BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 798 HEARING: 1/15/14
AUTHOR: deLeón FISCAL: Yes
VERSION: 1/6/14 TAX LEVY: Yes
CONSULTANT: Miller
INCOME TAXES: CREDITS: CONTRIBUTIONS TO EDUCATION FUNDS
Establishes a tax credit equal to 60%, 55%, and 50% of
contributions to a special education fund for the purposes
of providing Cal Grants.
Background and Existing Law
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 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 state and federal tax
rates. Therefore, the taxpayer would receive a $10 benefit
from the state, and about $30 from the federal government
for a total out of pocket expense of $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.
SB 798 -- 1/6/14 -- Page 2
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.
The California Educational Facilities Authority's (CEFA) is
part of the Treasurer's office mission is to provide
students with better access and broader opportunities in
higher education by providing qualified non-profit higher
education institutions with the assistance needed to reduce
their capital costs of financing academic related
facilities through a tax-exempt revenue bond program.
Cal Grant B High School Entitlement Program provides funds
to eligible low-income high school graduates who have at
least a 2.0 GPA on a four-point scale, and apply within one
year of graduation. The award provides up to $1,473 for
books and living expenses for the first year and each year
following for up to four years (or equivalent of four
full-time years). After the first year, the award also
provides tuition fee funding at qualifying postsecondary
institutions.
Proposed Law
Senate Bill 798 is an urgency bill that for taxable years
beginning on or after January 1, 2014, and before January
1, 2017, allows taxpayers, upon receipt of the California
Educational Facilities Authority (Authority) certification,
to receive an income or franchise tax credit for a
specified percentage of cash contributions made to the
College Access Tax Credit Fund (Fund).
The maximum aggregate amount of credit that could be
allocated and certified by the Authority for any calendar
year would be $500 million.
The specified percentage used to calculate the credit would
be:
60 percent of the amount contributed during the 2014
taxable year,
55 percent of the amount contributed during the 2015
taxable year,
50 percent of the amount contributed during the 2016
taxable year.
SB 798 -- 1/6/14 -- Page 3
The Authority would be required to do all of the following:
Allocate and certify the income tax credit to
personal and corporate taxpayers from January 1, 2014
to December 31, 2016.
Establish a procedure for taxpayers to contribute
to the fund and obtain certification for the credit.
Provide to the Franchise Tax Board (FTB) a copy of
each credit certificate immediately following the year
of issue.
The bill would preclude any deductions for amounts
taken into account in the calculation of the credit.
The credit would be repealed by its own terms as of
December 1, 2017.
SB 798 clarifies that revenues for this program are subject
to Proposition 98 consistent with the Constitution and
subject to all requirements.
Amounts contributed to the fund would, upon appropriation
by the Legislature, be allocated to the Student Aid
Commission for the purpose of awarding Cal Grants. The
funds would be used for CalGrant B programs contingent on
the passage of SB 174 (deLeón) set for hearing in the
Senate Education Committee on January 15th as well.
SB 798 would take effect immediately as an urgency.
State Revenue Impact
The FTB estimates that the credit will result in a revenue
loss of $190 million in 2014-15; $360 million in 2015-16
and $330 million in 2017-18.
FTB also estimates the potential "net gain" from the
proceeds but does not consider administrative costs. Any
net gain, after the costs are subtracted, would be applied
to CalGrants.
Estimate in Millions
--------------------------------------------
| |2014-1|2015-1|2017-1|
SB 798 -- 1/6/14 -- Page 4
| | 5 | 6 | 8 |
|-----------------------+------+------+------|
| Revenue raised by | $750 | $700 | $600 |
| donations | | | |
|-----------------------+------+------+------|
| Credit Cost to the |-$190 |-$360 |-$330 |
| General Fund | | | |
|-----------------------+------+------+------|
| Net Gain/Cal Grants | $560 | $340 |$270 |
--------------------------------------------
Comments
1. Purpose of the bill . In 2013, the Governor vetoed
nearly identical legislation (SB 284 & 285) when the
Department of Finance noticed that even though the tax
credit created by the legislation reimburses the General
Fund making it budget neutral, it does so with private
donations which cannot be counted toward Proposition 98.
