BILL ANALYSIS Ó
SB 251
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Date of Hearing: July 16, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
SB
251 (Roth) - As Amended July 13, 2015
PENDING TWO-DAY FILE NOTICE WAIVER
Majority vote. Fiscal committee.
SENATE VOTE: 40-0
SUBJECT: Civil rights: disability access
SUMMARY: Provides a credit under the Personal Income Tax (PIT)
Law and the Corporation Tax (CT) Law to a small business for
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eligible access expenditures in excess of $250 but less than
$10,250. Specifically, the tax-related provisions of this bill:
1)Provide, beginning on or after January 1, 2016, and before
January 1, 2023, a credit equal to 50% of the eligible access
expenditures that are in excess of $250 but less than $10,250.
2)Define an "eligible access expenditure" as having the same
meaning as defined in Internal Revenue Code (IRC) Section
44(c), except that the amount may be paid or incurred by a
taxpayer other than an eligible small business.
3)Define a "small business" as a trade or business that has
average gross receipts, less returns and allowances reportable
to California, of less than $3.5 million and has employed 25
or fewer employees in the three immediately preceding taxable
years.
4)Define a "full-time employee" as an employee of the taxpayer
who works at least 30 hours per week.
5)Define "gross receipts, less returns and allowances reportable
to this state" as the sum of the gross receipts from the
production of business income, as defined in Revenue and
Taxation Code (R&TC) Section 25120(a), and the gross receipts
from the production of nonbusiness income, as defined in R&TC
Section 25120(d).
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6)Provide that the $3.5 million threshold includes the gross
receipts of all taxpayers required or authorized to be
included in a combined report pursuant to R&TC Section 25101
or 25101.15.
7)Provide that in the case of a partnership, the limitation
under this bill shall apply with respect to the partnership
and each partner. A similar rule shall apply in the case of
an "S" corporation.
8)Provide that the credit may only be claimed on a timely filed
original return of the taxpayer.
9)Provide that no credit or deduction would be allowed for the
same expenses for which this credit is allowed and that the
adjusted basis of property would not be increased by the
amount of credit allowed.
10)Provide that any unused portion of the credit may be carried
over to the following year, and the succeeding six year until
the credit is exhausted.
11)Provide that the Franchise Tax Board (FTB) may prescribe
rules, guidelines, or procedures necessary or appropriate to
carry out the purpose of this bill.
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12)Provide that it is the intent of the Legislature to make the
findings required by R&TC Section 41.
13)Repeal the credit on December 1, 2023.
EXISTING FEDERAL LAW:
1)Allows a credit to eligible small businesses related to costs
paid or incurred for complying with the Americans with
Disabilities Act (ADA). An eligible small business means an
electing taxpayer with either gross receipts for the preceding
taxable year of $1 million or less, or not more than 30
full-time employees during the preceding taxable year. The
credit is computed as 50% of the eligible access expenditures
for the taxable year in excess of $250 but not more than
$10,250.
2)Provides that eligible access expenditures must be made to
enable the qualified small business to comply with the ADA
requirements, including costs to remove the architectural,
communication, physical, or transportation barriers of persons
with disabilities. Costs also include qualified interpreters
or equipment to make materials available to person with
hearing impairments, costs of qualified readers or equipment
to make material available to persons with visual impairments,
and costs to acquire or modify equipment for persons with
disabilities.
3)Provides that the tax credit may be used against the net tax
of the taxpayer and the excess, while not refundable, is
available for carryback to the immediately preceding tax year
and may be carried forward to the following 20 taxable years
or until exhausted. Taxpayers may not increase the adjusted
basis of property or claim any deduction for eligible access
expenditures that qualify for the credit.
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EXISTING STATE LAW:
1)Allows, in modified conformity to federal law, a tax credit
for the amount paid or incurred by eligible small business for
the improvements to the property in order to provide access to
disabled individuals of up to 50% of the eligible access
expenditures for the taxable year, but not to exceed $250.
The maximum allowed to a small business is $125.
2)Creates a Certified Access Specialists Program (CASp) designed
to meet the public's need for experienced, trained, and tested
individuals who can inspect buildings and sites for compliance
with applicable state and federal construction accessibility
standards.
