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       |
          |----------+---------------------------------+-----------+---------|
          |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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