BILL ANALYSIS                                                                                                                                                                                                    






                                                                    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