BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1356 HEARING: 4/25/12
AUTHOR: deLeón FISCAL: Yes
VERSION: 4/19/12 TAX LEVY: No
CONSULTANT: Miller
EDUCATION TAX CREDITS
Establishes a tax credit equal to 65% of contributions to a
special education fund for the purposes of providing Cal
Grants.
Background and Existing Law
Existing state and federal laws provide various tax credits
designed to provide tax relief for taxpayers who incur
certain expenses (child adoption, for example) or to
influence behavior, including business practices and
decisions (research credits or economic development area
hiring credits, for example). These credits are designed
to provide incentives for taxpayers to perform various
actions or activities that they may not otherwise
undertake. Currently, neither federal nor state law
provides a credit for contributions to a special education
fund.
Existing federal and state laws allow individuals to deduct
certain expenses, such as medical expenses, charitable
contributions, interest, and taxes, as itemized deductions.
For example, if a taxpayer making $100,000 annually makes
a $100 contribution to UCLA, he or she would receive a
state deduction for the amount that reduces income subject
to the tax at the 9.3% rate for the state and a federal
deduction of about 35% representing the state and federal
tax rates. Therefore, the taxpayer would receive about $10
from the state and about $30 from the federal government so
the total out of pocket expense is about $60, thus creating
a charitable giving incentive for taxpayers. Current
federal and state law allows a corporation and
S-corporation to deduct charitable contributions up to 10%
of its net income. Contributions in excess of 10% may be
carried over to five succeeding taxable years.
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A recent Internal Revenue Service (IRS) Chief Counsel Memo
unequivocally states that any contribution to a state
agency is deductible for federal purposes on federal tax
returns.
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Proposed Law
For taxable years beginning on or after January 1, 2013,
and before January 1, 2018, Senate Bill 1356 would allow
taxpayers to receive a tax credit for 65% of any
contributions made to the Higher Education Investment Tax
Credit Program Special Fund. Credits can be carried
forward to the subsequent six years. The maximum aggregate
amount of the credit that could be allocated for any
calendar year would be $500 million.
The bill precludes any deductions for amounts taken into
account in the calculation of the credit.
FTB must provide periodic notice on its Web site of the
amount of the credit claimed on original, timely filed
returns and may prescribe rules, guidelines, or procedures
necessary to carry out these provisions. Any rules,
guidelines, or procedures established would be exempt from
the Administrative Procedures Act.
The credit would be repealed by its own terms as of
December 1, 2018.
State Revenue Impact
The FTB estimates the following revenue loss associated
with this bill:
-----------------------------------------------------------
| 2012-13 | 2013-14 | 2014-15 |
|-------------------+-------------------+-------------------|
| -$230 million | -$480 million |-$500 |
| | |million |
-----------------------------------------------------------
Comments
1. Purpose of the bill . According to the author, "SB 1356
seeks to expand Cal Grants to middle class Californians
through $500 Million in available tax credits in the Higher
Education Investment Tax Credit Fund by leveraging federal
tax deductions for charitable contributions. During this
SB 1356 -- 4/9/12 -- Page 4
unprecedented budget crisis, we need to be creative. The
Franchise Tax Board (FTB) predicts that the Higher
Education Investment Tax Credit Fund would be fully
subscribed due to the high incentive to taxpayers. This
tax credit differs from most others in that the state
doesn't lose money to incentivize a behavior. Rather, the
taxpayer makes a contribution to the state and then a
credit is given. For every dollar donated to the Fund, the
individual taxpayer or the corporate donor would receive
65-cents back from the state and the Fund would receive
35-cents plus interest. The taxpayer would also be able to
take a donation deduction on their Federal Taxes. The
taxpayer would get back on every dollar donated a total of
80 cents to over 95 cents depending on how they file.
California is a so-called donor state, only receiving
around 78-cents for every dollar state taxpayers send to
Washington. It's time to leverage Federal dollars to help
offset skyrocketing college tuition. For the each of the
five years of the program, the California Student Aid
Commission (CSAC) would have on average an extra $300
Million, after the tax credits are paid to taxpayers, to
raise eligibility for Cal Grants for middle class families
of four making up to $150,000 a year."
2. Redirection or new money ? This bill encourages giving
to the state's Cal Grant program through a 65% credit
against contributions, the most generous tax credit the
state has ever allowed. Such a credit is sure to entice
taxpayers to contribute but the credit may be so great that
it redirects contributions from other educational
institutions or charitable institutions instead of
providing new money to fund the State's Cal Grant program.
This bill seeks to take full advantage of federal law while
funding the Cal Grant program in the state. In order to
ensure that there is more new money contributed to this
fund than a simple redirection, the Committee may wish to
consider reducing the amount of the credit to 50%. At a
lower amount, the taxpayer has more "skin in the game" and
is giving real money to the education fund, not simply
breaking even, or almost even. Of course, taxpayers
contribute for a variety of reasons including building
naming rights or to honor a family member; those taxpayers
would not redirect contributions. However, this credit may
provide a tax planning opportunity, for both corporations
and individuals, especially if there is little out of
pocket expense. The following chart provides a simple
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example of a $100 contribution from a simple wage earning
taxpayer with adjusted gross income of $100,000 annually
subject to the alternative minimum tax (AMT, see comment 6)
with a 30% federal tax rate with a 65% credit and a 50%
credit.
