BILL ANALYSIS �
AB 2107
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Date of Hearing: April 21, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2107 (Gorell) - As Amended: April 1, 2014
REPLACE
Majority vote. Fiscal committee.
SUBJECT : Preschool: privately funded pilot programs: tax
credits
SUMMARY : Allows an income tax credit equal to 40% of the amount
contributed by a taxpayer to the newly established California
Preschool Investment Fund (Fund) and requires the California
Department of Education (CDE) to disburse the money annually to
an alternative payment provider (APP), as specified, for
purposes of subsidizing preschool services for eligible families
in five counties chosen to participate in the California
Preschool Investment Pilot program (Program). Specifically,
this bill :
1)Declares that, by providing an additional source of funding,
California can expand the number of preschool slots and
subsidies needed to reduce the waitlist for parents seeking
prekindergarten childcare assistance.
2)Creates the Program, which is a five-county investor funded
preschool program to be administered by the CDE and allows a
county to apply to the CDE, no later than June 1, 2015, for
consideration of inclusion in the Program.
3)Requires a county selected to participate in the Program to
annually report to the CDE's Early Education and Support
Division. The report shall contain the county's assessment of
how the program is performing and a list of preschools that
were used by families who receive the subsidy.
4)Creates the Fund in the State Treasury to receive monetary
contributions.
5)Authorizes the CDE to accept monetary contributions made by a
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person to the Fund for purposes of funding the Program.
6)Requires the CDE to do all of the following:
a) Determine, no later than September 1, 2015, the five
counties to be included in the Program.
b) In making this determination, ensure that urban,
suburban, and rural counties are represented in the Program
and give priority to counties that meet any of the
following factors:
i) The length of the county's waitlist of individuals
seeking public child care assistance;
ii) The ability to increase the number of preschool
slots available to children in the county;
iii) Whether the county received federal Race to the Top
funds authorized under the federal American Recovery and
Reinvestment Act of 2009 (Public Law 111-5), with
favorable consideration going to the counties that did
not receive the funds.
c) Establish a procedure for making monetary contributions
to the Fund and obtaining a receipt from the CDE indicating
the amount of contributions made by the person. A receipt,
at a minimum, must contain the date of the monetary
contribution and the contributor's name.
d) Disburse the moneys in the Fund to an alternative
payment provider annually.
7)Requires the alternative payment provider to do both of the
following:
a) Disburse the money, as provided by Article 3 (commencing
with Section 8220) of the Education Code (ED Code), in the
form of a subsidy for preschool services, to support
families residing and using a preschool located in one of
the five counties participating in the Program.
b) Give priority, notwithstanding the eligibility criteria
established in ED Code Section 8263, to families who meet
all of the following conditions:
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i) The family has at least one child who is four years
of age;
ii) The family has at least one working parent; and,
iii) The family's adjusted monthly income is set at or
below 70% of the state median income, adjusted for family
size, and adjusted annually.
8)Continuously appropriates the money in the Fund, without
regard to fiscal year, to the CDE for purposes of funding the
Program.
9)Provides that the Program shall remain in effect only until
January 1, 2020, and as of that date is repealed, unless a
later enacted statute deletes or extends that date.
10)Specifies that any moneys remaining in the Fund as of January
1, 2020, shall be transferred to any other state fund
identified by the CDE that provides funding for increased
access to preschool programs for low-income children.
11)Allows a tax credit for taxable years beginning on or after
January 1, 2015, and before January 1, 2019, under either the
Personal Income Tax (PIT) or the Corporation Tax (CT) Law, in
an amount equal to 40% of the amount contributed by the
taxpayer during the taxable year to the Fund.
12)Allows the credit only if the taxpayer has:
a) Contributed to the Fund and received a receipt from the
CDE indicating that the taxpayer has made the contribution;
b) Retained the receipt; and,
c) Claimed the credit on a timely filed original return.
13)Requires the taxpayer to provide the receipt to the Franchise
Tax Board (FTB), upon request.
14)Allows a carryover of the credit to reduce the taxpayer's tax
in the following tax year, and the succeeding four years if
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necessary, until the credit is exhausted.
15)Reduces the amount of the charitable deduction, otherwise
allowed to the taxpayer, for contributions made to the Fund by
the amount of the credit allowable for the same contribution.
16)Exempts the FTB administrative pronouncements regarding the
credit and its implementation from the requirements of the
Administrative Procedures Act (Chapter 3.5 (commencing with
Section 11340) of the Government Code.)
