BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 1161 |Hearing |7/1/15 |
| | |Date: | |
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|Author: |Olsen |Tax Levy: |No |
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|Version: |2/27/15 |Fiscal: |Yes |
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|Consultant|Bouaziz |
|: | |
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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.
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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.
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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;
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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."
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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.
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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
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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)
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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.
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