BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2472


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          Date of Hearing:  May 9, 2016


                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                           Sebastian Ridley-Thomas, Chair





          AB 2472  
          (Linder) - As Amended April 28, 2016


          Majority vote.  Tax levy.  Fiscal committee.


          SUBJECT:  Personal income taxes:  credits:  disabled veterans:   
          service animals


          SUMMARY:  Creates a tax credit under the Personal Income Tax  
          (PIT) Law in an amount equal to 50% of the "qualified costs"  
          incurred by a "qualified disabled veteran" owning a service  
          animal.  Specifically, this bill:  


          1)Makes findings and declarations about the assistance service  
            animals may provide war veterans.


          2)Allows a tax credit under the PIT Law for taxable years  
            beginning on or after January 1, 2017 and before January 1,  
            2022, in an amount equal to 50% of "qualified costs" incurred  
            by a "qualified disabled veteran," not to exceed $2,000 for  
            the taxable year.









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          3)Defines "qualified costs" as the following costs incurred  
            during the taxable year by a "qualified disabled veteran" for  
            the ownership and maintenance of a "qualified animal":


             a)   Local fees for animal licenses;


             b)   Veterinary care and medical-related expenses, such as  
               vaccinations, annual check-ups, and drug prescriptions;


             c)   Pet insurance coverage expenses;


             d)   Expenses for specialty equipment, such as vests, leads,  
               and harnesses;


             e)   Grooming expenses; and,


             f)   Food expenses.


          4)Defines a "qualified animal" as a guide dog, signal dog, or  
            service dog as defined in Civil Code Section 54.1(b)(6)(C).


          5)Defines a "qualified disabled veteran" as an individual  
            meeting both of the following conditions:


             a)   Has served on active duty with the Armed Forces of the  
               United States and received an honorable discharge for all  
               periods of active service; and,










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             b)   Has a service-connected disability rating of at least  
               30%, as determined by the United States Department of  
               Veterans Affairs (VA), with which a qualified animal  
               assists.


          6)Provides that the costs accounted for in calculating the  
            credit cannot also be accounted for to claim any other tax  
            credit or deduction.


          7)Allows the credit to be carried over for seven years, or until  
            the credit is exhausted.


          8)Provides that Revenue and Taxation Code (R&TC) Section 41 does  
            not apply to the credit.


          9)Repeals the credit on December 1, 2022.


          10)Takes immediate effect as a tax levy.


          EXISTING LAW:  


          1)Allows various tax credits under the PIT Law.  These credits  
            are generally designed to encourage socially beneficial  
            behavior or to provide relief to taxpayers who incur specified  
            expenses.


          2)Allows a deduction under the PIT Law for medical and dental  
            expenses that exceed 7.5% of federal adjusted gross income  
            (AGI), including expenses related to the costs of buying,  
            training, and maintaining a guide dog or other service animal  
            to assist a visually impaired or hearing disabled person, or a  








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            person with other physical disabilities.  Eligible costs  
            include food, grooming, and veterinary care incurred in  
            maintaining the health and vitality of the animal so it may  
            perform its duties.  Federal law allows a deduction for  
            expenses that exceed 10% of federal AGI.


          3)Applies performance measurement standards to any new tax  
            credit under either the PIT Law or Corporation Tax Law if  
            enacted by a bill introduced on or after January 1, 2015.   
            Specifically, existing law requires 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.  The requirements shall include the specific  
               data and baseline measurements to be collected and remitted  
               in each year the credit is in effect, for the Legislature  
               to measure the change in performance indicators, and the  
               specific taxpayers, state agencies, or other entities  
               required to collect and remit data.  (R&TC Section 41)

          FISCAL EFFECT:  Pending.  The Franchise Tax Board (FTB)  
          estimated that a previous version of this bill would have  
          resulted in General Fund revenue losses of $0 in fiscal year  
          (FY) 2016-17, $47 million in 2017-18, and $50 million in  
          2018-19.  The scope of this bill has been slightly narrowed, so  
          the revenue impact should be slightly reduced but still  
          substantial.