17)Limits the aggregate amount of credits that may be allowed
under both the PIT and CT laws to an unspecified amount.
EXISTING FEDERAL LAW treats contributions to a state government
fund, like an educational special fund, as charitable
contributions. As such, these contributions may be deducted as
itemized deductions.
EXISTING STATE LAW:
1)Allows various tax credits under both the PIT Law and the CT
Law. These credits are generally designed to provide relief
to taxpayers who incur specified expenses or to encourage
socially beneficial behavior.
2)Authorizes an individual taxpayer to deduct certain expenses
as itemized deductions, such as for example, medical expenses,
charitable contributions, interest, and taxes.
3)Authorizes a corporate taxpayer to deduct charitable
contributions but limits the amount of those deductions to 10%
of the taxpayer's net income. Allows contributions in excess
of 10% to be carried forward to the following five succeeding
taxable years.
4)Establishes eligibility for child care services and child
development programs administered by the CDE and requires the
Superintendent of Public Instruction to adopt rules and
regulations on eligibility, enrollment and priority of
services needed for implementation.
5)Specifies that in order to be eligible for federal and state
subsidized child development services, families must meet at
least one requirement in each of the following areas:
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a) A family is: (i) a current aid recipient, (ii) income
eligible, (iii) homeless or (iv) one whose children are
recipients of protective services, or whose children have
been identified as being abused, neglected, or exploited,
or at risk of being abused, neglected, or exploited; and,
b) A family needs the child care services: (A) because the
child is identified by a legal, medical, social services
agency, or emergency shelter as: (i) a recipient of
protective services or (ii) being neglected, abused, or
exploited, or at risk of neglect, abuse or exploitation;
or, (B) because the parents are: (i) engaged in vocational
training leading directly to a recognized trade,
paraprofession or profession, (ii) employed or seeking
employment, (iii) seeking permanent housing for family
stability, or (iv) incapacitated. (ED Code Section
8263(a).)
6)Defines "income eligible" as a family whose adjusted monthly
income is at or below 70% of the state median income (SMI),
adjusted for family size, and adjusted annually. For the
2013-14 Fiscal Year, the income eligibility shall be 70% of
the SMI that was in use for the 2007-08 Fiscal Year, adjusted
for family size. (EC Code Section 8263.1.)
7)Establishes APPs to allow for maximum parental choice for the
provision of child care. Authorizes APPs to do the following:
(a) provide a subsidy that follows a family from one provider
to another; (b) allow the use of family day care homes,
general center based programs, and other state-funded
programs; and (c) provide choices in the hours of service.
(EC Code Section 8220 et seq.)
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual revenue loss of $2.2 million in the fiscal
year (FY) 2014-15, $17 million in FY 2015-16, and $19 million in
FY 2016-17.
COMMENTS :
1)The Author's Statement . The author states that, "Many
families throughout the state are unable to put their children
in early learning programs because they are on waitlists for
state assistance, which occurs when demand exceeds the number
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of available state subsidized slots. Numerous studies and
reports show the profound beneficial impact of early learning.
Some economists estimate that every dollar invested in early
education provides up to $16 in benefits. This is a result of
reducing the likelihood of a student dropping out of school,
entering a remedial program, or involvement in crime.
Researchers estimate that increasing graduation rates by 10
percent would lead to a 20% drop in murders and assaults.
"'The pilot program established through AB 2107 will provide
incentives for private sector businesses to invest dollars
into a newly established state fund, which will be used to
supplement the state's current voucher assistance program to
allow more families on waitlists to receive the financial help
they need to enroll their child into a state-subsidized
program. This pilot program will utilize the state's current
infrastructure and mechanism through the Department of
Education and local alternative payment centers to deliver
vouchers to eligible families.
"Other states have shown evidence of significant private sector
interest from large corporations that are willing to invest in
early education. The bill will ensure California is also
establishing a system to capture private investment to help
increase early learning access to lower income families."
2)What Would this Bill Do ? For years beginning on January 1,
2015, and before January 1, 2020, this bill would create the
California Preschool Investment Pilot Program, would establish
the Fund, and would authorize the CDE to administer the
Program and to accept monetary contributions made to the Fund.
This bill would also establish a process whereby an
individual, partnership, corporation, limited liability
company, association, or other group, however organized, may
donate to the Fund to subsidize preschool slots in five
counties. The moneys in the Fund would be disbursed by the
CDE to an APP to provide for the specific purpose of
supporting certain eligible families residing and using a
preschool locating in one of the five counties selected by the
CDE to participate in the Program.