3)Defines a "certified access specialist" (CAS) as a person that
has met the certification requirements as provided for by the
State Architect
FISCAL EFFECT: The FTB estimates General Fund revenue loss of
$3 million for Fiscal Year (FY) 2015-16, $7.6 million for FY
2016-17, and $10 million for FY 2017-18
COMMENTS:
1)Author's Statement : The author has provided the following
statement in support of this bill:
California's higher accessibility standard and the ability
for a disabled person who has been discriminated against to
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seek civil statutory damages has been a powerful force in
making many more businesses and buildings accessible to
those with disabilities. Unfortunately, small (micro)
businesses are frequently unaware of ADA requirements. They
move into retail or office space that has been certified as
habitable by local government planning and code
inspections, receiving a certificate of occupancy and
believe that with this certification they are fully able to
operate as a lawful enterprise. They do not discover they
may have potential ADA violations until they are threatened
with litigation. Many of these small businesses would, in
good faith, address and remediate the ADA violations had
they been educated of their responsibilities and the
requirements of the law. For some businesses the potential
costs of repairs, in addition to costs associated with
defending a potential lawsuit to avoid litigation have
forced them to close their businesses. Businesses are not
utilizing a CASp to help them comply with the law as much
as they should be. Part of this is businesses not being
aware of the existence and purpose of certified CASps.
Rather than rely solely on the court system to enforce the
ADA, it is the intent of this bill to provide businesses
who wish to comply fully with the law an incentive to use a
CASp to find and fix their construction related violations,
while protecting the ability of disabled persons who
encounter discrimination to sue for compliance and damages
if that business fails to fix its violations. This bill
will help ensure individuals with disabilities have a full
and fair opportunity to access facilities and services in
California and further ensure that business owners and
operators have the education and training necessary to
comply with federal and state disability access law and
regulation.
2)Arguments in Support : Consumer Attorneys of California argue
that this bill seeks to balance the interest of making
"buildings more accessible for people with disabilities while
at the same time stopping the abusive practices of some
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attorneys who are filing multiple lawsuits against mostly
small businesses and seeking fees, not compliance."
Proponents of this bill are open to other solutions such as an
amnesty program for businesses to hire a CAS.
3)What Does this Bill Do : This bill contains three main
provisions: (a) a rebuttable presumption that certain
"technical violations" do not cause a person difficulty,
discomfort, or embarrassment; (b) protection for businesses
with 100 or less employees from liability from minimum
statutory damages in construction-related accessibility
claims, as specified, and provides 120 days to correct
violations after the business has obtained an inspection of
its premises by a CAS; and (c) a tax credit for specified
access disability expenditures. Access disability
expenditures include amounts paid to:
a) Remove barriers that prevent a business from being
accessible to or usable by individuals with disabilities;
b) Provide qualified interpreters or other methods of
making audio materials available to hearing-impaired
individuals;
c) Provide qualified readers, taped texts, and other
methods of making visual materials available to individuals
with visual impairments; and,
d) Acquire or modify equipment or devices for individuals
with disabilities.
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4)Purpose of the Tax Credit : As explained by the author, the
purpose of the bill is, in part, to "ensure that business
owners and operators have the education and training necessary
to comply with federal and state disability access law and
regulation." The author further states that "[m]any of these
small businesses would, in good faith, address and remediate
the ADA violations had they been educated of their
responsibilities and the requirements of the law." Despite
the stated purpose, it is unclear how a tax credit for
accessibility improvements would help educate business owners
or help them become aware of unknown violations. Assuming
that a lack of knowledge is the biggest problem, a business
owner who wrongly believes himself/herself to be in compliance
with the law is unlikely to utilize this credit specifically
because he/she wrongly believes he/she is in compliance. A
business owner is also unlikely to seek the assistance of a
CAS if the business owner wrongly believes he/she is in
compliance. It appears that this credit has the potential of
only encouraging compliance with the law from business owners
who are aware that their places of business currently violate
building standards.
The possibility of helping individuals who know that they are
in violation of the law also raises an interesting policy
question as to whether or not the state should be subsidizing
compliance. Citizens are expected to know and comply with the
law, irrespective of the law's complexity. Furthermore, a
violation of law is generally accompanied by a fine or
imprisonment, not a subsidy to comply.
