BILL ANALYSIS �
AB 2421
Page 1
Date of Hearing: June 25, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2421 (Nestande) - As Amended: June 17, 2014
Majority vote. Fiscal committee. Tax levy.
SUBJECT : Corporation Tax Law: credits: Homeless and Foster
Youth Opportunities Investment Act
SUMMARY : Enacts the Homeless and Foster Youth Opportunities
Investment Act. Specifically, this bill :
1)Contains the following legislative findings and declarations:
a) Providing tax incentives to encourage private
investments for the common good is sound public policy.
b) Expanding educational opportunities and improving the
quality of, and access to, educational services within the
state are valid public purposes that the legislature may
promote using its sovereign power to determine tax policy.
c) Creative tax policy can inspire greater charitable
contributions and public-private partnership that ensure
additional resources for the education of all children in
California.
d) Encouraging voluntary support for education, without
prejudice for or against any state-sanctioned educational
enterprise promotes the state's interest and common good in
providing the highest quality education to all children in
the state.
e) At a time when fiscal realities challenging California's
education system demand innovative ways to deliver vital
education services to public private pupils in kindergarten
and grades 1 through 12, and in college, charitable giving
for educational purposes should be stimulated.
f) California benefits from ensuring accessibility and
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viability of strong public, as well as, private school and
college options in educating students, especially for those
with the greatest needs: our homeless and foster youth.
2)Allows, for taxable years beginning on or after January 1,
2015, and before January 1, 2020, a credit under the
Corporation Tax (CT) Law equal to 50% of a taxpayer's monetary
contributions made during the taxable year, not to exceed
$200,000, to a "qualified K-College education scholarship
organization" to fund qualified K-College education
scholarships.
3)Defines "qualified K-College education scholarship
organization" or "ESO" to mean an organization that meets the
following requirements:
a) Is organized and operated with the purpose of providing
qualified K-College education scholarships to specified
pupils attending a public, charter, or private school in
California. Organizations with three or more years of
audited financial statements must distribute at least 80
percent of contributions for which a credit is claimed, and
organizations with fewer than three years of audited
financial statements must distribute at least 90 percent of
contributions for which a credit is claimed;
b) Makes qualified K-College education scholarships
available for specified pupils from more than one school;
c) Retains data on the progress of the specified pupils
participating in qualified K-College education scholarships
on nationally available norm-referenced tests to evaluate
the programs efficacy;
d) Submits financial and compliance audit reports performed
by a certified public accountant to the Franchise Tax Board
(FTB).
e) Submits quarterly reports on the number of qualified
K-College education scholarship recipients and the schools
that the recipients attend to the State Department of
Education.
f) Applies to participate in this credit program with the
State Department of Education;
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g) Is formed as any of the following:
i) A nonprofit public benefit corporation described in
Corporations Code (CC) Section 5110 et seq.;
ii) A nonprofit religious corporation described in CC
Section 9110 et seq.;
iii) A duly authorized foreign nonprofit corporation that
has complied with all registration requirements in the CC
Section 6910, as specified; or,
iv) Is an organization exempt from federal income tax as
an organization described in Internal Revenue Code (IRC)
Section 501(c)(3).
4)Defines "qualified education-related expenses" to mean
expenses paid or incurred for the purchase of books, service,
and other materials that support academic success, including
computers, software, tutoring, and other academic support.
5)Defines "qualified K-College education scholarship" to mean
any of the following:
a) Financial assistance for a specified pupil to partially
or fully pay for the fees associated with the general costs
of transportation to attend a private, public, or charter
school or to attend school-related activities and other
educationally beneficial programs;
b) Financial assistance for a specified pupil to attend
college courses after graduation from high school provided
by any public college or independent, nonprofit college
where the specified pupil has been admitted to attend; and,
c) Financial assistance for a specified pupil attending a
public, charter, or private school for qualified
education-related expenses, not provided by the
McKinney-Vento Homeless Assistance Act of 1987.
