BILL ANALYSIS �
AB 2422
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Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2422 (Nestande) - As Amended: April 1, 2014
Majority vote. Tax levy.
SUBJECT : Corporation tax law: credits: STEAM Investment
Incentives Act
SUMMARY : Establishes the STEAM Investment Incentives Act.
Specifically, this bill :
1)Contains the following legislative findings:
a) Providing tax incentives to encourage private
investments for the common good is sound public policy.
b) Expanding educational opportunities and improving the
quality, 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 partnerships 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
school communities demand innovative ways to deliver vital
education services to public and private pupils in
Kindergarten and Grades 1 to 12, inclusive, charitable
giving for educational purposes should be stimulated.
f) Expanding science, technology, engineering, and
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mathematics (STEAM) learning and education in the arts is
vital for our state and particularly for students from
financially-disadvantaged families to help close their
achievement gap.
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 (the "STEAM tax credit") equal to 50%
of a taxpayer's monetary contribution to a nonprofit
educational improvement organization to fund a qualified grant
for a K-12 education innovative program for pupils attending
private, public, or charter schools.
3)Defines an "education improvement organization" or "EIO" as a
charitable institution in this state organized and operated as
an art museum, science center, institution of higher
education, districtwide educational enrichment program, or any
other organization, with the primary purpose of providing
monetary support to a K-12 education innovative program, that
meets all of the following requirements:
a) Contributes at least 80% of the qualified grants to a
California public or private school for funding K-12
education innovative programs;
b) Does not have a person who has been convicted of any sex
offense, as defined, supervising or assisting a pupil
participating in a K-12 education innovative program;
c) Requires each employee or volunteer, whether prospective
or current, who will directly and personally supervise or
assist any pupil to comply with the provisions of Education
Code Section 44237 to ascertain whether the employee or
volunteer has been convicted of any sex offense, as
defined; and,
d) Has applied with the Franchise Tax Board (FTB) to
receive a qualified grant.
4)Defines a "nonprofit" as an organization that meets all of the
following requirements:
a) Is formed as any of the following:
i) A nonprofit public benefit corporation described in
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Corporations Code (CC) Section 5110 et seq.;
ii) A nonprofit religious corporation described in CC
Section 9110 et seq.;
iii) Any other charitable corporation, as defined by
Government Code Section 12582.1; or,
iv) A duly authorized foreign nonprofit corporation that
has complied with all registration requirements in the
CC, as specified; and,
b) Is an organization exempt from federal income tax as an
organization described in Internal Revenue Code Section
501(c)(3).
5)Defines a "qualified grant" as a grant that meets all of the
following requirements:
a) Includes guidelines that detail what specific programs
may be funded by the grant moneys;
b) Limits the amount of grant moneys that may be used for
administration or overhead costs; and,
c) Is included on a list created by the State Department of
Education, as specified.
6)Provides that a "qualified grant" may include cash payments to
a California private, public, or charter school to carry on a
K-12 education innovative program or may include costs
incurred by an EIO in providing a program to, or in
conjunction with, a California private, public, or charter
school.
7)Defines a "K-12 education innovative program" as instruction,
programs, or other activities in science, technology,
engineering, and math learning, or the visual and performing
arts for a private, public, or charter school with a
Kindergarten or any Grades 1 to 12, inclusive, that involve
one or more of the following:
a) An advanced academic or similar program that is not part
of the regular program but enhances the curriculum of the
school;
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b) A creative focus or delivery, including Internet-based
and distance learning technologies, methodology, or skill
training that enriches the academic program of the school;
c) An integration of out-of-school time programs, offered
before or after school hours, on weekends, as a summer
program, or as a year-round program, that reinforces
learning in the areas of science, technology, engineering,
and mathematics, or visual and performing arts education of
the curriculum year round; or,
d) A co-curricular activity for pupils that is an elected
educational activity that supplements education, including,
but not limited to, gifted programs, visual and performing
arts, academic clubs, and educational field trips.
8)Defines a "private school" as a person, firm, association,
partnership, or corporation offering or conducting private
school instruction in the State of California that is located
in an eligible school attendance area, as defined in Section
1113 of the federal Elementary and Secondary Education Act (20
U.S.C. Sec. 6301, et seq.), that meets all of the following
requirements:
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 the
Education Code Section 33190;
c) Complies with applicable provisions of the Health and
Safety Code;
d) Complies with applicable provisions of the Fair
Employment and Housing Act (Part 2.8 (commencing with
Section 12900) of Division 3 of Title 2 of the Government
Code); and,
e) Utilizes background checks in connection with hiring all
school employees, consistent with the standards set forth
in Education Code Section 44237(a).
9)Defines a "public school" as any California day or evening
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elementary, middle, junior high, or high school established by
statute or by municipal or district authority that is located
in an eligible school attendance area, as defined in Section
1113 of the federal Elementary and Secondary Education Act (20
U.S.C. Section 6301 et seq.).
