BILL ANALYSIS Ó
AB 2768
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2768
(Thurmond) - As Introduced February 19, 2016
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Income and corporation taxes: credit: donation of
food
SUMMARY: Creates a tax credit under the Personal Income Tax
(PIT) Law and the Corporation Tax (CT) Law for donations of
"qualified food" of a taxpayer's trade or business to specified
organizations. Specifically, this bill:
1)Makes findings and declarations about food insecurity and
hunger relief in California.
2)Allows a tax credit under both the PIT Law and the CT Law for
taxable years beginning on or after January 1, 2017, and
before January 1, 2023, for a taxpayer that donates "qualified
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food" of, or from, its trade or business to an organization
located in California exempt from federal income taxation as
an organization described in the Internal Revenue Code (IRC)
Section 501(c)(3). The credit will be equal to:
a) 10% of the fair market value of the contribution under
the PIT Law; or,
b) 15% of the fair market value of the contribution under
the CT Law.
3)Defines "qualified food" as the following:
a) Prepackaged food as defined in Health and Safety Code
(HSC) Section 113876; and,
b) Food prepared for immediate human consumption, including
unspoiled fruits and vegetables.
4)Disallows a deduction or credit for donations used to generate
the credit under the PIT, and disallows a deduction for
donations used to generate the credit under the CT.
5)Allows the credit to be carried over for nine years, or until
the credit is exhausted.
6)Repeals the credit on December 1, 2023.
7)States the intent of the Legislature to comply with Revenue
and Taxation Code (R&TC) Section 41.
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8)Takes immediate effect as a tax levy.
EXISTING FEDERAL LAW:
1)Allows a deduction for charitable contributions, subject to
certain limitations depending on the type of taxpayer, the
property contributed, and the recipient organization.
Contributions in excess of limitations may be carried forward
for up to five taxable years.
2)Limits charitable contribution deductions for corporations
generally to 10% of taxable income. However, a C corporation
may claim an enhanced deduction for inventory equal to the
lesser of (1) basis plus one-half of the item's appreciation,
or (2) two times basis, if the recipient does the following:
a) Uses the property consistent with the recipient's exempt
purpose solely for the care of the ill, the needy, or
infants;
b) Refrains from transferring the property in exchange for
money, other property, or services; and,
c) Provides the taxpayer a written statement that the
recipient's use of the property will be consistent with
such requirements.
3)Allows an enhanced deduction for donations of "apparently
wholesome food" inventory by a taxpayer engaged in a trade or
business. The total deduction generally may not exceed 15% of
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the taxpayer's net income, except the deduction may not exceed
15% of taxable income for a C corporation. "Apparently
wholesome food" is defined as food intended for human
consumption that meets all quality and labeling standards
imposed by federal, state, and local laws and regulations even
though the food may not be readily marketable due to
appearance, age, freshness, grade, size, surplus, or other
conditions.
4)Grants civil and criminal liability protections to entities
that donate "apparently wholesome food" in good faith to a
non-profit organization for distribution to needy individuals.
(Bill Emerson Good Samaritan Food Donation Act)
EXISTING STATE LAW:
1)Conforms generally to federal law regarding deductions for
charitable contributions, but does not conform to the enhanced
deductions for donations of food inventory.
2)Allows various tax credits under the PIT Law and the CT Law,
generally designed to encourage socially beneficial behavior
or to provide relief to taxpayers who incur specified
expenses.
3)Allows a tax credit, under the 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 and vegetables to food banks
located in California.
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4)Applies performance measurement standards to any new tax
credit under either the PIT Law or the CT 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, 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.
5)Defines prepackaged food as any properly labeled processed
food, prepackaged to prevent any direct human contact with the
food product upon distribution from the manufacturer, a food
facility, or other approved source. (HSC Section 113876)
6)Grants civil liability protections to food facilities donating
food fit for human consumption at the time it was donated to a
nonprofit charitable organization or food bank, unless injury
results from negligence or a willful act. (Civil Code Section
1714.25)
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FISCAL EFFECT: The Franchise Tax Board (FTB) estimates General
Fund revenue losses of $55 million in fiscal year (FY) 2016-17,
$160 million in FY 2017-18, and $200 million in FY 2018-19.
