BILL ANALYSIS Ó
SB 670
Page 1
Date of Hearing: July 13, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
SB
670 (Jackson) - As Amended June 1, 2015
Majority vote. Tax levy. Fiscal committee.
SENATE VOTE: 40-0
SUBJECT: Income taxes: credit: child care
SUMMARY: Allows a credit, under both the Personal Income Tax
(PIT) Law and the Corporation Tax (CT) Law, for employer child
care facility startup expenses (Employer Child Care Credit)
along with a credit, under both laws, for employer contributions
to a qualified child care plan (Contributions Credit).
Specifically, this bill:
SB 670
Page 2
1)Enacts an Employer Child Care Credit. Specifically, this
provision allows, for taxable years beginning on or after
January 1, 2016, and before January 1, 2021, a tax credit
equal to 30% of any of the following:
a) Costs paid or incurred by the taxpayer on or after
January 1, 2016, for the "startup expenses" of establishing
a child care program or constructing a child care facility
in California, to be used primarily by the children of the
taxpayer's employees;
b) For each taxable year beginning on or after January 1,
2016, the cost paid or incurred by the taxpayer for
"startup expenses" of establishing a child care program or
constructing a child care facility in California, to be
used primarily by the children of employees of tenants
leasing commercial or office space in a building owned by
the taxpayer; and,
c) Costs paid or incurred by the taxpayer on or after
January 1, 2016, for contributions to California child care
information and referral services, including those that
identify local child care services, offer information
describing these resources to the taxpayer's employees, and
make referrals of the taxpayer's employees to child care
services where there are vacancies.
2)Provides that in the case of a child care facility established
by two or more taxpayers, the credit shall be allowed to each
taxpayer if the facility is to be used primarily by the
children of the employees of each of the taxpayers or the
children of the employees of the tenants of each of the
taxpayers.
SB 670
Page 3
3)Caps the credit amount at $50,000 for any taxable year.
4)Defines "startup expenses" to include feasibility studies,
site preparation, and construction, renovation, or acquisition
of facilities for purposes of establishing or expanding
on-site or near-site centers by one or more employers or one
or more building owners leasing space to employers.
5)Provides that if two or more taxpayers share in the costs
eligible for the credit, each taxpayer shall be eligible to
receive a tax credit with respect to the taxpayer's respective
share of the costs paid or incurred.
6)Provides that, in cases where the credit for the taxable year
exceeds the taxpayer's tax liability, the excess credit amount
may be carried over to reduce the tax liability in the
following year, and succeeding years if necessary, until the
credit has been exhausted. The excess from any one year,
however, shall not exceed $50,000.
7)Provides that, if the credit carryovers from preceding taxable
years plus the credit allowed for the taxable year would
exceed an aggregate total of $50,000, then the credit allowed
to reduce tax liability for the taxable year shall be limited
to $50,000 and the amount in excess of the $50,000 limit may
be carried over and applied against the tax liability in the
following year, and succeeding years if necessary, in an
amount which, when added to the credit for that succeeding
taxable year, does not exceed $50,000.
8)Provides that a deduction shall not be allowed for that
portion of expenses paid or incurred for the taxable year
which is equal to the amount of the credit allowed
attributable to those expenses.
SB 670
Page 4
9)Provides that, in lieu of claiming the tax credit, the
taxpayer may elect to take depreciation pursuant to Revenue
and Taxation Code (R&TC) Section 17250. In addition, the
taxpayer may take depreciation under that section for the cost
of a facility in excess of the amount of the tax credit
claimed.
10)Provides that the basis for any child care facility for which
a credit is allowed shall be reduced by the amount of the
credit attributable to the facility. The basis adjustment
shall be made for the taxable year for which the credit is
allowed.
11)Provides that, to be eligible for the Employer Child Care
Credit, the taxpayer must submit to the Franchise Tax Board
(FTB) upon request a statement certifying that the costs for
which the credit is claimed are incurred with respect to the
startup expenses of establishing a child care program or
constructing a child care facility in California to be used
primarily by the children of the taxpayer's employees or the
children of the employees of tenants leasing commercial or
office space in a building owned by the taxpayer and which
will be in operation for at least 60 consecutive months after
completion.