In addition, this bill would allow taxpayers, upon the issuance
of the receipt by the CDE, to claim a credit for contributions
made to the Fund. This bill would cap the total aggregate
amount of credit that may be claimed by the taxpayers to an
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unspecified amount. The percentage used to calculate the
credit would be 40% of the amount contributed during any of
the taxable years beginning on or after January 1, 2015, and
before January 1, 2019. Amounts contributed to the Fund would
be continuously appropriated to the CDE, without regard to
fiscal year.
3)The Child Care and Development Services Act . The CDE
administers a child care and development system, maintaining
1,401 service contracts with approximately 758 public and
private agencies supporting and providing services to children
from birth through 12 years of age. Contractors include
school districts, county offices of education, cities,
colleges, other public entities, community-based
organizations, and private agencies. State and federal
subsidized child care is based on eligibility for CalWORKs, or
based on income and need for child care services.
Non-CalWORKs families and former CalWORKs recipients can also
receive subsidized child care if they meet income eligibility
of 70% of the state median income ($46,896 for a family of
four) or if they are recipients of child protective services,
and if they can show need for child care services (parents are
participating in vocational training leading directly to a
recognized trade, paraprofession or profession, employed or
seeking employment, seeking permanent housing for family
stability, or incapacitated).
Services are provided through a voucher system that enables
recipients to choose the child care arrangements that work
best for them, including licensed centers, licensed family
child care homes, or license-exempt care (e.g., care by a
relative). The voucher program is administered by APPs
selected by the CDE. The CDE also administers non-CalWORKs
General Child Care and Development Program and the California
State Preschool Program that are income-based programs.
4)It is Unclear Who May Apply . This bill requires the CDE to
select five counties to be included in the program, from
applications submitted by counties. It is unclear, however,
as to who in the county will be filling out and submitting the
applications. Is it a county board of supervisors? A county
office of education? Any other entity within the county? The
author may wish to consider designating an appropriate entity
within a county that will be responsible for submitting the
application to the CDE.
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5)The Selection Criteria Require Clarification . This bill
requires the CDE to give priority to counties based on the
length of the county's waitlist of individuals seeking public
child care assistance, the ability to increase the number of
preschool slots, and whether the county received federal Race
to the Top funds, with favorable consideration given to
counties that did not receive the funds. With regard to a
waitlist, each contractor maintains a list, but there is no
longer a centralized list in each county. From 2005 to 2011,
funds were provided to establish centralized eligibility lists
in each county, but were terminated in 2011.
With regard to the Race to the Top funds, California received
a four-year federal Race to the Top Early Learning Challenge
Grant beginning in January 2012. The purpose of the grant is
to improve the quality of early learning programs. Seventeen
consortia covering 16 counties collaborate with the CDE and
First 5 California to develop local quality rating scales and
other strategies to improve quality of child development
programs operating within the local consortia. It is unclear
why priority should be given to counties where the consortia
are not located.
6)Allocation of Funds . This bill requires the funds to be
disbursed through APPs to families who reside in one of the
five counties selected for participation. APPs offer a
variety of child care arrangements for parents, including
licensed family child care homes and center-based care, and
arrange for payments to licensed-exempt providers who are
relatives or friends of parents or guardians. The APP helps
families access child care services and makes payment for
those services directly to the child care provider selected by
the family. This bill appears to focus on preschool, yet the
funds are not directed to the California State Preschool
Program. The authors may wish to consider directing the
allocation of funds to the California State Preschool Program.
7)Family Eligibility . This bill requires priority to be given
to a family that has at least one child who is four years old,
has at least one working parent, and whose family adjusted
monthly income is at or below 70% of the SMI, adjusted for
family size. The eligibility is similar to that required of
state subsidized programs. Rather than setting up a separate
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eligibility process, the authors may wish to consider allowing
funds to augment existing child care and development programs.