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          COMMENTS:  


           1)Author's Statement  :  The author has provided the following  
            statement in support of this bill:


               Veterans face significant challenges when they re-enter  
               society after their time in service.  We owe it to the  
               community of veterans in California to provide them with as  
               many tools as possible to aid them in their transition out  
               of the military.  AB 2472 is in response to a growing body  
               of research that demonstrates the many health benefits  
               service animals offer veterans with war-related  
               disabilities.  AB 2472 seeks to ensure that costs don't act  
               as a barrier to veterans who would benefit from the healing  
               power of a service animal.


           2)Arguments in Support  :  Proponents of this bill state that  
            "[m]any of our disabled veterans benefit from the aid of a  
            service animal, but the cost of the animal can be a burden to  
            them.  We strongly support this modest tax credit to assist  
            with the costs associated with the service animal of a  
            disabled veteran."


           3)Arguments in Opposition  :  Opponents of this bill believe that  
            the program is "worthwhile" but it should be amended to "be  
            more carefully targeted to reduce the cost" or "[a]lternately,  
            a program which pays directly for those expenses is likely to  
            be more efficient and cost-effective."


           4)Committee Staff Comments  :


              a)   What is a "Tax Expenditure"  ?  Existing law provides  
               various credits, deductions, exclusions, and exemptions for  








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               particular taxpayer groups.  In the late 1960s, United  
               States Treasury officials began arguing that these features  
               of the tax law should be referred to as "expenditures,"  
               since they are generally enacted to accomplish some  
               governmental purpose and there is a determinable cost  
               associated with each of them (in the form of forgone  
               revenues).  This bill would enact a new tax expenditure  
               program in the form of a tax credit for disabled veterans  
               who own a service dog.


              b)   Tax Expenditure vs. Direct Expenditure  :  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.  This can offer  
               taxpayers greater certainty, but it can also result in tax  
               expenditures remaining part of the tax code without  
               demonstrating any public benefit.  Second, there is  
               generally no control over the amount of revenue losses  
               associated with any given tax expenditure.  Finally, it  
               should also be noted that, once enacted, it takes a  
               two-thirds vote to rescind an existing tax expenditure  
               absent a sunset date.  This bill includes a five-year  
               sunset date for the tax credit as generally recommended by  
               this Committee. 


              c)   A Veteran's Best Friend  :  According to the author's  
               office, non-profit organizations throughout the country  
               have formed to connect veterans with service animals.   
               However, these organizations primarily focus on adoption  
               and training, and do not help alleviate the annual costs of  
               pet ownership.  Pets are generally expensive to care for  
               and service animals may require specialty equipment to  
               perform their requisite duties - these costs can be a  
               burden to veterans, especially those who struggle to find  
               employment post-service.  








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               This bill provides a tax credit for a veteran with a  
               service-connected disability rating of at least 30% as  
               determined by the VA whose disability is assisted by a  
               qualified animal.  VA disability ratings indicate the  
               extent to which a disability impacts a veteran's average  
               earning capacity.  According to the author's office, the  
               disability rating threshold of 30% represents the typical  
               disability rating for a post-traumatic stress disorder  
               (PTSD) related diagnosis and the numeric value that results  
               in medical discharge from the military.  


               To receive the tax credit, a veteran's qualified animal  
               must be a guide dog trained to lead the blind or vision  
               impaired; a signal dog trained to alert an individual who  
               is deaf or hearing impaired; or a service dog individual  
               trained to the requirements of the individual with a  
               disability, including minimal protection work, rescue work,  
               pulling a wheelchair, or fetching dropped items.  Although  
               this definition of a "service dog" is vaguely broad, it is  
               not clear whether dogs assisting veterans with PTSD or  
               related diagnoses would qualify, as intended by the author,  
               since the enumerated services primarily relate to physical  
               disabilities.  