12)Provides that, if the child care center for which a credit is
claimed is disposed of or ceases to operate within 60 months
after completion, that portion of the credit claimed which
represents the remaining portion of the 60-month period shall
be added to the taxpayer's tax liability in the taxable year
of that disposition or nonuse.
13)Requires the FTB, on or before January 1, 2018, to submit to
SB 670
Page 5
the Legislature a report on the following:
a) The dollar amount of credits claimed annually;
b) The number of child care facilities established or
constructed by taxpayers claiming the credit; and,
c) The number of children served by these facilities.
14)Provides that R&TC Section 41 does not apply to this credit.
15)Provides that the statutory sections authorizing this credit
shall sunset on December 1, 2021.
16)Allows a Contributions Credit. Specifically, this provision
allows, for taxable years beginning on or after January 1,
2016, and before January 1, 2021, a tax credit equal to 30
percent of the cost paid or incurred by the taxpayer for
"contributions" to a "qualified care plan" made on behalf of
any "qualified dependent" of the taxpayer's "qualified
employee".
17)Caps the amount of the credit in any taxable year at $360 for
each "qualified dependent".
18)Defines "contributions" to include direct payments to child
care programs or providers. "Contributions" do not include
amounts contributed to a qualified care plan pursuant to a
salary reduction agreement to provide benefits under a
dependent care assistance program within the meaning of
SB 670
Page 6
Internal Revenue Code (IRC) Section 129, as applicable.
19)Defines a "qualified care plan" as a plan providing
"qualified care".
20)Defines "qualified care" to include onsite service,
center-based service, in-home care or home-provider care, and
a dependent care center as defined by IRC Section 21(b)(2)(D)
that is a "specialized center" with respect to short-term
illnesses of an employee's dependents. "Qualified care" must
be provided in this state under the authority of a license
when required by California law.
21)Defines a "specialized center" as a facility that provides
care to mildly ill children and that may do all of the
following:
a) Be staffed by pediatric nurses and day care workers;
b) Admit children suffering from common childhood ailments
(including colds, flu, and chickenpox);
c) Make special arrangements for well children with minor
problems associated with diabetes, asthma, breaks or
sprains, and recuperation from surgery; and,
d) Separate children according to their illness and
symptoms in order to protect them from cross-infection.
22)Defines a "qualified dependent" as any dependent of a
"qualified employee" who is under 12 years of age.
SB 670
Page 7
23)Defines a "qualified employee" as any employee of the
taxpayer who is performing services for the taxpayer in this
state, within the meaning of R&TC Section 25133, during the
period in which the qualified care is performed.
24)Provides that if an employer makes contributions to a
qualified care plan and also collects fees from parents to
support a child care facility owned and operated by the
employer, a credit shall not be allowed for contributions in
the amount, if any, by which the sum of the contributions and
fees exceed the total cost of providing care.
25)Provides that if the duration of the child care received is
less than 42 weeks, the employer shall claim a prorated
portion of the allowable credit. The employer shall prorate
the credit using the ratio of the number of weeks of care
received divided by 42 weeks.
26)Provides that, if the credit amount exceeds the taxpayer's
tax liability, the excess may be carried over to reduce the
taxpayer's tax liability in the following year, and succeeding
years if necessary, until the credit has been exhausted.
27)Provides that the credit shall not be available to an
employer if the care provided on behalf of an employee is
provided by an individual who:
a) Qualifies as a dependent of that employee or that
employee's spouse under R&TC Section 17054(d); or,
b) Is, within the meaning of R&TC Section 17056, a son,
SB 670
Page 8
stepson, daughter, or stepdaughter of that employee and is
under 19 years of age at the close of that taxable year.
28)Provides that the contributions to a qualified care plan
shall not discriminate in favor of employees who are officers,
owners, or highly compensated, or their dependents.
29)Provides that a deduction shall not be allowed for that
portion of expenses paid or incurred for the taxable year that
is equal to the amount of the credit allowed.
30)Provides that if the credit is taken by an employer for
contributions to a qualified care plan that is used at a
facility owned by the employer, the basis of that facility
shall be reduced by the amount of the credit. The basis
adjustment shall be made for the taxable year for which the
credit is allowed.
