BILL ANALYSIS Ó
AB 1577
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Date of Hearing: April 18, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 1577
(Eggman) - As Amended March 9, 2016
Majority vote. Fiscal committee.
SUBJECT: Income taxes: credits: food bank donations
SUMMARY: Expands the existing tax credit program under the
Personal Income Tax (PIT) Law and Corporation Tax (CT) Law for
contributions of qualified donation items to a food bank and
extends the program until January 1, 2022. Specifically, this
bill:
1)Broadens the definition of a "qualified taxpayer" (QT) to
include persons responsible for growing or raising a qualified
donation item, or harvesting, packing, or processing a
qualified donation item.
2)Expands the definition of "qualified donation item" (QDI) to
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include, in addition to fresh fruits and vegetables, the
following raw agricultural products and processed foods, as
specified:
a) "Fruit, nuts or vegetables" as defined in Food and
Agricultural Code (F&AC) Section 42510;
b) "Meat food product" as defined in F&AC Section 18665;
c) "Poultry" as defined in F&AC Section 18675;
d) "Eggs" as defined in F&AC Section 75027;
e) "Fish" as defined in F&AC Section 58609; and,
f) All of the following food items as defined in Health and
Safety Code (H&SC) Section 109935:
i) Rice;
ii) Beans;
iii) Fruit, nuts, and vegetables in canned, frozen,
dried, dehydrated, and 100-percent juice forms;
iv) Any cheese, milk, yogurt, butter, or dehydrated milk
meeting the requirements in Division 15 (commencing with
Section 32501) of the F∾
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v) Vegetable oil and olive oil;
vi) Soup, pasta sauce, and salsa;
vii) Infant formula subject to Section 114094.5 of the
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viii) Bread and pasta; and,
ix) Canned meats and canned seafood.
3)Increases the allowed credit percentage from 10% to 15%.
4)Provides that the allowed credit would be calculated, not
according to inventory costs, but rather as 15% of the
qualified value of the QDI.
5)Defines "qualified value" as either of the following:
a) The weighted average wholesale sale price based on the
qualified taxpayer's total like grade wholesale sales of
the donated item sold within the calendar month of the
qualified taxpayer's donation; or,
b) The nearest regional wholesale market price for the
calendar month of the donation based upon the same grade
products as published by the United States Department of
Agriculture's Agricultural Marketing Service, or its
successor. This qualified value may be used only if no
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wholesale sales of the donated item have occurred in the
calendar month of the qualified taxpayer's donation.
6)Provides that the credit amount may not be less than what
would otherwise be available as per existing law - Chapter
503, of the Statutes of 2011.
7)Requires the donor to provide the food bank the qualified
value and information regarding where the donation items were
grown and/or processed.
8)Upon receipt and acceptance of the donations, the food bank is
required to sign and provide to the donor a certificate, which
shall include certain information, as specified, including the
acceptance, grade, origin and qualified value of the donated
items.
9)Requires the FTB to include in its annual report to the
Legislature, among other things, the estimated value and the
origin of the QDIs.
10) Requires a qualified taxpayer to claim the credit only
on a timely filed return.
11) Extends the tax credit program until January 1, 2022,
and repeals it on December 1, 2022.
12) Renames the State Emergency Food Assistance Program
(SEFAP) as the CalFood Program (CFP), effective on or after
January 1, 2017.
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EXISTING LAW:
1)Allows a tax credit, under PIT law and the CT law, to
qualified taxpayers (defined as the person(s) responsible for
planting a crop, managing the crop, and harvesting the crop
from the land) in an amount equal to 10% of the cost that
would otherwise be included in, or required to be included in,
inventory costs, as specified under federal law, with respect
to the donation of fresh fruits or fresh vegetables to food
banks located in California. (Chapter 503, Statutes of 2011.)
2)Authorizes a deduction for charitable contributions, subject
to certain limitations that depend on the type of taxpayer,
the property contributed and the donee organization. The
deduction amount for charitable contributions of inventory is
generally limited to the taxpayer's basis in the inventory,
usually its cost. The amount of deduction for corporate
taxpayers may not exceed 10% of the corporation's net income.
3)Requires the State Department of Social Services to establish
and administer the SEFAP to provide food and funding to food
banks.
4)Allows corporations that are members of the same unitary
combined reporting group to assign "eligible" credits to other
members of the group. An "eligible" credit is any credit
earned by the taxpayers in a taxable year beginning on or
after July 1, 2008, or any credit earned in any taxable year
beginning before July 1, 2008, that was eligible to be carried
forward to the first taxable year beginning on or after July
1, 2008. The credit assignment is made by an irrevocable
election. The assignor and assignee taxpayers must be members
of the same combined reporting for the taxable year in which
the credit is earned and the taxable year the credit is
assigned.