5)Cost-Benefit Analysis of Improving Disability Access : Despite
providing a substantial subsidy, it is unclear if the credit
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would have a substantial impact on increasing disability
access. Business owners may decide to make disability access
improvements because it is the right thing to do or in
response to the risk of litigation, but business decisions are
primarily driven with the goal of making a profit. To that
end, improving disability access may bring in new customers
that would otherwise not patronize the store, but the costs of
making disability improvements would have to be outweighed by
any increase in revenue that might occur from new customers.
Remodeling bathrooms, adding automatic doors, making
substantial modifications to the entry way of a store can all
be very expensive improvements, far exceeding the $10,250 cap
on qualifying expenditures. Accessibility improvements would
also have to be weighed against other available opportunities
to increase revenue and profit such as purchasing new
software, computers, or making changes to the façade of the
store to attract more customers.
Increasing the tax credit available to business owners might
encourage a few businesses owners to make additional
improvements but, as with any tax credit, some of the subsidy
will be provided to individuals who would have made
improvements because of a legal obligation. If the purpose of
the bill is to educate businesses and improve accessibility,
increasing penalties for violating building and accessibility
standards may be more effective.
6)100% of Eligible Expenses : The state credit, when taken with
the federal credit, provides a dollar-for-dollar reduction in
income tax liability equal to 100% (50% state credit + 50%
federal credit) of "eligible access expenditures." In
essence, the Federal Government and the State of California
pay for almost all qualifying expenses under $10,250. As a
general policy, California has almost always provided a much
smaller percentage of credits than those provided by federal
law. As existing law demonstrates, California provides $125
to small businesses for eligible access expenditures while the
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Federal Government provides $5,000. As currently drafted, not
only would this bill move away from existing tax policy, it
would also require California to pay more of the qualifying
expenses than the Federal Government ($5,125 from the state
versus $5,000 from the Federal Government) because the
existing state credit of $125 is maintained. As such, the
Committee may wish to reduce the credit percentage from 50% to
10%.
7)Tax Expenditure vs. Direct Expenditure : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, U.S. 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 (in the form
of foregone revenues). Former Federal Reserve Chairman Alan
Greenspan has stated that tax expenditures are "misclassified"
because they are identical to outlays. Additionally, Gregory
Mankiw, who led President George W. Bush's Council of Economic
Advisers, calls expenditures "stealth spending implemented
through the tax code."<1>
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. While this affords
taxpayers greater financial predictability, it can also result
in tax expenditures remaining a part of the tax code without
demonstrating any public benefit. Second, there is generally
--------------------------
<1>
Ezra Klein, Wonkbook: Tax Spending vs. Government Spending,
Washington Post, 2012.
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no control over the amount of revenue losses associated with
any given tax expenditure. The FTB estimates annual revenue
losses of $10 million for this credit but the costs could be
far greater. 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, effectively resulting in a
"one-way ratchet" whereby tax expenditures can be conferred by
a majority vote, but cannot be rescinded, irrespective of
their cost or efficacy, without a supermajority vote. In
light of these concerns, the Committee may wish to reduce the
sunset date to five years.
8)Definition of Small Business differs from Federal Definition :
This bill provides a credit to a "small business" with an
average of less than $3.5 million in gross receipts and less
than 25 employees in the preceding three years. The federal
program defines a "small business" as having gross receipts of
less than $1 million in gross receipts or a business with no
more than 30 full-time employees during the preceding taxable
year. Having two different definitions can create confusion
among taxpayers. The small business definition found in this
bill was chosen because the author is attempting to aid small
businesses that may be subject to statutory damages under
Civil Code (CC) Section 55.56. However, in order mitigate
confusion among taxpayers seeking this credit, the Committee
may wish to conform entirely to the federal credit and provide
a 10% credit to businesses that meet the requirements of the
federal definition.
9)California already Conforms to IRC Section 44 : This bill does
not specifically conform to federal law, but instead creates a
standalone credit that borrows many of the definitions found
in IRC Section 44. The enactment of a separate credit seems
odd since California already conforms to IRC Section 44. As
noted above, conformity can reduce administrative costs and
confusion among taxpayers. As such, the Committee may wish to
modify the state's existing tax credit instead of creating a
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standalone credit.