31)Requires the FTB, on or before January 1, 2018, to submit a
report to the Legislature on the following:
a) The dollar amount of credits claimed annually; and,
b) The number of children of employees served by the
qualified child care plan for which the taxpayer claimed a
credit.
32)Provides that R&TC Section 41 does not apply to this credit.
33) Provides that the statutory sections authorizing this credit
SB 670
Page 9
shall sunset on December 1, 2021.
34)Takes immediate effect as a tax levy.
EXISTING LAW:
1)Allows various tax credits under both the PIT Law and the CT
Law. These credits are generally designed to encourage
socially beneficial behavior or to provide relief to taxpayers
who incur specified expenses.
2)Allows taxpayers engaged in a trade or business to deduct
expenses considered ordinary and necessary in conducting that
trade or business.
3)Requires any bill authorizing a new credit to contain 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
SB 670
Page 10
required to collect and remit data. (R&TC Section 41.)
FISCAL EFFECT: The FTB estimates that this bill would reduce
General Fund revenues by $0.5 million in fiscal year (FY)
2015-16, by $4.3 million in FY 2016-17, and by $4.8 million in
FY 2017-18.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
By re-establishing the [child care credits], we can uphold
the state's commitment to provide a supportive business
environment while also helping to provide working mothers
afford and access child care so that they can continue to
pursue their careers and strengthen California's economy.
This is a necessary yet modest common sense measure that
does two things. First, it will help provide increased
access to more affordable child care for working mothers.
And secondly, it will revive a supportive effort for
California's businesses to establish child care programs to
recruit, retain and support working families.
2)This bill is sponsored by the Bay Area Council, which notes
the following:
The Bay Area Council is a civic leadership organization
SB 670
Page 11
that works to strengthen the Bay Area's economy and quality
of life. Our work is led by the hundreds of major
employers that comprise our membership. Surveys of the
public and input from our business members consistently
reveal that the lack of access to affordable and quality
childcare is [a] top challenge in attracting and retaining
employees.
A robust child care and early childhood education system is
imperative for California to remain economically
competitive. Currently access to affordable and quality
child care has long been a challenge for working families,
where demand has consistently outpaced supply. SB 670
would make it easier for employers to recruit and retain
employees, thus reducing training costs, employee
absenteeism and productivity [sic].
3)The FTB has identified the following implementation and policy
concerns in its staff analysis of this bill:
a) "Provision one would:
i) "[A]llow multiple taxpayers to claim the full amount
of the credit for the same child care facility. If this
is inconsistent with the author's intent, the bill should
be amended.
ii) "[A]llow taxpayers, eligible for the credit under
the [PIT Law], to elect to take depreciation in lieu of
the credit. This election would be unavailable to those
taxpayers eligible for the credit under the [CT Law]. If
SB 670
Page 12
this is inconsistent with the author's intent, the bill
should be amended.
b) "Both provisions would allow for an unlimited carryover
period. Consequently, the department would be required to
retain the carryover on the tax forms indefinitely. Recent
credits have been enacted with a carryover period
limitation because experience shows credits typically are
exhausted within eight years of being earned."
4)Committee Staff Comments
a) What is a "tax 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).
b) How is a tax expenditure different from a 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. 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 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, effectively resulting
in a "one-way ratchet" whereby tax expenditures can be
SB 670
Page 13
conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy or cost, without a
supermajority vote.
c) What would this bill do ? This bill would reestablish
two employer tax credits in an effort to increase the
availability of childcare for working parents. The first
tax expenditure program, known as the Employer Child Care
Credit, would allow a credit for specified "startup
expenses" of establishing a child care program or
constructing a child care facility in California to be used
primarily by the children of the taxpayer's employees. The
credit would also be available to owners of commercial or
office space that establish a child care program or
construct a child care facility. Finally, the Employer
Child Care Credit would also be allowed for contributions
to California child care information and referral services.
The credit amount is capped at $50,000 per taxable year.
