BILL ANALYSIS Ó
SB 1356
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Date of Hearing: August 8, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 1356 (de León) - As Amended: June 21, 2012
Policy Committee: Revenue and
Taxation Vote: 7-1
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill allows a credit, for taxable years beginning on or
after January 1, 2013, and before January 1, 2016, based on the
taxpayer's contribution to a newly established Higher Education
Investment Tax Credit Program Special Fund (Special Fund), as
specified. Specifically, this bill:
1)Provides a credit equal to 60% of the amount contributed by
the taxpayer during the 2013 taxable year. Provides a credit
of 55% during the 2014 taxable year and 50% in the 2015
taxable year, as allocated and certified by the California
Educational Facilities Authority (CEF Authority).
2)Provides that the aggregate amount of credit that may be
allocated and certified shall not exceed $100 million for the
2013 calendar year and $100 million for each calendar year
thereafter.
3)Requires the CEF Authority to develop administrative
procedures and authorized the authority to develop
regulations. If the allocation and certification would be
limited or denied because the $100 million annual cap has been
reached, the CEF Authority shall offer to either return the
contribution or provide a certification for the next taxable
year.
4)Provides that in cases where the credit amount exceeds the tax
owed, the excess credit amount may be carried over to reduce
the tax liability in the following year, and the succeeding
five years if necessary, until the credit is exhausted.
Prohibits a deduction for amounts taken into account in
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calculating the credit.
5)Provides that revenue in the Special Fund shall be allocated
as follows:
a) First, to the General Fund (GF) in an amount equal to
the amount of certified credits allowed for the taxable
year;
b) Second, revenues shall be allocated, upon appropriation
by the Legislature, to the:
i) FTB, the CEF Authority, the State Controller, and
the Student Aid Commission for reimbursement of all
administrative costs incurred in connection with their
duties under this bill, and Education Code Section
69432.75; and,
ii) To the Student Aid Commission for purposes of
awarding Cal Grants to students pursuant to Education
Code Section 69432.75.
6)Becomes operative only if SB 1466 (De Leon) of the 2011-12
legislative session is enacted and takes effect on or before
January 1, 2013.
7)Sunsets the credit provisions on December 1, 2016.
FISCAL EFFECT
1) The State Treasurer's Office (STO) estimates costs of
approximately $1 million annually to administer the program.
Additional administrative costs of approximately $100,000
annually for FTB and Student Aid Commission. STO costs will
vary depending on the number of taxpayers who apply for the
credit.
2) Assuming $165 million in donations, which should be enough to
exhaust the credit in the 2013 taxable year, approximately
$65 million will be available for administrative costs and
for transferring to the Student Aid Commission for Cal
Grants to students. The available funds will increase in
the two subsequent years as the amount of donations will
have to increase to exhaust the available credit.
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COMMENTS
1)Purpose . The author states SB 1356 seeks to expand Cal Grants
to middle-income Californians through $100 Million in
available tax credits, by leveraging federal tax deductions
for charitable contributions. The author argues this tax
credit differs from most others in that the state doesn't lose
money in providing an incentive, rather the taxpayer makes a
contribution to the state and then a credit is given. The
author notes experts predict that this tax credit will be
fully subscribed due to the incentive to taxpayers.
The author explains that SB 1356 is joined to SB 1466 which
uses the money in the fund to expand Cal Grants to
middle-income Californians. SB 1466 first prioritizes funding
for the students who were eligible to receive Cal Grants in
the 2011-12 year and ensures the money in SB 1356 is first
used to maintain the 2011-12 eligibility criteria for new and
renewing students.
2)Support . Proponents, including the University of California
Student Association, state that by 2018, 63% of all jobs in
the United States will require some form of postsecondary
education or training; the U.S. is only on track to deliver a
fraction of this education. They note, currently, only 38% of
America's young adults have a college degree, compared to 58%
in South Korea.
Supporters argue that during this unprecedented budget crisis,
we need to be creative and contend the Higher Education
Investment Tax Credit Fund would be fully subscribed due to
the high incentive to taxpayers. They note for every dollar
donated to the Fund, the first year, the individual taxpayer
or the corporate donor would receive 60 cents back from the
state and 13 cents back from the Federal Government.
Supporters conclude the taxpayer is only out of pocket about
27 cents and California earns interest on the consumer's
30-cent expenditure.
3)Contingencies : As noted above, this bill will become
operative only if SB 1466 (de León) is also enacted. SB 1466
would, beginning with the 2014-15 academic year, establish
priorities for allocation within the Cal Grant program of
funds derived from the HEITC program proposed to be
established by SB 1356.
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4)Income tax deductions . 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 charitable contribution, the
taxpayer 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. The charity has received $100.
5)Doing the math. This bill takes advantage of the
deductibility of charitable contributions. 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. If the taxpayer in
the example donates $100 to the state under SB 1356, the
taxpayers will obtain a $60 credit, in the first year. The
taxpayer can also deduct $40 as a charitable contribution on
the federal return. Assuming a 28 percent federal tax rate,
the deduction will result in $11 from the federal government;
a deduction on state taxes is precluded in the bill. The
taxpayer now is out of pocket only $29. The charity, in this
case the state, has received a net of $40, less than the
preceding example, but the taxpayer is significantly better
off, relative to other tax deductible charitable donations.
6)New money? The generous tax benefit related to this tax
credit could change charitable giving. It is unclear what
this impact will be, but following are some possibilities.
a) The attractive credit could lead to significantly
increased giving, as taxpayers increase their overall
charitable giving to take advantage of it.
b) Taxpayers could shift their giving from other charitable
purposes to the state to take advantage of the credit.
c) Taxpayers may not find the program attractive. If their
intention is to donate $100, receive some gratification and
enjoy a tax deduction, receiving a credit does not serve
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their purpose.
7. Related legislation .
a) SB 1466 (de León) is the companion measure to this bill
and lays out direction for the Cal Grant program. These
two bills must become operative together or neither becomes
operative. SB 1466 is set for hearing August 8 in this
Committee.
b) AB 1501 ((Perez) establishes the Middle Class
Scholarship Program, to be administered by the California
Student Aid Commission, beginning with the 2012-13 academic
year, and provides for an appropriation for purposes of
funding the program, contingent upon the enactment of AB
1500 (Perez).
Analysis Prepared by : Roger Dunstan / APPR. / (916)
319-2081