6)Defines "specified pupil" to mean an individual who has
applied for a K-College education scholarship and who is
either within foster care, has been placed in a foster care
system within the State of California, or has been placed with
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a relative caretaker through child protective services at any
time prior to graduating high school, or who was at any time
prior to graduating high school, or is currently a homeless
youth as defined by Government Code Section 11139.3 or the
McKinney-Vento Homeless Assistance Act of 1987. A specified
pupil is not required to be previously enrolled in a public
school or charter school to participate.
7)Defines "private school" to mean a person, firm, association,
partnership, limited liability company, or corporation
offering or conducting private school instruction in the State
of California on the elementary or high school level, that
meets all of the following:
a) Is accredited by the Western Association of Schools and
Colleges or an affiliated organization;
b) Has filed a current private school affidavit with the
State Department of Education in accordance with Section
33190 of the Education Code;
c) Complies with applicable provisions of the Health and
Safety Code;
d) Complies with applicable provisions of the California
Fair Employment and Housing Act (Part 2.8 (commencing with
Section 12900) of Division 3 of Title 2 of the Government
Code);
e) Utilizes background checks in connection with hiring all
school employees, consistent with the standards set forth
in Education Code Section 44237(a);
f) Requires a specified pupil to take nationally available
norm-referenced test; and,
g) Has obtained, if it has been in operation for less than
three years, a surety bond or letter of credit in an amount
equal to the value of the education scholarship payment for
one quarter.
8)Provides that "private school" also means an institution that
meets the definition of a "qualifying institution" in
Education Code Section 69432.7. A "private school" does not
include program of instruction offered by a tutor or a
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non-accredited private school to a pupil who is exempt from
compulsory full-time education as provided for in Education
Code (commencing with Section 48220).
9)Provides that the taxpayer shall receive a certification by
the State Department of Education upon a determination that
the contribution meets the necessary requirements.
10)Provides that the scholarship tax credit shall be in lieu of
any other credit or deduction that the taxpayer may otherwise
claim pursuant to the CT law for the same monetary
contribution, as specified, and requires the credit to be
claimed on a timely filed original return.
11)Limits the aggregate amount of the tax credits allowed to $10
million for each calendar year but authorizes the Legislature
to increase the amount.
12)Provides that the FTB and the State Department of Education
shall administer the credit, and that the allocation of
credits be made on a first-come, first-served basis.
13)Provides that the FTB is required to do all of the following:
a) Adopt rules and regulations as necessary or appropriate
to implement this credit;
b) Track credits claimed;
c) Post aggregate totals of the credits claimed on the
Internet Web site of the FTB; and,
d) Determine when the aggregate total of the credits
reaches $10 million for a calendar year.
14)Provides that the State Department of Education is required
to do all of the following:
a) Adopt rules and regulations necessary to determine
whether an ESO and a contribution meet specified
requirements;
b) Submit a list of eligible ESOs that comply with
specified requirements to the FTB annually by March 15;
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c) Establish application forms and procedures; and,
d) Certify that the contributions meet specified
requirements.
15)Provides that this bill shall remain in effect only until
December 1, 2020, and as of that date is repealed.
16)Takes effect immediately as a tax levy.
EXISTING LAW :
1)Provides various tax credits designed to provide tax relief to
taxpayers who incur certain expenses, e.g., child adoption, or
to influence behavior, i.e. to provide incentives for
taxpayers to perform various activities that they may not
otherwise undertake.
2)Allows individual and corporate taxpayers to deduct certain
expenses as itemized deductions.
3)Allows deductions for monetary charitable contributions,
gifts, or property to qualified organizations formed for
religious, charitable, educational, scientific, or literary
purposes. A charitable contribution is defined as a
contribution or gift made exclusively for public purposes.
Individual taxpayers can claim charitable contributions as an
itemized deduction and can deduct the greater of the standard
deduction or itemized deductions from their adjusted gross
income (AGI) when computing taxable income. Corporate
taxpayers can claim charitable contributions up to 10% of the
corporation's taxable income, without regard to the amount of
charitable contribution, but the amount in excess of the 10%
limitation may be carried over for five years.