10)Defines a "charter school" as a California school established
pursuant to Part 26.8 (commencing with Section 47600) of
Division 4 of Title 2 of the Education Code providing
elementary or high school education that is located in an
eligible school attendance area, as defined in Section 1113 of
the federal Elementary and Secondary Education Act (20 U.S.C.
Sec. 6301 et seq.).
11)Limits both of the following amounts as follows:
a) The aggregate amount of the tax credits allowed under
this bill to $50 million for each calendar year, but
authorizes the Legislature to increase this amount.
b) The maximum amount allowed to each taxpayer per taxable
year to $200,000.
12)Provides that the allocation of credits be made on a
first-come, first-serve basis.
13)Requires the FTB and the State Department of Education (CDE)
to administer the credit. Specifically:
a) Requires the FTB to perform all of the following duties:
i) Promulgate rules and regulations as necessary or
appropriate to implement this credit;
ii) Establish application forms and procedures;
iii) Track credits claimed;
iv) Post aggregate totals of the credits claimed on the
Internet Web site of the FTB;
v) Determine when the aggregate total of credits
reaches $50 million; and,
vi) Certify that the contributions meet the requirements
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of this bill.
b) Requires the State Department of Education to do all of
the following:
i) Adopt rules necessary to determine whether an EIO
and a contribution meet the requirements of this bill;
and,
ii) Submit a list of eligible EIOs that comply with the
requirements of this bill to the FTB annually by March
15.
14)Requires the taxpayer, in order to claim the STEAM tax
credit, to do all of the following:
a) Receive a certification from the FTB that the taxpayer's
monetary contribution meets the necessary requirements;
b) Apply with the FTB to receive the credit; and,
c) Claim the credit on a timely filed original return.
15)Allows taxpayers to carry forward the STEAM tax credit to
reduce the tax, as defined, in the following year, and
succeeding five years, if necessary, until the credit is
exhausted.
16)Provides that the STEAM 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.
17)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.
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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.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual General Fund revenue loss of $3.6 million in
the fiscal year (FY) 2014-15, $15 million in FY 2015-16, and $22
million in FY 2016-17.
COMMENTS :
1)The author's statement . The author has provided the following
statement in support of this bill:
"STEM and Fine Arts are two areas that have been casualties of
budget cuts faced by our schools in recent years. Students
from disadvantaged backgrounds have been hit especially hard
which compounds with their lack of opportunities outside
school to become interested in STEM and the Fine Arts.
California's economy relies heavily on technology and
creativity-driven industries which provide high wages and
stable jobs. By expanding opportunities for low-income
students to engage with STEM and Fine Arts through field
trips, after school programs, or clubs, we can improve
educational outcomes and open new career paths. AB 2422 is an
example of one of the ways we can use creative tax policy to
encourage private investment into areas that serve the
public's interest."
2)Arguments in Support . The proponents of this bill argue that
"creating tax incentives to encourage private investments for
the common good is sound public policy." They believe that
this bill "would inspire greater philanthropic contributions,
and public-private partnerships, to ensure new resources that
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expand opportunities for STEM learning, and/or arts education
that help close the achievement gap among our state's K-12
students." The particular focus of this bill "is aimed at
supporting students attending public and private schools
located in attendance areas with a high concentration of
children from low-income families." The opponents also note
that over "one-fourth of our country has instituted tax
incentives to encourage individual and corporate philanthropy
designed to help families and local communities put private
money to work at the classroom level." Finally, the proponents
contend that expanding "STEM learning and education in the
arts is vital for our state and particularly for students from
financially-disadvantaged families to help close their
achievement gap."
3)Arguments in Opposition . The opponents oppose any "reduction
in revenue to the State's General Fund," especially in light
of the fact that in the last several years "K-12 education
alone has taken over $20 billion in cuts." The opponents
argue that the tax credits for special interest groups "have,
over the last decade, depleted our General Fund by billions of
dollars," and that California "can no longer afford to keep
giving tax credits ? at a time when the economy is still
trying to recover."
4)What Does this Bill Do ? As pointed out by the author of this
bill, in light of diminished resources and budget cuts, public
and private schools have been struggling to provide high
quality education to children in California. Many schools
were forced to eliminate or reduce their offerings of science
and math classes. This bill would create a tax incentive for
corporations to make monetary contributions to support STEM
and art programs in public, private, and charter schools.
Specifically, this bill would allow a corporation to claim a
tax credit for monetary contributions to a nonprofit
organization that provides grants to schools (both private and
public) to support qualified K-12 innovating art programs or
programs relating to STEM learning.
The amount of credit is limited to 50% of the amount of the
monetary contribution. Unlike many other tax incentives, the
proposed tax credit is capped and allocated. It is effective
only for five taxable years, from 2015 until 2020; and the
annual aggregate amount of the credit may is limited to $50
million (although this bill authorizes the Legislature to
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increase this amount). Additionally, this bill limits the
amount of the STEAM credit that could be awarded to a
qualified taxpayer per taxable year to $200,000. The FTB is
required to allocate and certify the credit on the first-come,
first-serve basis, up to $50 million every calendar year. The
credit is not refundable and, in many respects, is similar to
a grant program.