10)Performance Measurement Standards : Existing law requires any
bill, introduced on or after January 1, 2015, that would
authorize a new credit under either the PIT Law or the CT Law
to provide performance measurement standards. According to
legislative findings and declarations, tax preferences
represent a major exercise of government power, but face less
oversight than the spending side of the budget. As a way of
ensuring transparency and accountability when investing public
dollars through tax credit programs, the Legislature has
decided to apply performance measurement standards as a way of
reviewing tax credits with the same level of scrutiny as
spending programs.
This bill does not currently address requirements as provided
for under Revenue and Taxation Code Section 41, but the
author's office has provided a statement specifying that this
tax credit advances the public policy that a small business'
funds are better spent correcting violations than defending
lawsuits. To this end, the author's office has proposed
looking at the following performance indicators:
a) The number of businesses statewide that claim the tax
credit compared to the number of eligible businesses with
construction violations;
b) Whether the number of businesses claiming the credit has
increased from the number of businesses currently claiming
the tax credit;
c) Within the years this tax credit is available, the
number of businesses that claim the tax credit on an annual
basis, with year over year increases and whether the
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growth, if any, is due to an increase in awareness of the
ADA;
d) The average and median amounts claimed by businesses,
the number of businesses claiming the full credit, and
whether the credit offered is adequate to incentivize
costly construction related improvements; and,
e) The average amount a business spends on accessibility
improvements when claiming the credit and comparing the
increase with existing enforcement measures and incentives.
Furthermore, the FTB and the State Architecture shall annually
collect the following information:
a) The estimated number of businesses with accessibility
violations;
b) The number of businesses that claimed the existing $250
credit and the loss to the General Fund as a result;
c) The number of businesses that claim this increased
credit annually; and,
d) Information regarding the expenditures made by
businesses claiming the credit.
11)Double Referral : This bill was double-referred to the
Assembly Committee on Judiciary, which passed this bill on
July 14, 2015, with a vote of 10-0. For additional discussion
of disability access laws related to this bill, please refer
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to the analysis prepared by the Assembly Committee on
Judiciary.
REGISTERED SUPPORT / OPPOSITION:
Support
Consumer Attorneys of California (Co-Sponsor)
Apartment Association, California Southern Cities
Apartment Association of Orange County
Associated Builders and Contractors of California
CalAsian Chamber of Commerce
California Chamber of Commerce
California Ambulance Association
California Association of Bed and Breakfast Inns
California Business Properties Association
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California Citizens Against Lawsuit Abuse
California Grocers Association
California Hotel and Lodging Association
California Manufacturers and Technology Association
California Retailers Association
Camarillo Chamber of Commerce
Chamber of Commerce Alliance of Ventura and Santa Barbara
Counties
Chamber of Commerce Mountain View
Civil Justice Association of California
Culver City Chamber of Commerce
East Bay Rental Housing Association
Fairfield-Suisun Chamber of Commerce
Family Business Association
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Fullerton Chamber of Commerce
Greater Bakersfield Chamber of Commerce
Greater Fresno Area Chamber of Commerce
Greater Riverside Chamber of Commerce
Greater San Francisco Valley Chamber of Commerce
National Association of Theater Owners of California/Nevada
National Federation of Independent Business
NorCal Rental Housing Association
North Lake Tahoe Chamber of Commerce
North Valley Property Owners Association
Orange County Business Council
Oxnard Chamber of Commerce
Rancho Cordova Chamber of Commerce
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Redondo Beach Chamber of Commerce and Visitors Bureau
San Jose Silicon Valley Chamber of Commerce
Santa Ana Chamber of Commerce
Santa Maria Valley Chamber of Commerce Visitor and Convention
Bureau
Simi Valley Chamber of Commerce and Visitors Bureau
South Bay Association of Chamber of Commerce
South Lake Tahoe Chamber of Commerce
Southwest California Legislative Council
State of California Auto Dismantlers Association
Torrance Area Chamber of Commerce
Opposition
None on file
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Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098