4)Imposes limitations on the amount of deduction for individual
charitable contributions, depending on the individual's AGI
and the amount of contributions, the types of organizations
that receive the donations, and the type of property donated.
FISCAL EFFECT : The FTB estimates that this bill will reduce
general fund revenue by $1.6 million in fiscal year (FY)
2014-15, $6.1 million in FY 2015-16, and $8.3 million in FY
2016-17.
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COMMENTS :
1)Author's Statement . The author has provided the following
statement in support of this bill:
The use of tax policy to influence behavior is an important
tool for governments. AB 2421 presents a unique
opportunity to incentivize corporate donations to provide
key resources for foster and homeless youth. These
vulnerable populations face daunting challenges when
striving to receive a quality education. They need support
from their community to achieve their goals particularly
since many do not have the luxury of receiving help that
would traditionally come from a student's family. Working
through non-profits, AB 2421 would provide college
scholarships to help bridge the gap between the true cost
of attending college and currently available financial aid.
It would also provide scholarships to purchase school
supplies and cover transportation costs to school-related
activities. Given that foster and homeless youth tend to
have drastically lower college completion rates than
traditional students, it is clear there is a need to
provide additional support to help them achieve their
goals.
2)Arguments in Support . Supporters of this bill state that the
scholarships provided by this program "would provide homeless
and foster youth with financial assistance toward the general
costs of transportation to attend a public, charter or private
school (and school-related activities), or the purchase of
qualified education-related expenses which support their
academic success, or to attend college courses after
graduation from high school provided by any public or
independent, non-profit college." Supporters explain that
"creating tax incentives to encourage private investments for
the common good is sound public policy." Furthermore, "[t]his
bill would inspire greater philanthropic contributions, and
public-private partnerships, to ensure new resources that
deliver vital education services to highly at-risk public and
private school students from kindergarten into college."
3)Arguments in Opposition . Opponents state that "[i]n the last
several years, K-College education alone has taken over $25
billion in cuts. This does not include cuts that have hit the
California Community Colleges, CSU, and the UC systems."
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Opponents "believe in financing public education directly from
public funds, and oppose any education funding systems (e.g.,
vouchers, coupons, scholarships, tuition tax credits) that
would allocate public tax monies to either individuals or
non-public agencies." Finally, opponents and other
organizations "worked hard in the fall of 2012 to add revenues
to the General Fund via the tax initiative, Proposition 30.
Why would the Legislature consider a measure that will take
away from the General Fund, when so many people worked so hard
to increase those General Fund revenues?"
4)What does this bill do ? This bill would provide a tax
incentive for contributions made to nonprofits that provide
scholarships to foster youth for transportation and qualified
educational expenses of attending a public, private, or
charter school, or for the cost of attending a public of
private college. The amount of credit is limited to 50% of
the amount of the monetary contribution made during the
taxable year, and may not exceed $200,000. Unlike many other
tax incentives, the proposed tax credit is capped and
allocated. The credit is effective only for five taxable
years, from 2015 until 2020; and the annual aggregate amount
of the credit may not exceed $10 million (although this bill
authorizes the Legislature to increase this amount). The
Department of Education and the FTB are required to allocate
and certify the credits on a first-come, first-served basis,
up to $10 million for each taxable year. The credit is not
refundable and, in many respects, is similar to a grant
program.
5)Is it Necessary to Include Transportation Costs and
School-Related Fees ? This bill provides that a "qualified
K-College education scholarship" includes financial assistance
to pay for the fees associated with the general costs of
transportation to attend a public, charter, or private school,
or to attend school-related activities and other educationally
beneficial programs. This bill also allows for financial
assistance to pay for expenses incurred for the purchase of
books, services, and other material that support academic
success, including computers, software, tutoring, and other
academic support.