5)Applies performance measurement standards to any new tax
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credit under either the PIT or CT Law if enacted by a bill
introduced on or after January 1, 2015. Specifically,
existing law requires the all of the following:
a) Specific goals, purposes, and objectives that the tax
credit will achieve:
b) Detailed performance indicators for the Legislature to
use when measuring whether the tax credit meets the goals,
purposes, and objectives stated in the bill; and,
c) Data collection requirements to enable the Legislature
to determine whether the tax credit is meeting, failing to
meet, or exceeding those specific goals, purposes, and
objectives, including a requirement to specify both of the
following:
i) The baseline data, to be collected and remitted in
each year the credit is effective, for the Legislature to
measure the change in performance indicators; and,
ii) The taxpayers, state agencies, or other entities
required to collect and remit data
FISCAL EFFECT: The Franchise Tax Board (FTB) estimates that
this bill will reduce General Fund revenue by $0.6 million in
fiscal year (FY) 2016-17, $1.3 million in FY 2017-18, and $1.6
million in 2018-19.
COMMENTS:
1)Author's Statement : The Author has provided the following
statement in support of this bill:
"California is the leader agricultural producer in the
U.S., yet many Californians still suffer from hunger and
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poor nutrition. AB 1577 will broaden the existing state
tax credit offered to agricultural producers for donations
to qualified California non-profits, such as food banks.
It expands the list of eligible products to include other
fresh items and a limited set of core shelf-stable items.
It also moves the tax credit to 15% of the donated items'
wholesale value, and extends the sunset of this program to
2022."
2)Existing Tax Credit: Food Banks and Food Insecurity .
According to the California Association of Food Banks'
(CAFBs) Web site, California is ranked 19th for food
insecurity in the nation with a food insecurity rate of
16.2%, translating into 6.1 million Californians with, on
average, one out of six people in California not knowing
from where their next meal will come. All the more
troubling is that the child food insecurity rate is 26.3%,
meaning 2.4 million, or more than 1 in 4 children, in
California may go to bed hungry each night.
In 2011, a state tax credit program was enacted into law to
allow a qualified taxpayer, under both the PIT and CT laws,
a tax credit in an amount equal to 10% of the inventory
costs of the fresh fruits or fresh vegetables donated to
food banks located in California. (Chapter 503, Statutes of
2011.)
3)Tax Credit vs. Grant Program . Each year, more and more
interest groups are seeking ways to increase funding through
alternative means, such as tax check-offs and tax credits.
However, 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, which can offer
taxpayers greater certainty but can also result in tax
expenditures remaining a part of the tax code in perpetuity
without demonstrating any public benefit. Second, there is
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generally no control over the amount of revenue losses
associated with any given tax expenditure. Finally, the vote
requirements for direct expenditures and tax expenditures are
different. While it takes a two-thirds' vote to make a
budgetary appropriation, a tax expenditure measure can be
enacted by a simple majority vote. It should also be noted
that once enacted, it generally takes a two-thirds vote to
rescind an existing tax expenditure. 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.
Although well intentioned, this bill represents an attempt to
use the tax code to accomplish a public policy objective that
may be more efficiently addressed through a direct outlay of
state funds. To this end, this bill proposes to deliver a tax
subsidy to taxpayers that donate fresh produce as well as
processed foods to food banks. The FTB staff estimates that
this bill would eventually result in an annual GF revenue loss
of $1.6 million. However, it is unknown how many meals food
banks would be able to provide in exchange for this GF revenue
loss. While this credit is limited in scope and fiscal
impact, and focuses only on food donated, it is unclear
whether the tax code is the best way to subsidize food banks
and whether these growers would donate the food without the
credit.
The Committee may wish to consider whether a direct grant
program - funding the SEFA program - would be a better vehicle
to achieve these goals. According to the California
Association of Food Banks, each $1 million appropriated to the
SEFA program, which provides food and funding to food banks,
would enable California food banks to provide roughly five
million meals. Furthermore, SEFAP funds must be used to
purchase and distribute foods grown or produced in California,
benefiting California's agricultural sector. In contrast,
this bill would allow the 15% tax credit for foods produced or
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grown outside of California, benefitting out-of-state
producers. Finally, the existing infrastructure within the
California Department of Social Services may be used
efficiently to administer the SEFA program.