The second tax expenditure program, known as the
Contributions Credit, would allow a credit for employer
contributions to a "qualified care plan" made on behalf of
any qualified dependent of the taxpayer's employee. The
"qualified care plan", in turn, could provide childcare
through onsite services, center-based services, in-home
care, home-provider care, or a dependent care center. This
bill caps the amount of the credit in any taxable year at
$360 for each qualified dependent.
d) Program background : The original tax credits, upon
which this bill is based, were enacted in 1988. [SB 722
(Hart), Chapter 1239, Statutes of 1988.] The credit
provisions were thereafter amended numerous times. For
example, AB 3144 (Hannigan), Chapter 748, Statutes of 1994,
reduced the percentage of costs for which the credit could
be claimed and the maximum amount of the credit, limited
qualified contributions to direct payments to child care
programs or providers, and limited application of the
credit to dependents of a qualified employee under the age
SB 670
Page 14
of 12. AB 866 (Diaz), Chapter 650, Statutes of 2001,
subsequently extended the sunset date for the credit
provisions to taxable years beginning before January 1,
2007. AB 1282 (Mullin), Chapter 712, Statutes of 2006,
thereafter extended the credits to taxable years beginning
before January 1, 2012. Because no subsequent legislation
was enacted extending the credit provisions, they were
repealed by their own terms.
Thus, prior to 2012, state law allowed both the Employer
Child Care Credit and the Contributions Credit. The FTB
was required, under these credit statutes, to report to the
Legislature by January 1, 2011, the following information
on credit utilization:
i) The amount of the Employer Child Care Credit claimed
each year was approximately $400,000, while the estimated
average number of children served each year was 1,400
statewide; and,
ii) The amount of the Contributions Credit claimed each
year was approximately $2.7 million, while the estimated
average number of children served each year was 8,700
statewide.
e) R&TC Section 41 shall not apply : On September 29, 2014,
Governor Brown signed into law SB 1335 (Leno), Chapter 845,
Statutes of 2014, which added R&TC Section 41. SB 1335
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 introduced on or after January 1, 2015
that allows a new 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.
SB 670
Page 15
The present bill provides that R&TC Section 41 shall not
apply to the reestablished credits. The Committee may wish
to consider the appropriateness of this Section 41
exemption. Critics of a Section 41 exemption might argue
that the exemption exacerbates one of the primary problems
inherent in crafting tax expenditure measures - namely, it
is often unclear what objectives the Legislature is aiming
to achieve.
f) Is this the right tool ? The rising cost of childcare
and its limited availability present real challenges for
working parents. Thus, Committee staff fully appreciates
the desire to increase the supply of available childcare.
The question arises, however, whether tax credits offer the
most cost-effective or equitable way for the state to
promote childcare. As with other tax expenditure measures
- both proposed and enacted - it is often difficult to
determine with any accuracy whether the credit will serve
as a true incentive for taxpayers to undertake socially
useful action, or whether the credit simply serves to
reward taxpayers for actions they would have taken in the
absence of a tax expenditure program. For example, will a
large technology company's decision whether or not to build
a child care facility for its employees be significantly
impacted by the provision of a $50,000 per year credit? Or
will it be determined by annual profits and the desire to
create an attractive package of benefits in a highly
competitive marketplace for skilled labor? Moreover, even
if a high tech company were to weigh the availability of
this tax credit in its decision-making calculus, are its
employees those most in need of indirect state subsidies?
How would such a proposal help a parent working a second
shift at a restaurant or a small retail establishment?
Might it be preferable to target limited state resources to
parents directly, or through the funding of preschool
programs or before- and after-school programs? In
addition, prior experience calls into question the
potential utility of the Employer Child Care Credit, which
SB 670
Page 16
received very modest utilization over its history. To the
extent this Committee desires to provide an employer tax
credit, might it be preferable to reauthorize the
Contributions Credit, which is likely to be advantageous to
a larger pool of employers?
g) Suggested technical amendments :
i) On page 9, in line 21, delete "employers" and insert
"employees"; and,
ii) On page 14, in line 30, delete "employers" and
insert "employees".
REGISTERED SUPPORT / OPPOSITION:
Support
Bay Area Council (Sponsor)
Orange County Business Council
Regional Economic Association Leaders Coalition
Opposition
SB 670
Page 17
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098