8)An Innovative Tax Idea to Capture the Federal Dollars . This
bill is based on a very creative idea of "capturing" the
federal dollars by enacting a state charitable tax credit. In
2013, Phillip Blackman, Associate Director of Development at
the Penn State Dickinson School of Law, and Kirk Stark,
Professor and Vice Dean at the UCLA School of Law, outlined a
roadmap for states to capture federal moneys by creating a
state tax credit for cash contributions to a state entity,
with very little cost to the state. [Capturing Federal
Dollars with State Charitable Tax Credits, 139 Tax Notes 53
(2013).] The authors relied on the recent Internal Revenue
Service (IRS) memo issued on October 27, 2010, in concluding
that a state, by providing a tax credit for charitable
contributions to a state fund, will be able to leverage
federal dollars to generate new revenues for the fund, without
a substantial increase in state costs. The idea hinges on the
current IRS view that charitable contributions not only to
non-profits, but also to a state, are eligible for the federal
tax deduction, if certain requirements are met.<1>
Thus, if the Legislature were to create the credit proposed by
this bill, a taxpayer who makes a $100 contribution to the
Fund would receive $40 back from the state via the state tax
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<1> Generally, to be deductible as a charitable contribution
under Internal Revenue Code (IRC) Section 170, a transfer to a
charitable organization or government unit must be a gift. The
IRS memo stated that a gift is a transfer of money or property
without receipt of adequate consideration, made with charitable
intent. A transfer is not made with charitable intent if the
transferor expects a direct or indirect return benefit
commensurate with the amount of the transfer. However, a
federal or state charitable contribution deduction is not
regarded as a return benefit that negates charitable intent,
reducing or eliminating the deduction itself. The IRS Chief
Counsel memo noted that a state or local tax benefit is treated
for federal tax purposes as a reduction, or potential reduction,
in tax liability. As such, it is reflected in a reduced
deduction for the payment of state or local tax under IRC
Section 164, and not as consideration that might constitute a
quid pro quo, for purposes of IRC Section 170. Accordingly, a
taxpayer may take a deduction under IRC Section 170 for the full
amount of their charitable contributions of cash, assuming the
requirements are otherwise met.
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credit and, depending on the taxpayer's federal tax rate,
could save as much as $28 for federal income tax purposes. In
turn, the CDE, which is a state agency, would keep $60 out of
each $100 contributed. The state, as a whole, will
potentially raise significant revenues. The taxpayer, on the
hand, would only incur a net out-of-pocket expense of $32.
9)Haven't We Seen this Idea Before ? This creative idea was
incorporated in SB 284 (De Leon) in 2013, which would have
established an income tax credit for cash contributions made
to a state fund with an aggregate credit cap of $500 million
per calendar year. Specifically, SB 284 proposed to create a
California College Access Tax Fund (CCATF), in the State
Treasury, to receive cash contributions from taxpayers and to
allow taxpayers making the contributions to receive a state
income or franchise tax credit in a specified percentage. The
credit would have been effective for taxable years beginning
on or after January 1, 2014, and until January 1, 2017. The
amounts contributed to the CCATF would have been used first to
make the General Fund whole for each taxable year in which the
credit was allowed and then would have been awarded, upon
appropriation by the Legislature, to the California Student
Aid Commission for purposes of awarding Cal Grants to
students. As noted by Prof. Stark and Mr. Blackman in
reference to SB 284, this type of a state tax credit is very
beneficial to taxpayers subject to the federal Alternative
Minimum Tax (AMT) and the tax savings for that type of
donation are far more than the tax savings normally arising
from charitable gifts. It was suggested that SB 284 program
be made even more attractive to potential donors by either
increasing the credit percentage or making the credit
transferrable or allowable against the sales tax. In fact, a
credit percentage greater than 72% would ensure that donors
experience no out-of-pocket costs for their donations.
The Legislature, however, decided against increasing the credit
percentage above 60%.<2> SB 284 reached the Governor's desk
but was vetoed because the bill, as written, would have
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<2> The Senate Governance and Finance Committee analysis of SB
284 noted these changes would have created a significant
precedent in tax law that could have resulted in unintended
consequences.
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impacted Proposition 98 funding guarantee.<3>
10)How Different is this Bill ? While based on the same tax
concept as SB 284, this bill proposes to leverage federal
funds for a very different purpose - preschool education. The
credit percentage, while still very generous, would be lower -
40% versus 60%. Furthermore, in contrast to SB 284, it would
not compensate the General Fund for the lost revenues and it
would not reimburse the CDE and the FTB for their
administrative costs. Instead, all of the funds would be
allocated to preschool grants. The author may wish to
consider making the General Fund whole by reimbursing the
General Fund for the credit allowed by this bill.
Furthermore, the aggregate amount of the credit is unspecified.
The Committee may wish to specify the total amount of the
credit that would be available to both individual and
corporate taxpayers. The Committee may also wish to consider
clarifying whether the total amount would be available for
each taxable year or the life of the credit. Finally, it
appears that this bill suffers from the same defect
highlighted in the Governor's veto of SB 284 - a negative
impact on Proposition 98 funding guarantee.
