers to incur certain expenses, such as child adoption, or to influence behavior, including business practices and decisions, such as research and development credits and Geographically Targeted Economic Development Area (GTEDA) credits. The Legislature typically enacts such tax incentives to encourage taxpayers to do something that, but for the tax credit, they would otherwise not do. State law authorizes an individual taxpayer to deduct certain expenses as itemized deductions, such as medical expenses, charitable contributions, interest, and taxes. Also, a corporate taxpayer may deduct charitable contributions but state law limits the amount of those deductions to 10% of the taxpayer's net income. Contributions in excess of 10% can be carried forward to the following five succeeding taxable years. AB 1161 (Olsen) 2/27/15 Page 2 of ? 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. Assembly Bill 1161 seeks to establish a similar tax credit program to the College Access Tax Credit established by SB 798 (De Leon, 2014). The College Access Tax Credit allows a specified percentage of cash contributions made to the College Access Credit Fund. The specified percentage is 60% for the 2014 taxable year, and declines by 5% each of the remaining two years the credit is available. 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. In 2014, the College Access Tax Credit Fund received a total of $6,199,289 in donations. Proposed Law Assembly Bill 1161 establishes an income tax credit, under the Personal Income Tax or the Corporation Tax Law, 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. The credit must be claimed on a timely filed original return. The credit 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. The credit 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. AB 1161 limits the aggregate amount of credits to $250 million for each calendar year. The bill provides that credit amounts claimed are factored into the calculation of the state's Proposition 98 obligation. The bill creates the Fund in the State Treasury and authorizes CDE to accept monetary contributions made by a person to the Fund for purposes of funding the Program. AB 1161 (Olsen) 2/27/15 Page 3 of ? AB 1161 requires the Franchise Tax Board (FTB) and CDE to place the information relating to the tax credit on their respective web sites, and authorizes FTB to prescribe rules, guidelines, or procedures necessary or appropriate to carry out the purposes of this section. The bill allows a county to apply to CDE, no later than June 1, 2016, for consideration of inclusion in the Program. The bill requires a county's local child care and development council to submit the application. A county selected to participate in the Program must annually report to CDE's Early Education and Support Division. The report shall contain the county's assessment of the program's performance. By September 1, 2016, AB 1161 requires CDE to determine the five counties to be included in the Program, ensure that urban, suburban, and rural counties are represented in the Program, and give priority to counties based on any of the following factors: The length of the county's waitlist of individuals seeking public child care assistance; The ability to increase the number of preschool slots available to children in the county; Whether the county received federal "Race to the Top" funds, with favorable consideration going to the counties that received the funds. The bill requires CDE to establish a procedure for making monetary contributions to the Fund and obtaining a receipt from CDE indicating the amount of contributions made by the taxpayer. A receipt, at a minimum, must contain the date of the monetary contribution and the contributor's name. CDE must allocate the tax credits on a first-come, first-served basis, and notify FTB of the credits allocated on at least a monthly basis. The money in the Fund must be allocated as follows: First to reimburse the General Fund for the aggregate amount of certified credits allowed; To reimburse CDE and FTB for administrative costs associated with the Program; AB 1161 (Olsen) 2/27/15 Page 4 of ? To support state preschools located in the five participating counties. The Program applies to taxable years beginning on or after January 1, 2016, and before January 1, 2020, and as of that date is repealed. Any moneys remaining in the Fund as of January 1, 2021, shall be transferred to any other state fund identified by CDE that provides funding for increased access to preschool programs for low-income children. State Revenue Impact FTB staff estimates that this bill will result in an annual revenue loss of $700,000 in the fiscal year (FY) 2015-16, $23 million in 2016-17, and $30 million in 2017-18. However, this bill requires funds to be transferred from the California Preschool Investment Fund to the General Fund, so that the net impact of Preschool Investment Fund Credits on the General Fund would be zero or a minimal gain due to timing and usage. Comments 1. Purpose of the bill. According to the author, "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." AB 1161 (Olsen) 2/27/15 Page 5 of ? 2. 2015-2016 Budget. On June 24, 2015, Governor Brown signed a $167.6 billion budget that dedicated over $265 million to expanding the child care system through higher child care reimbursement rates, and more slots. Additionally, the budget included $34.3 million to provide access to fullday State Preschool for an additional 7,030 low-income children, and $52.6 million General Fund to provide child care vouchers for an additional 6,800 low-income children. AB 1161 would further build on this year's budget, and provide even more funding for low income families seeking access to early education programs. 3. 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 requirements are met. 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, 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. 4. Have We Seen this Idea Before ? This creative idea was incorporated in SB 798 (De Leon, 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. AB 1161 (Olsen) 2/27/15 Page 6 of ? Specifically, SB 798 created a California College Access Tax Fund (CCATF), in the State Treasury, to receive cash contributions from taxpayers 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 awarded, upon appropriation by the Legislature, to the California Student Aid Commission for purposes of awarding Cal Grants to students. 5. 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 CDE and FTB for their administrative costs. Finally, it appears that this bill is intended to alleviate any negative impact on the Proposition 98 funding guarantee by providing that the annual amount of the credits claimed would be counted as "proceeds of taxes" for purposes of Proposition 98 calculations. 6. Generous Incentive. This bill creates one of the most generous tax credits ever allowed in California. Under existing law, taxpayers may only claim a deduction for contributions to charitable organizations. A tax credit, however, may be much more valuable, particularly to corporate taxpayers. While this bill limits 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. As a result, this bill could incentivize many corporate taxpayers to redirect charitable contributions to the Fund, creating a tax planning opportunity for corporate social responsibility programs without necessarily increasing total corporate giving. 7. No double dipping. The credit does not allow any deductions for amounts taken into account in the calculation of the credit, but a deduction may be made on a taxpayer's federal return. For example, Jane Doe contributes $10,000 to the Fund, thus she is AB 1161 (Olsen) 2/27/15 Page 7 of ? entitled to a $4,000 credit (40% ? $10,000). Jane may claim a $4,000 credit on her California tax return. She can also claim a $10,000 charitable contribution on her federal return. However, she will not be able to claim a charitable contribution on her California return. 8. Related Legislation; SB 295 (De Leon), extends the College Access Tax Credit program by one year and raises the credit percentage amount 5% per year. The bill is currently in Assembly Revenue and Taxation. 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. 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. 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. AB 1261 (Gorell), of the 2013-14 Legislative Session, was similar to AB 1161. AB 1261 would have created a temporary tax credit for cash contributions made to the California Preschool Investment Fund. AB 1261 was never heard by the Assembly Revenue and Taxation Committee. Assembly Actions Assembly Revenue and Taxation8-0 Assembly Appropriations 17-0 Assembly Floor 75-0 Support and Opposition (6/25/15) AB 1161 (Olsen) 2/27/15 Page 8 of ? Support : California Catholic Conference; County of San Bernardino; First 5 Association of California; Junior Leagues of California, the State Public Affairs Committee. Opposition : California Federation of Teachers; California Tax Reform Association. -- END --