COMMENTS:
1)Author's Statement : The author has provided the following
statement in support of this bill:
AB 2768 would incentivize and support the costs related to
donating prepared food to soup kitchens, meals-on-wheels,
afterschool programs and other providers of meals to
low-income children and adult providers by offering a tax
credit equal to 10% of the fair market value of the donated
food. Doing so would reduce hunger among low-income
Californians and greenhouse gases, by making it easier for
food stores and restaurants to donate food rather than
throwing it into the landfill.
2)Arguments in Support : Proponents of this bill state:
A 2012 study by the Natural Resources Defense Council
(NRDC) found that the United States wastes 40 percent of
the food it produces. . .By incentivizing and supporting
the costs of food donations, AB 2768 would not only help
spur broader donations to California relief agencies, but
also help move California towards a more sustainable and
environmentally-friendly state, as prepared food donation
programs are EPA-verified as reducing Greenhouse Gas
Emissions (GHG) from landfills and waste combustion.
3)Committee Staff Comments :
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a) What is a "Tax Expenditure" ? Existing law provides
various credits, deductions, exclusions, and exemptions for
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 donations of
"qualified food."
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 sunset date of December 1, 2023 and
specifies that the tax credit can only be claimed for
taxable years beginning on or after January 1, 2017, and
before January 1, 2023, a total of six years. However,
this Committee typically recommends a five-year sunset date
on tax expenditures to evaluate whether the benefits
outweigh the costs. The Committee may wish to consider
shortening the sunset date for the proposed tax credit.
This bill also allows any unused credit amount in the year
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claimed to be carried over for nine years. However, the
typical carryforward period for tax credits is seven years.
The Committee may wish to consider shortening the
carryforward period.
c) 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.
While this bill specifies legislative intent to comply with
R&TC Section 41, it does not outline the proposed tax
credit's specific goals, purposes, or objectives, nor does
it specify performance indicators for the Legislature to
use when measuring the tax credit's effectiveness. The
Committee may wish to consider what criteria should be used
in future evaluation of the proposed tax credit.
d) Food Insecurity : According to data from the California
Food Policy Advocates, over four million low-income
California households (38%) struggled with food insecurity
in 2014. Food insecurity is defined as the inability to
consistently afford enough food, and can lead to higher
risks of chronic diseases, depression, poor mental health,
and poor academic outcomes for children. This bill
attempts to address this problem by providing a tax credit
so businesses have a greater incentive to donate food that
they may otherwise discard to non-profit organizations that
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will help redistribute the food to people in need.
However, this bill only specifies that the food donation
must be made to a non-profit organized under IRC Section
501(c)(3), which includes a range of organizations with
vastly different purposes: from food banks to pet rescue
groups to organizations dedicated to testing for public
safety. In order to better fulfill this bill's intent, the
Committee may wish to consider specifying that the food
donation must be made to a food bank, or other type of
non-profit whose mission is consistent with feeding the
hungry, in order for the tax credit to be claimed.
e) But What Exactly Are We Incentivizing ? Tax credits are
intended to encourage socially beneficial behavior that
likely would not occur absent a financial incentive.
However, the National Restaurant Association reports that
73% of restaurants currently make food donations and are
actively involved in addressing the challenge of hunger.
For example, Starbucks recently announced FoodShare, a
program to donate ready-to-eat meals to foodbanks from its
7,600 company-operated stores in the United States that
will provide nearly five million meals to hungry families
in its first year alone. 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.