4)Tax Credit vs. Tax Deduction . In contrast to a deduction, the
value of a tax credit to a taxpayer is the same, regardless of
the tax rate. Thus, a tax credit is generally more appealing
to taxpayers. Furthermore, charitable deductions allowed to
corporate taxpayers are limited to 10% of the taxpayer's net
income and thus a tax credit for the same donations will be
more valuable to a corporate taxpayer.
5)10% vis-à-vis 15%: What Exactly Is Being Incentivized ? This
bill proposes a generous 15% tax credit, broadens the scope of
what would be considered a QDI, and redefines how the product
is to be valued. However, increasing the allowable credit
percentage may not be necessary; at the very least, it may be
premature. Since this bill expands the applicable QDIs and the
definition of a qualified taxpayer, donations should
theoretically increase simply because of the wider pool of
both participants and products. Moreover, in some cases, a
qualified taxpayer may be more inclined to contribute a QDI
simply because he/she is not able to turn a profit by selling
his/her products. In those instances, receiving the current
10% credit would be enough of an incentive. Receiving a
larger credit may go beyond what is needed to encourage the
desired outcome. Finally, increasing the "incentive"
available for food donations does little to help a qualified
taxpayer who is unable to navigate the cumbersome regulatory
fields to become eligible in the first place. Data from the
National Restaurant Association shows that 83% of restaurants
that made charitable contributions do so by already donating
food to individuals or charitable organizations. The
California Grocers Association also highlights its existing
partnership with the California Association of Food Banks,
sharing success stories on its Web site of grocery retailers
and local food banks working together to help alleviate
hunger.
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Alternatively, funding could potentially be more efficiently
utilized by incentivizing other related programs, such as
gleaning<1> or regulating the disposal of unsold food by
grocery stores<2>. Gleaning entails collecting leftover
crops from farmer's fields after they have been commercially
harvested or where it is not economically profitable to
harvest. For these reasons, the Committee may wish to
consider maintaining the existing 10% tax credit percentage.
6)On Operative Dates . Tax credits are generally used to
encourage socially beneficial behavior, to provide relief to
taxpayers who incur specified expenses, or to influence
behavior (including business practices). Tax incentives are
typically enacted to encourage specific taxpayer behavior
that presumably would not take place absent the credit.
As currently drafted, this bill's proposed changes to the
existing tax credit program would most likely apply to
taxable years prior to January 1, 2017. If this expanded
credit program is indeed interpreted to apply retroactively,
newly qualified taxpayers would be able to file amended tax
returns with the FTB to claim refunds for the previously
paid income taxes. Consequently, this bill would be
providing a credit for behavior that had already occurred
before the bill's enactment. In other words, this bill
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<1> In Europe, leaders from governments, the food industry, and
NGOs work together to find solutions to the problem of food
waste and food loss. Some innovative ways of addressing this
problem include increasing amount of produce gleaned from farms
and recovered from markets.
<2> Supermarkets in France have been banned from throwing away
unsold food by law. The stores are now required to donate
unwanted food to charities and food banks.
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would give a tax break for decisions made before the credit
becomes law, thereby providing an unanticipated benefit
instead of an incentive. To address this issue, the
Committee may wish to amend this bill to allow the expanded
tax credit to newly qualified taxpayers only for donations
made in taxable years beginning on or after January 1, 2017.
7)Original vs. Amended Tax Returns and Prior Donations . This
bill does not require a taxpayer to claim the credit on a
timely original return, meaning a taxpayer could donate food
without the knowledge of the credit and then amend past tax
returns to claim the credit. The purpose of this tax credit
is to incentivize behavior, not reward individuals who are
engaging in behavior they would have otherwise engaged in
the absence of the tax subsidy. Given the policy
implications of rewarding taxpayers for the behavior that
has already occurred, the Committee may wish to amend this
bill to provide that the credit may be claimed only on the
timely filed original returns (similar to the requirement
included in AB 515 (Eggman)).
8)R&TC Section 41 . SB 1335 (Leno), Chapter 845, Statutes of
2014 added R&TC Section 41, which recognized that the
Legislature should apply the same level of review used for
government spending programs to tax preference programs,
including tax credits. Thus, Section 41 requires any bill
that is introduced on or after January 1, 2015 and allows a
new PIT credit to contain specific goals, purposes, and
objectives that the tax credit will achieve. In addition,
Section 41 requires detailed performance indicators for the
Legislature to use when measuring whether the tax credit
meets the goals, purposes, and objectives so-identified.
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While this bill does not create a new tax credit program per
se, it does substantially expand the existing one. Thus,
the Committee may wish to consider amendments to articulate
the specific goal, purpose or objective of the bill.