11)New Money for Preschool Programs ? AB 2107 encourages
taxpayers to make charitable donations to the state's
preschool program through a 40% income and franchise tax
credits. If enacted, this credit would be one the most
generous tax credits California has ever allowed. Such a
credit is sure to entice taxpayers to contribute to the Fund
instead of a regular non-profit organization. Under existing
law, taxpayers may only claim a charitable deduction for
contributions to qualified charitable organizations. A
deduction is generally more valuable to high-income taxpayers
because the "value" of a deduction varies with the marginal
tax rate (or tax bracket) of the taxpayer. For example, an
individual taxpayer in the 10% tax bracket would receive a tax
benefit of $10 on a $100 contribution. In contrast, a
taxpayer in the 25% tax bracket will save $25 in tax out of
every $100 contributed to a charitable entity. Thus, assuming
the same level of charitable contributions, high-income
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<3> The Governor's veto message: "This bill is a creative
approach for funding Cal Grant awards. I commend the author for
his resourcefulness. Unfortunately, the bill inadvertently
impacts the Proposition 98 funding guarantee negatively. This
flaw can easily be corrected by specifying in a new bill that
the donations transferred to the General Fund are 'General Fund
revenues' for purposes of Proposition 98. I direct the
Department of Finance to work with the author so a new bill that
avoids this negative impact can be sent to me next January."
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taxpayers, presumably with a greater ability to pay taxes,
would receive a greater tax benefit from the charitable
deduction than the lower income taxpayer.
The value of a tax credit, on other hand, is the same,
regardless of the tax rate. Thus, it is generally more
appealing to taxpayers. Furthermore, charitable deductions
allowed to corporate taxpayers are limited to 10% of the
taxpayer's net income. As such, this bill would greatly
benefit corporate taxpayers willing to contribute to the Fund.
In fact, the credit proposed by this bill may be so great
that it would redirect contributions from charities that
currently receive them to the preschool program. Instead of
making a donation to a non-profit university or school, for
example, a taxpayer may choose to use this tax credit instead.
Will this bill result in new revenue or would simply redirect
charitable funds from other charities to the preschool
program? The proposed credit may provide a tax planning
opportunity, for both corporations and individuals, especially
if there is little out-of-pocket expense. Arguably, with a
lower credit amount, the taxpayer would not be simply
motivated by a tax credit that would allow him/her to break
almost even, but instead would contribute to the Fund for
other reasons as well. The Committee may wish to consider
whether a reduction in the credit percentage is warranted to
prevent a redirection of charitable contributions away from
existing non-profit organizations.
12)The Sky is the Limit . While this bill attempts to limit the
total aggregate amount of the credit, it does not place any
limit on an amount that each taxpayer may claim. Hence, a few
contributions from large individual or corporate taxpayers may
easily reach the total cap, thereby discouraging other
taxpayers to contribute. The Committee may wish to consider
whether the limit imposed on the aggregate amount of the
credit should apply to each taxable year or the life of the
credit. The Committee may also wish to consider if there
should be a limit on the amount of the credit claimed by a
taxpayer.
13)First come, first served ? It is unclear to the Committee
staff whether or not taxpayers may claim this credit on a
rolling basis, without regard to the taxable year. This bill
is intended to provide the credit until its total aggregate
amount reaches some unspecified number, at which point no
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further credits may be allocated. The FTB staff also points
out in its analysis of this bill that AB 2701 fails to limit
the amount of contributions that the CDE is authorized to
accept. As such, the total credit amount based on receipts
for contributions could exceed the unspecified cap. This bill
does not specify how credits in excess of the aggregated total
would be treated. Would the taxpayer be allowed to carry
those credits forward to future taxable years? Would those
credits be lost?
Potentially, this process may create taxpayer confusion and
uncertainty. For example, if a taxpayer makes a contribution
to the Fund in April of 2016, there is no assurance that, in
2017, there will be enough money for the taxpayer to claim the
credit for the 2016 taxable year. A "certified credit" could
create a clearer and timely credit program for taxpayers.
Under this scenario, the taxpayer would contribute to the Fund
and the CDE, for example, would certify immediately that funds
exist to allocate the credit. The FTB would be required to
notify taxpayers whether the cap will be reached at the end of
the calendar quarter. When the cap is reached, whether annual
or total, no further credits would be certified. The
Committee may wish to consider amending the bill to create a
certified credit program in order to create greater
efficiencies for taxpayers.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Federation of Teachers
California Tax Reform Association
Analysis Prepared by : Sophia Kwong Kim / ED. / Oksana Jaffe /
REV. & TAX. / (916) 319-2098