-----------------------------------------------------------
|Credit amount |State tax |Federal |Total Out of |
| |Credit |Deduction |Pocket |
|--------------+-------------+---------------+--------------|
|65% |$65 |$30 |$5 |
|--------------+-------------+---------------+--------------|
|50% |$50 |$30 |$20 |
| | | | |
-----------------------------------------------------------
3. How long until we know ? The state has never attempted
a credit like this to increase funds to a state program.
While the dollars cut from the program in the budget year
are not deep (the program is approximately $1.5 billion and
the Governor proposes savings of $260 million), the asset
test requirements have changed. The Department of Finance
stated in January that this is an entitlement program
without substantive changes. This bill aims to increase
the number of grants available by increasing the income
ceilings for families up to $150,000 annually; the current
ceiling is about $96,000. The Cal Grant policy discussion
will take place in the Senate Education Committee (see
comment 7). The author recognizes the novel and new
approach and suggests a sunset of 5 years. This credit is
dependent on the IRS Chief Counsel opinion. If that
opinion were to change, it would significantly alter the
incentive to invest in this new education fund. In order
to evaluate the new credit, the Committee may wish to
consider a 3 year credit, with an evaluation to determine
whether such a generous and new credit provides new monies
to the state while other higher education systems remain
relatively whole.
4. First come, first served . SB 1356 provides this credit
until total credits allocated reach $500 million at which
point no further credits may be allocated. This process
will create taxpayer confusion and not allow taxpayers to
plan well. For example, if I make a contribution to the
fund today, I will not know until 2013 whether there was
enough money for me to claim the credit. A "certified
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credit" by which the Treasurer notifies taxpayers that the
cap will be reached at the end of the calendar quarter will
create a clearer and timely credit for taxpayers. Under
this scenario, the taxpayer would contribute funds to the
program and the Treasurer, for example, would certify
immediately that funds existed to allocate the credit. If
a taxpayer contributed to the fund and there were no more
funds available, the taxpayer should be able to have the
money returned. When the $500 million annual cap is
reached, no further credits would be certified. The
Committee may wish to consider a certified credit program
in order to create greater efficiencies for taxpayers.
5. Could there be too much ? The bill also doesn't provide
a limit to the creditable amount. For example, five large
taxpayers could contribute $100 million each thereby
discouraging other taxpayers to contribute. The Committee
may wish to consider a mechanism that would allow for
allocations of subsequent year's $500 million caps to allow
for enthusiastic taxpayers to be able to participate.
6. Creativity counts . Professor Kirk Stark, Vice Dean and
Professor of Law at UCLA Law School points to some
interesting points about this credit, especially how it
affects taxpayers who are subject to the federal
alternative minimum tax (AMT). State and local taxes are
not deductible for purposes of the AMT. When a state
provides an income tax credit to a taxpayer for charitable
contributions he or she is making, the effect is to convert
the state and local taxes to a charitable contribution.
Unlike any other credit, SB 1356 can reduce the taxpayer's
state income tax liability and thereby reduce the total
amount of state/local taxes that the taxpayer may deduct on
his federal return. The chief benefit Ýof the credit],
therefore, would be for taxpayers subject to the federal
AMT-those taxpayers who don't get any benefit from the
state and local tax deduction and thus would benefit from
"converting" their non-deductible state and local tax
payments to deductible charitable contributions.
Professor Stark provides the following example to
illustrate the point:
Example Involving Taxpayer NOT Subject to the Federal AMT:
Joe donates $10,000 to the Fund. Joe gets a $6,500 state
income tax credit. Assuming Joe gets a $10,000 federal
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income tax deduction for the charitable contribution, his
federal income tax liability would be reduced by $3,500
(assuming a 35% marginal tax rate). However, because of
the credit, Joe also loses $6,500 in state/local tax
deductions on his federal return, which would increase his
federal income tax liability by $2,275 (again, assuming a
35% marginal tax rate). On balance, Joe's federal income
tax liability would be reduced by $1,225 (i.e., $3,500
minus $2,275), but he had to pay $3,500 to the Fund to get
that net federal tax benefit.
Example Involving Taxpayer Subject to the Federal AMT: Tom
donates $10,000 to the Fund. Tom gets a $6,500 state
income tax credit. Tom gets a $10,000 federal income tax
deduction for the charitable contribution (which reduces
his federal income tax liability by $2,800, assuming a 28%
marginal tax rate-i.e., the top marginal rate for AMT
taxpayers). Tom doesn't "lose" any state/local tax
deduction because he's on the AMT and there doesn't get any
value from the state/local tax deduction. On balance,
Tom's federal income tax liability is reduced by $2,800,
but he had to pay $3,500 to the Fund to get that federal
tax benefit. Therefore, he's out of pocket a net $700.
The federal AMT has proven controversial and difficult over
the years and many more taxpayers are subject to it than
the state's AMT because the federal government has not
indexed its AMT amounts. The Committee may wish to
consider how this credit helps taxpayers currently subject
to that tax.
7. The program . SB 1466 (deLeón) is the companion measure
to this bill and lays out the programmatic expenditures
within the Cal Grant program. These two bills must become
operative together or neither bill becomes operative. SB
1466 is set for hearing in the Senate Education Committee
on April 25th.
Support and Opposition (4/19/12)
Support : Unknown.
Opposition : Unknown.
SB 1356 -- 4/9/12 -- Page 8