Performance indicators are critical in measuring the
effectiveness of the tax credit, especially in light of the
increased credit amount.
9)Qualified Taxpayers Outside California . This bill provides
that a credit equal to 15% of the qualified value will be
given to qualified taxpayers that donate QDIs to food banks
in California. However, whereas the donee must be in
California, qualified taxpayers outside of California would
be able to claim the credit as long as they meet the
applicable requirements. Therefore, it is possible that GF
money may be used to subsidize qualified taxpayers with most
of their operations located outside of California. The
Committee may wish to consider whether the benefits of
potentially increasing the amount of donated food outweighs
the costs of subsidizing producers located, and economic
activities performed, outside of California.
10)Definition of "Qualified Taxpayer ." Under existing tax
credit program, a qualified taxpayer is defined as a person
responsible for planting a crop, managing the crop, and
harvesting the crop from the land. In analyzing the bill
that implemented the existing program - AB 152 (Fuentes),
Chapter 503, Statutes of 2011 - the FTB noted the following
implementation consideration with regard to the definition
of "qualified taxpayer":
"The definition of a qualified taxpayer as the person
responsible for planting a crop, managing the crop, and
harvesting the crop from land is silent on requiring the
person to be engaged in the business of farming and
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specifying that the crop is the source of the donated fresh
fruits or fresh vegetables. As a result, "qualified
taxpayer" could be more interpreted more broadly than
originally intended."
This bill's provision mirrors the definition of a qualified
taxpayer used in AB 152 that created the program, with
additional language expanding the definition to persons
"harvesting, packing, or processing a qualified donation
item." The Committee may wish to consider whether the
existing definition of "qualified taxpayer" may have
unintended consequences (especially, considering the bill's
considerable expansion of the existing credit).
11)Related Legislation : AB 515 (Eggman) is substantially
similar to this bill and was vetoed. In his veto message,
the Governor Brown noted that despite "strong revenue
performance over the past few years, the state's budget has
remained precariously balanced due to unexpected costs and
the provision of new services," and that tax credits, "like
new spending on programs, need to be considered
comprehensively as part of the budget deliberations."
12)Prior Legislation : AB 152 (Fuentes), Chapter 503, Statues
of 2011, created the existing 10% tax credit for donations
of fresh fruits and vegetables to a qualified nonprofit
entity and required the State Department of Social Services
to establish and administer a State Emergency Food
Assistance Program, as specified.
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REGISTERED SUPPORT / OPPOSITION:
Support
Alameda County Community Food Bank
American Academy of Pediatrics, California
California Bean Shippers Association
California Cattlemen's Association
California Citrus Mutual
California Farm Bureau
California Fresh Fruit Association
California League of Food Processors
California Pan-Ethnic Health Network
California Taxpayers Association
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Californians Against Waste
California Grocers Association
Community Action Agency, San Bernardino County
Community Action Agency, Butte County
Community Action Partnership of Orange County
Community Alliance with Family Farmers
Community Food Bank
FABBRI
Feeding America, San Diego
FIND Food Bank
Food Access
Food Bank Coalition of San Luis Obispo County
Food Bank of Contra Costa and Solano
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Food Bank of Santa Cruz County
Food for People, the Food Bank for Humboldt County
FoodLink for Tulare County
Grimmway Enterprise, Inc.
HMC Farms
Hunger Action Los Angeles
Imperial Valley Food Bank
International Grape Management, LLC
Jacobs & Cushman San Diego Food Bank
Los Angeles Regional Food Bank
MAZON
McClarty Farms
Mendocino Food and Nutrition Program
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Napa Valley Food Bank
National Resources for Defense Council
Orange County Food Access Coalition
Orange County Food Bank
Prime Time
Redwood Empire Food Bank
San Diego Hunger Coalition
San Diego Food Bank
Sacramento Food Bank & Family Services
Second Harvest Food Bank, Orange County
Second Harvest Food Bank, Santa Cruz County
Second Harvest Food Bank, San Joaquin & Stanislaus Counties
SF-Marin Food Bank
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Sharp HealthCare
St. Anthony's
Sun World International, LLC
The HMC Group Marketing, Inc.
The Resource Connection Food Bank
Vessey & Company
Western Agricultural Processors Association
Western Growers Association
Western United Dairymen
Westside Food Bank
Wonderful Orchards, LLC
Wonderful Citrus LLC
Wonderful Pistachios and Almonds LLC
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POM Wonderful LLC
Yolo Food Bank
Opposition
None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098