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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