The California Supreme Court ruled in Hartzell v. Connell
(1984) 35 Cal.3d 899, 201) that pupil fees violate the
constitutional right to a free education. Specifically, the
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court ruled that extracurricular activities also must be free
because they are an integral component of public education and
a part of the educational program. In September 2010, the
American Civil Liberties Union (ACLU) filed a class action
lawsuit alleging the unconstitutional assessment of pupil fees
by school districts [Jane Doe, et al. v. State of California,
et al., (Super. Ct. Los Angeles County, 2010, BC445151)]. The
lawsuit was brought forward because ACLU reports showed that
more than 50 public school districts required pupils to pay
fees for textbooks, workbooks, science labs, physical
education uniforms, classroom materials, and extracurricular
activities. Instead of moving forward with the lawsuit, the
ACLU and interested parties sought a legislative solution. As
a result, AB 1575 (Lara), Chapter 776, Statutes of 2012, which
was sponsored by ACLU, codified the long held constitutional
prohibition on the imposition of pupil fees and established
procedures to ensure compliance with the prohibition.
Since the passage of AB 1575, many schools have stopped
imposing fees for participation and, in some cases, are paying
for items that were traditionally paid for by pupils and
parents. Most recently, school districts have informed
parents that caps and gowns will be provided free of charge.
Within the last year, parents throughout California have been
utilizing compliance procedures to challenge school districts
that require families to pay for Advanced Placement exams,
classrooms supplies, workbooks, and school uniforms. (Loretta
Kalb, California to Schools: Student don't have to pay for
graduation attire, other items 'integral' to education,
Sacramento Bee, May 7, 2014.) In some cases, parents and
activists are even challenging "supply lists" posted by school
for returning student. One parent, in the San Juan School
District, received a letter outlining a list of supplies that
children would need at the beginning of the year. The list
included items such as tissue paper, binders, pencils and
pens. The supplies cost parents between $70 and $100. In
response to the challenge to required supplies, the school
notified parents that all necessary materials will be provided
to school children and that "supply lists" are suggestions,
not required for full participation. Schools across
California have begun making similar changes to "required"
items and fees that are imposed on pupils. As such, many
public schools have stopped imposing fees for many of the
expenses contemplated by this bill. Therefore, expenses
relating to transportation, books, services, and other
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materials, if any, will likely be those imposed by private
schools.
The fact that these scholarships will likely provide funding
to pay for expenses incurred while attending private schools
raises certain constitutional issues. Specifically,
California's Constitution prohibits the state from helping "to
support any school, college, university, hospital, or other
institution controlled by any religious creed, church, or
sectarian denomination whatever." By establishing an indirect
subsidy program for expenses related to attending private
schools, this bill may be challenged under the Constitution
for inappropriately using public funds to support private,
sectarian institutions. The Committee may wish to amend the
bill to limit the use of scholarship funds only for expenses
and tuition costs related to attending a college and
university courses after high school graduation.
1)Ensuring Compliance . This bill provides that qualifying
contributions be made by corporations to a "qualified
K-College education scholarship organization," which, in
general, includes nonprofit organizations that provide
K-College education scholarships to homeless or foster youth.
Each organization is required to retain data on the progress
of pupils, submit financial records to the FTB, submit
quarterly reports to the State Department of Education, and
must apply to participate in the program. Depending on how
many nonprofits apply to participate in the program, it may be
difficult for the two agencies to ensure that all nonprofits
comply with the law.
The California Student Aid Commission (Commission) operates as
the principal state agency responsible for administering
financial aid programs for students attending public and
private universities, colleges, and vocational schools in
California. Its mission is to make education beyond high
school financially accessible to all Californians. Along with
the Cal Grant program, the Commission also administers the
California Chafee Grant for Foster Youth program, which
provides up to $5,000 a year to individuals who are or were in
foster care and have financial need. Having the Homeless and
Foster Youth Opportunities Investment Act administered by the
Commission would make it easier for FTB and the State
Department of Education to ensure compliance and to make
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future improvements. Also, having the Commission distribute
scholarships may also help inform foster youth of other
financial assistance that may be available, such as the
California Grant for Foster Youth and Cal Grant programs.
