BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 1356 (De Leon) - Higher Education Investment Tax Credit
Program.
Amended: May 1, 2012 Policy Vote: G&F 8-1
Urgency: No Mandate: No
Hearing Date: May 24, 2012 Consultant: Mark McKenzie
SUSPENSE FILE. AS PROPOSED TO BE AMENDED.
Bill Summary: SB 1356 would enact the Higher Education
Investment Tax Credit (HEITC) Program, allowing a tax credit for
a percentage of contributions to the state to fund Cal Grant
Awards to students.
Fiscal Impact:
Estimated tax revenue losses of $190 million in 2012-13,
$380 million in 2013-14, and $350 million in 2014-15
(General Fund).
Maximum revenue gains of up to $833 million in 2013, up to
$909 million in 2014, and up to $1 billion in 2015 (HEITC
Program Special Fund, created by this bill). These amounts
represent the contribution levels necessary to reach the
$500 million maximum aggregate tax credit level for each tax
year for which the credit is available. The Franchise Tax
Board (FTB) does not anticipate that the credit will be
fully subscribed each year.
Unknown costs to the State Treasurer's Office (STO) to
administer the certification of tax credits for
contributions. Staff estimates startup costs in the range
of $300,000 to $500,000 in 2012-13, and ongoing
administrative costs of approximately $100,000 annually
through 2015-16 (General Fund).
Background: 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
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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.
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.
Proposed Law: SB 1356 would establish the HEITC Program Special
Fund and provide a tax credit equal to the following amounts:
60 percent of the amount contributed to that fund during
the 2013 taxable year, as allocated and certified by the
STO.
55 percent of the amount contributed to that fund during
the 2014 taxable year, as allocated and certified by the
STO.
50 percent of the amount contributed to that fund during
the 2015 taxable year, as allocated and certified by the
STO.
The aggregate amount of credit allowable in each taxable year
would be a maximum of $500 million. Any credits allocated to a
taxpayer, but not used in the taxable year may be carried
forward for six years.
This bill would require the STO to establish procedures for
taxpayers to contribute to the HEITC Program Special Fund and
obtain a certification for the credit, which would be provided
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to FTB. The STO would notify the taxpayer of the amount that is
eligible for a credit within seven days of receiving a
contribution. If the credit is limited or denied because the
$500 million annual cap has been reached, the STO would offer
the taxpayer the option of either receiving a certification for
the next taxable year, if available, or returning the
contribution. Credits would only be allocated and certified
through the 2015 taxable year, and the bill's provisions would
be repealed on December 31, 2016.
All revenue contributed to the HEITC Program Special Fund would
be allocated to the Student Aid Commission, upon appropriation
by the Legislature, for purposes of awarding Cal Grants pursuant
to the provisions enacted by SB 1466 (De Leon), a companion
measure to this bill.
Related Legislation: The provisions of this bill are contingent
upon the enactment of SB 1466 (De Leon) which would expand
eligibility for a Cal Grant beginning in the 2014-15 academic
year and provide that HEITC funding would be used, until
exhausted, to fund grants for qualifying students whose
household income does not exceed $150,000, subject to specified
funding prioritization. SB 1466 will also be heard in this
Committee on May 21, 2012.
Staff Comments: SB 1356 encourages taxpayers to contribute to
the state's Cal Grant program through a generous tax credit
against contributions. Depending on the credit amount available
in each of the years in which it is available, and depending on
how a taxpayer files taxes and the tax bracket that applies, a
taxpayer could receive close to 90 percent of his or her
donation back in state tax credits and federal tax deductions
combined. For example, if a taxpayer subject to the Federal
Alternative Minimum Tax (AMT) donates $1,000 to the HEITC Fund
in 2013, he or she would receive a $600 state tax credit. The
taxpayer would also receive a federal tax deduction for the
$1,000 contribution, reducing federal tax liability by $280
(assuming a 28% marginal rate). AMT filers are not eligible for
state tax deductions related to charitable contributions. On
balance, the taxpayer would receive $880 in reduced tax
liability for a $1,000 contribution, and only be out of pocket a
net $120. Staff notes that the generous tax benefit related to
the HEITC program could result in reduced contributions directly
to education institutions, such as the University of California
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and others, and could result in decreased charitable giving to
other causes. As such, this credit could result in a
redirection of charitable giving, rather than providing "new"
money for Cal Grants.
The STO, a constitutionally established office, provides banking
services for state government. The office is responsible for
the custody of all monies and securities belonging to or held in
trust by the state; investment of temporarily idle state monies;
administration of the sale of state bonds, their redemption and
interest payments; and payment of warrants or checks drawn by
the State Controller and other state agencies. The STO also
oversees and administers a number of investment commissions,
boards, and financing authorities that provide conduit bond
financing for various public and private entities that would not
otherwise have access to tax-exempt bond financing. The
California Tax Credit Allocation Committee (CTCAC) administers
the State Low Income Housing Tax Credit Program, which is an
extension of a federal tax credit program that enables
developers of affordable rental housing to raise project equity
through the "sale" of tax benefits to investors. Credits are
awarded by CTCAC to developers with eligible projects, and the
credits are in turn distributed to investors in that project who
purchase the credits in a secondary market.
It is unclear that the STO would be able to direct one of the
financing authorities under its purview to effectively
administer the certification of HEITC tax credits. These
entities generally provide conduit bond financing services and
function from the fees they collect from applicants to issue
tax-exempt bonds. It would be inappropriate to pay for the
administrative costs for certifying HEITC credits from the
fee-paid budgets of the STO's financing entities, so any
administrative costs related to this bill would be from the
General Fund. The STO is unable to provide a specific cost
related to administering the certification of credits and
monitoring annual allocations at this time. Staff assumes that
the STO would develop and adopt regulations, establish
procedures for taxpayers to follow, coordinate with the FTB and
the Student Aid Commission, and provide staff to administer the
certification process. Staff estimates startup costs would be
in the range of $300,000 to $500,000 in 2012-13, and about
$100,000 annually through 2015-16.
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Proposed amendments would authorize FTB, the STO, the State
Controller, and the Student Aid Commission to recover
administrative costs incurred in connection to this bill from
the HEITC Program Special Fund.