5)Tax Credit vs. Tax Deduction . Under existing law, taxpayers
may claim a charitable deduction for contributions to
qualified charitable organizations, including those that would
qualify as EIOs. This bill proposes to treat donations to
EIOs more generously than donations to other charitable
organizations by providing a tax credit instead of a
deduction. 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. Thus, assuming the same level of charitable
contributions, high-income taxpayers, presumably with a
greater ability to pay taxes, would receive a greater tax
benefit from the charitable deduction than the lower income
taxpayer. Charitable deductions allowed to corporate
taxpayers are currently limited to 10% of the taxpayer's net
income. 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. As such, this bill would greatly
benefit corporate taxpayers willing to contribute to EIOs.
6)The Most Generous Credit Ever ? This bill encourages corporate
taxpayers to make charitable donations to a qualified EIO
through a 50% tax credit. 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
one of the EIOs instead of a regular non-profit organization.
In fact, the credit proposed by this bill may be so great that
it would redirect contributions from charities that currently
receive them to EIOs. Instead of making a donation to a
non-profit university or school directly, for example, a
taxpayer may choose to donate to an EID the STEM tax credit to
use instead of a charitable deduction. Will this bill result
in new revenue for STEM and art programs or would simply
redirect charitable funds from other charities to EIOs? Will
the credit provide a tax planning opportunity for
corporations? Arguably, with a lower credit amount, the
taxpayer would not be simply motivated by a tax credit, but
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instead would contribute to EIOs 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. The Committee may also wish to consider
limiting the amount of credit available to a corporate
taxpayer in any given year to a certain percentage of the
taxpayer's state income tax liability for that year.
7)The Aggregate Amount . This bill limits to the total amount of
the credit in each calendar year to $50 million, at which
point no further credits may be allocated. It is unclear to
the Committee staff whether returned or unused credits in the
previous calendar year would increase the $50 million
allocation in the current calendar year. Would it be simply
lost if not allocated?
8)Costs versus Benefits to the State . The proposed tax credit
program is intended to encourage corporate contributions to
support STEM programs in public, charter, and private schools.
It is presumed that the proposed tax incentive will not only
result in a significant increase in the amount of private
monetary support for the schools, but will also lead to some
substantial educational benefits to students in both public
and private schools. However, providing tax credits to
unrelated corporate businesses has the unintended consequence
of making private schools dependent on EIOs, rather than
parents, for funding. The EIOs will have to compete for a
finite amount of contributions from corporations and then
decide which schools they will support. Whose interest are
those organizations going to serve - the interests of parents
and students or those of the contributors and schools they
help to finance?
This bill uses the tax system as a convenient means of
delivering a specific subsidy to those companies that
contribute to schools. It is challenging to quantify the
impact or effectiveness of the proposed tax incentive, but all
of its benefits are estimated to come at a great price to the
state General Fund. The Committee may wish to examine the
rationale of using General Fund moneys to pay for
contributions, in the form of a tax credit, instead of using
that money to support STEM and art programs directly.
9)Federal Tax Incentives for K-12 Education . Federal tax law
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allows parents to create tax-free education savings accounts
by investing up to $2,000 annually. The funds from those
accounts may be used tax-free for K-12 or college expenses.
The Coverdell Education Savings Account (ESA), formerly known
as an Education IRA, is an investment trust account
specifically designated for qualified education costs, which
include both K-12 expenses and higher education expenses, such
as tuition and fees, books, and room and board for students
enrolled at least part-time. Interest earned on the deposits
is not taxed, and withdrawals for education expenses are
tax-free.
10)The Not-so-Dormant Commerce Clause : The credits this bill
proposes apply 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."
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(Ibid.)
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.
11)The FTB Implementation Concerns . The FTB staff identified
the following implementation concerns:
a) Eligibility requirement. This bill lacks specificity on
the eligibility requirements for contributing to a
qualified grant.
b) Certification requirement. This bill requires an EIO to
apply for qualified grants with the FTB but lacks
administrative details on the application and grant
approval process.
c) Potential amendment . An organization that fails to meet
the EIO requirements could create a subordinate EIO
specifically for the purpose of participating in this tax
credit program. If this is contrary to the author's
intent, this bill should be amended.
d) Calendar year vs. taxable year . The FTB staff is
unclear as to how the FTB will be able to obtain the
necessary information on a calendar vs. taxable year basis.
e) Allocation . It is unclear whether the author intends
for the tax credit to be allocated and certified, similarly
to the California Film and Television Tax Credit program.
12)Related Legislation . AB 943 (Nestande) is similar to this
bill. AB 943 was held on in this Committee's Suspense File.
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13)Prior Legislation .
a) AB 2582 (Nestande), of the 2011-12 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 heard 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.
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
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California Catholic Conference
Palm Desert Area Chamber of Commerce
Western Center Academy
William E. Simon, Jr.
Opposition
California Tax Reform Association
California Teachers Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098