Therefore, the Committee may wish to amend the bill to have
the Homeless and Foster Youth Opportunities Investment Act
administered exclusively by the Commission.
2)The Not-so-Dormant Commerce Clause : The credit available
under the Homeless and Foster Youth Opportunities Investment
Act applies only in connection with California-based schools.
By limiting the credits to in-state activity, this bill could
arguably be susceptible to challenge under the dormant
commerce clause of the U.S. Constitution.
The U.S. Constitution authorizes Congress to regulate commerce
with foreign nations, and among the several states. (U.S.
Constitution, Article I, Section 8, Clause 3.) While the
commerce clause is phrased as a positive grant of regulatory
power, it "has long been seen as a limitation on state
regulatory powers, as well as an affirmative grant of
congressional authority." [Fulton Corp. v. Faulkner (1996)
516 U.S. 325, 330.] This negative aspect, commonly referred
to as the dormant commerce clause, prohibits economic
protectionism in the form of state regulation that benefits
"instate economic interests by burdening out-of-state
competitors." (Ibid.)
Both the U.S. Supreme Court and the California courts have
addressed challenges to various state tax provisions on
dormant commerce clause grounds. Most recently, the Court of
Appeal struck down a California statute that allowed taxpayers
a deferral for income received from the sale of stock in
corporations maintaining assets and payroll in California,
while providing no such deferral for income from the sale of
stock in corporations maintaining assets and payroll
elsewhere. [Cutler v. Franchise Tax Board (2012) 208
Cal.App.4th 1247, 1250.] Specifically, the court held that
"the deferral provision discriminates on its face on the basis
of an interstate element in violation of the commerce clause."
(Ibid.)
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Thus, while no court decision has yet invalidated, as a
general matter, a state income tax credit that provides an
incentive for in-state activity, such credits may be subject
to constitutional challenge. Any potential constitutional
infirmity could be remedied by expanding this bill's
definition of public, private, and charter schools to include
schools located outside of California. While such a proposal
would be geographically neutral, it is hard to argue that
California should subsidize contributions that end up
benefiting schools located in other states.
3)Related Legislation :
a) AB 2422 (Nestande) would enact similar legislation by
creating the STEAM Investment and Incentive Act. AB 2422
was held on this Committee's Suspense File.
b) AB 943 (Nestande) would have enacted similar legislation
by creating the Education Investment Incentives Act. AB
943 was held on this Committee's Suspense File.
4)Prior Legislation :
a) AB 2582 (Nestande), of the 2012 Legislative Session,
would have provided a tax credit for contributions to
public school co-curricular activities, to an educational
improvement organization that supports innovative programs
in public schools, as specified, or to an educational
scholarship organization. AB 2582 was never heard by this
Committee.
b) SB 1542 (Negrete-McLeod), of the 2011-12 Legislative
Session, would have created an income tax credit for
contributions made to a local educational advancement
program organization. SB 1542 was never by this Committee.
c) AB 279 (Duvall), of the 2009-10 Legislative Session,
would have allowed a tax credit for taxable years beginning
on and after January 1, 2010, equal to the amount of the
total contribution made by a qualified taxpayer to a
scholarship granting organization during the taxable year.
AB 279 was held on this Committee's Suspense File.
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d) AB 2605 (Nakanishi), of the 2007-08 Legislative Session,
would have allowed a personal income tax credit to
qualified taxpayers for each dependent attending a
nonpublic school. AB 2605 was held on this Committee's
Suspense File.
e) AB 2561 (Niello), of the 2007-08 Legislative Session,
would have provided an income tax credit for costs paid or
incurred for private school tuition. AB 2561 was held on
this Committee's Suspense File.
f) SB 1768 (Hollingsworth), of the 2005-06 Legislative
Session, would have provided an income tax credit for
contributions made to a school tuition organization or a
public school. SB 1768 died in the Senate Revenue and
Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Private School Organizations
California Catholic Conference
Opposition
California Teachers Association
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098