BILL ANALYSIS Ó SB 670 Page 1 Date of Hearing: August 26, 2015 ASSEMBLY COMMITTEE ON APPROPRIATIONS Jimmy Gomez, Chair SB 670 (Jackson) - As Amended August 20, 2015 ----------------------------------------------------------------- |Policy |Revenue and Taxation |Vote:|9 - 0 | |Committee: | | | | | | | | | | | | | | ----------------------------------------------------------------- Urgency: No State Mandated Local Program: NoReimbursable: No SUMMARY: This bill allows the following tax credits, for taxable years beginning on or after January 1, 2016, and before January 1, 2021, under the Personal Income and Corporation Tax Laws: 1)A credit equal to 30%, subject to a cap of $50,000 for any taxable year, for certified employer child care facility startup expenses related to establishing a child care program or facility used primarily by the children of the taxpayer's employees or employees of the taxpayer's commercial tenants, or contributions to child care referral services on behalf of the taxpayer's employees (Employer Child Care Credit). Unused SB 670 Page 2 credits may be carried forward up to eight years. 2)A credit equal to 30%, subject to a cap of $360 per child under 12 years of age for any taxable year, for direct contributions to qualified child care plans made on behalf of taxpayer's employees (Contributions Credit). The bill limits the credit to only the employer's portion of total payments made, and prorates the credit if the duration of child care received is less than 42 weeks. Unused credits may be carried forward up to eight years. The bill requires the Franchise Tax Board (FTB) to submit reports to the Legislature on or before January 1, 2018 on: (a) the amount of each credit claimed annually; (b) the number of child care facilities established by taxpayers claiming the credit; and (c) the number of children served by those facilities and child care plans for which taxpayers have claimed credits. FISCAL EFFECT: 1)Potentially significant administrative costs to FTB to administer credits and produce reports. 2)Estimated GF revenue decreases for each credit as follows: a) Employer Child Care Credit: estimated GF revenue decreases of $100,000, $600,000, and $700,000 in FY 2015-16, FY 2016-17, and FY 2017-18, respectively. b) Contributions Credit: estimated GF revenue decreases of $400,000, $3.7 million, and $4.1 million in FY 2015-16, FY SB 670 Page 3 2016-17, and FY 2017-18, respectively. COMMENTS: 1)Purpose. According to the author, re-establishing these child care credits will improve the state's business environment while helping provide working parents affordable access to child care. The bill also revives a credit to encourage businesses to establish child care programs to help them recruit, retain, and support working families. SB 670's sponsor, the Bay Area Council, indicates its business members consistently cite the lack of access to affordable and quality child care a key challenge to attracting and retaining talent. The sponsor argues a quality child care system is critical for the state to remain economically competitive, and demand for child care has consistently outpaced supply. 2)Prior Credit Usage. This bill revives two credits that existed in various guises between 1988 and 2012. The Employer Child Care Credit and the Contributions Credit were last authorized in 2006, and were repealed by their own terms in 2012. As part of that legislation, the FTB reported to the Legislature in 2011 the following credit usage: a) Employer Child Care Credit: taxpayers claimed approximately $400,000 in credits each year, serving approximately 1,400 children; and b) Contributions Credit: taxpayers claimed approximately $2.7 million in credits each year, servicing approximately 8,700 children. SB 670 Page 4 3)Incentive or Reward? While the rising cost and limited availability of child care present genuine challenges for working parents, the limited use and structure of the tax credit makes it difficult to determine whether the credit will incentivize new activity or simply reward activity already underway. The sponsor's members include several of the largest and most profitable technology, financial services, legal services, health, and energy companies in the world. Those companies may have strong incentives to offer quality child care in order to recruit employees, but would such companies make decisions to build child care facilities based on a $50,000 credit? Would they subsidize child care costs for a $360 credit? Furthermore, it would appear the companies best positioned to benefit from these credits are those that already offer some of the most lucrative employment compensation and benefits. The Committee may wish to consider whether a subsidy for parents employed at those firms represents the best use of state resources, or whether a direct subsidy to parents based on means would better help those with the greatest need. 4)Is Section 41 Already Doomed? Tax credits are often used to encourage or influence socially beneficial behavior, and provide relief to taxpayers who incur expenses from desired behavior. Tax credits are often more appealing than tax deductions as the taxpayer may take the same credit regardless of income. This bill ignores Section 41 of the revenue and taxation code, authorized just last year in SB 1335 (Leno), Statutes of 2014, which requires tax credits to articulate specific goals, purposes, and objectives for the credit, as well as establish performance indicators to measure the credit's success in achieving those goals. While the policy goals of this bill SB 670 Page 5 may be laudable, there is no indication that 30% or $50,000/$360 are the appropriate credit amounts to achieve the desired increase in affordable child care, and there are no metrics proposed with which to evaluate whether the credit is achieving its aims. Ensuring the Legislature conducts some objective and dispassionate evaluation of tax credits was the goal of SB 1335, and the Committee might wish to consider whether this is precisely the type of tax credit for which Section 41 ought to apply. Analysis Prepared by:Joel Tashjian / APPR. / (916) 319-2081