               According to regulations implementing the Americans with  
               Disabilities Act (ADA), however, a service dog includes  
               individually trained (whether formally or informally) dogs  
               providing specific services for people with physical,  
               developmental, or psychiatric disabilities.  Some examples  
               of tasks that psychiatric service animals may perform  
               include preventing or interrupting impulsive or destructive  
               behaviors, reminding individuals to take medicine,  
               providing safety checks or room searches for persons with  
               PTSD, interrupting self-mutilation, and removing  
               disoriented individuals from dangerous situations.  The  








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               mere provision of emotional support, well-being, comfort,  
               or companionship by a dog does not constitute service.   
               Although the ADA uses different standards than the VA in  
               determining disability, many service-connected disabilities  
               are also considered disabilities under the ADA, including  
               major depressive disorder and PTSD.  To avoid any  
               ambiguity, however, the author may wish to consider further  
               harmonizing eligibility of a veteran and service dog for  
               purposes of this tax credit.


              d)   Other Implementation Considerations  :  A disabled  
               veteran's service dog is not subject to a prescription or  
               any formal regulation, as neither is required by the ADA.   
               A service dog could be trained by a non-certified  
               professional, friend, family member, or the individual with  
               a disability, and is not required to be registered as a  
               service dog or wear any special identification.  Even if it  
               can be demonstrated that the service dog was provided by an  
               organization with a mission to assist veterans, it would be  
               difficult to readily demonstrate that the service dog has  
               been individually trained to satisfy the specific needs of  
               the veteran.  As noted in the FTB's analysis of this bill,  
               the FTB lacks the expertise to determine whether a veteran  
               is eligible for the proposed service dog tax credit.   
               Credits involving areas for which the FTB lacks expertise  
               are generally certified by another state agency that  
               possesses the relevant expertise.  The Committee may wish  
               to consider tasking another agency to work with the FTB in  
               implementing the proposed tax credit.


              e)   Tax Credit vs. Tax Deduction  :  A tax credit is generally  
               more appealing to taxpayers than a deduction because the  
               value of a tax credit is the same, regardless of the  
               taxpayers' tax rate.  Additionally, a tax deduction  
               generally applies only to taxpayers who itemize their  
               deductions in lieu of taking the standard deduction.   
               Although veterans with service dogs may already be able to  








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               write off related costs via the existing tax deduction for  
               medical expenses, the monetary benefit may not be as  
               impactful as a credit.  This bill specifies that  
               overlapping deductions cannot be simultaneously claimed  
               with this proposed tax credit.  However, since this credit  
               is nonrefundable, disabled veterans still may not see a  
               benefit if their tax liability is insufficient to be offset  
               by a credit.  Since a veteran's disability rating is based  
               on the extent the disability impacts a veteran's average  
               earning capacity, and lower income earners often have  
               little to no tax liability, disabled veterans with lower  
               income levels may not be able to take advantage of the  
               proposed credit as readily as disabled veterans with higher  
               income levels.


               While providing a tax credit specifically for veterans with  
               service dogs recognizes the personal sacrifices made by  
               members of the military, it is important to highlight the  
               fact that this bill would favor one group of taxpayers over  
               others, such as other individuals with service-related  
               disabilities who may benefit from extra financial support.   
               Additionally, the credit provides relief for one expense  
               that veterans may experience, but there are other expenses  
               with which veterans may need greater assistance, such as  
               education, housing, and other health-related issues.   
               Lastly, the credit assumes that that costs incurred caring  
               for a service animal amount to $4,000 annually (covers 50%  
               of qualified costs capped at $2,000).  According to the  
               American Kennel Club, the average cost the first year  
               raising a dog is estimated to be $3,085.  While service  
               dogs may incur greater costs than average pets, the credit  
               amount may also be higher than average.  Since this bill  
               does not distinguish between high-income earners who may  
               not realize the effect of the credit and low-income earners  
               for whom the credit may make a real difference, the  
               Committee may wish to consider whether the proposed tax  
               credit supports the most vulnerable veterans.









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              f)   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 or CT 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.  This bill provides that R&TC  
               Section 41 does not apply to the proposed tax credit.  The  
               Committee may wish to consider the appropriateness of this  
               exemption.


           5)Technical Amendment  :  Committee staff suggests adoption of the  
            following amendments:


             a)   On Page 2, strike Lines 27-29 and insert:


               "amount as determined by paragraph (2).


               (2) The credit amount allowed pursuant to this section  
               shall be the lesser of the following:


               (A) 50 percent of the qualified costs of a qualified  
               disabled veteran during the taxable year.


               (B) Two thousand dollars ($2,000)." 










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             b)   On Page 3, Lines 8-9, strike "Armed Forces of the United  
               States" and insert "United States Armed Forces".


          REGISTERED SUPPORT / OPPOSITION:




          Support




          None on file




          Opposition


          None on file




          Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098



















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