This bill does not require a taxpayer to claim the credit
on a timely filed original return, meaning a taxpayer could
donate food without the knowledge of the credit and then
amend past tax returns to claim the credit. Given the
policy implications of rewarding taxpayers for past
behavior, the Committee may wish to consider only allowing
the tax credit to be claimed on timely filed original
returns. Alternatively, the Committee may wish to consider
whether the tax code is the best way to incentivize food
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donations. Other health and safety code changes may be
needed to prevent waste, and funding could potentially be
more efficiently invested in other related programs, such
as gleaning<1> or regulating the disposal of unsold food by
grocery stores<2>.
f) What Do You Mean ? This bill provides a tax credit for
donations of "qualified food," a definition that is very
broad and would allow the donation of almost any food
product (including candy and other "junk" foods) that is
packaged. If an intended goal of this bill is to help
reduce food waste, donated food should be of practical use
to the recipient in order to avoid scenarios of non-profit
organizations serving as dumping grounds for unwanted
products that will simply be redisposed. The Committee may
wish to consider narrowing the definition of food that can
be donated in order for the tax credit to be claimed.
Furthermore, the FTB analysis notes that this bill provides
a tax credit for donated food "of" or "from" its "trade or
business," and calculated as a percentage of its "fair
market value." Without further definition of these terms,
there may be ambiguity during the administration of this
bill, leading to disputes with taxpayers. The author may
wish to consider further defining these terms to ease
administration and ensure the tax credit is applied as
intended. The FTB analysis also recommends that the bill
-------------------------
<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
- collecting leftover crops from farmer's fields after they have
been commercially harvested or where it is not economically
profitable to harvest.
<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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be amended to require the non-profit recipient to provide a
receipt to the taxpayer specifying the date of donation, a
description of the products donated, and the value of the
products.
g) 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. Although this bill specifies that
other deductions and credits cannot be simultaneously
claimed for donations of "qualified food," the taxpayer may
still take advantage of the existing federal charitable
contribution deduction or enhanced deduction for donations
of "apparently wholesome food" inventory. The Committee
may wish to consider whether any new tax incentive for
donated food would be better structured as an enhanced
deduction.
h) Qualified Taxpayers outside California : This bill
proposes that the tax credit apply to taxpayers that donate
food to non-profits in California. However, whereas the
recipient must be in California, taxpayers outside of
California would be able to claim the credit as long as
they meet the applicable requirements. Therefore, it is
possible that General Fund money may be used to subsidize
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.
4)Author's Amendments : According to the author's office, the
tax credit provided in this bill is intended to be an amount
equal to 10% of the fair market value of the contribution, and
intended to preclude other deductions or credits for donated
food from being applied under both the PIT Law and the CT Law.
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Additionally, the definition of "qualified food" is intended
to encompass prepackaged food or food prepared for immediate
human consumption. As such, the following amendments should
be made to this bill:
a) On Page 2, Line 33, strike "and" and insert "or";
b) On Page 3, Line 12, strike "15" and insert "10";
c) On Page 3, Line16, strike "and" and insert "or";
d) On Page 3, Line 18, insert "or credit" after
"deduction".
5)Related Legislation : AB 1255 (Thurmond) was substantially
similar to this bill but would have provided a more expansive
tax credit. AB 1255 was never heard by this Committee.
AB 1577 (Eggman) would expand the existing state tax credit
offered to agricultural producers donating fresh fruits and
vegetables to include other agricultural products and
processed foods. AB 1577 is pending hearing by the Assembly
Committee on Appropriations.
AB 515 (Eggman) was substantially similar to AB 1577 (Eggman).
AB 515 was vetoed.
REGISTERED SUPPORT / OPPOSITION:
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Support
United Food and Commercial Workers, Western States Council
(Co-Sponsor)
Western Center on Law and Poverty (Co-Sponsor)
Yum! Brands (Co-sponsor)
California Association of Food Banks
California Grocers Association
California Retailers Association
Californians Against Waste
Courage Campaign
Darden
Feeding America San Diego
Food Donation Connection
International Franchise Association
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Opposition
None on file
Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098