The Governor's veto message contained a request to fix this
technical error so as not to inadvertently hurt K-12. SB
174 & SB 798 contains the language from these vetoed bills,
plus the technical clean-up.
According to the author, "This bill seeks to increase Cal
Grant B Access Award amounts for California's lowest income
students to improve academic achievement and graduation
rates through $500 Million in available tax credits in the
College Access Tax Credit Fund by leveraging federal tax
deductions for charitable contributions. This tax credit
has been fully vetted by a University of California Los
Angeles report which concludes that the members of
legislature are custodians of California's welfare,
particularly in an era of state budgetary distress and
should take advantage of Internal Revenue Service (IRS)
rules and regulations to benefit the state. This tax
credit differs from most others in that the state does not
lose money to incentivize a behavior. Rather, the taxpayer
makes a donation to the state and then a credit is given.
For every dollar donated to the Fund in the first year, the
individual taxpayer or the corporate donor would receive
60-cents back from the state and the Fund would receive
40-cents plus interest. The Franchise Tax Board (FTB)
predicts that the College Access Tax Credit Fund would be
fully subscribed due to the high incentive to taxpayers
SB 798 -- 1/6/14 -- Page 5
because according to IRS rules the taxpayer would also be
able to take a donation deduction on their Federal Taxes.
The taxpayer would get back on every dollar donated a total
of 80 cents to over 95 cents depending on how they file.
California is a so-called donor state, only receiving
around 78-cents for every dollar state taxpayers send to
Washington. It's time to leverage Federal dollars to help
offset skyrocketing college tuition. For each of the three
years of the program, the California Student Aid Commission
(CSAC) would have on average an extra $300 Million, after
the tax credits are paid to taxpayers, and after all
administrative costs are paid for, to increase the
under-funded Cal Grant B Access Awards for over 170,000
California students at our for profit and not-for-profit
private institutions, and all three sectors of our public
institutions. College graduates are a critical part of the
engine that drives California's economy. They are the
future innovators, educators, engineers, lawyers,
scientists, doctors, architects, executives, and so on that
help make California the 9th largest economy in the world.
The taxpayers of California make a tremendous investment in
its college graduates. There is not a single public
college or university student, whether they are on direct
financial aid or not, who doesn't have their education at
least partially underwritten by the taxpayers of
California. We must make sure that we are getting maximum
benefit from that investment.
When the Cal Grant B Access Award was first established in
1969, the amount granted per student for the year was $960
to pay for books, housing and transportation. 43 years
later that amount has grown to only $1,473 for the year -
not even close to keeping up with inflation-that figure
should be $5,900. What results is that many students must
work one or even two jobs to help pay the bills, which
delays graduation and impacts the students' ability to
maximize their learning experience. This not only
shortchanges the students but it shortchanges the
California taxpayers, who are investing in their education
for much longer than the four years it should take students
to complete their degree and start contributing to the
economy as graduates."
2. Redirection or new money ? This bill encourages giving
SB 798 -- 1/6/14 -- Page 6
to the state's Cal Grant program through a 60%, 55%, and
50% credit against contributions, the most generous tax
credit the state has ever allowed. Such a credit is sure
to entice taxpayers to contribute but the credit may be so
great that it redirects contributions from charities that
currently receive them to this program. Instead of making
a donation to UCLA, for example, a taxpayer may choose to
use this tax credit instead therefore creating a greater
need for a public university which is at partially funded
by the general fund. Will this result in new revenue or
simply redirect charitable funds from some charities to
CalGrants? The study's authors (comment 4) believe that
donations to schools are largely from alumni and that these
dollars will remain intact.
3. Proposition 98 . SB 798 addresses the Governor's veto
message that specifically reads:
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.
4. The research is in . 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) wrote a report "Capturing Federal Dollars
with State Charitable Tax Credits" where they outline the
extensive benefits of this type of credit, with very little
cost to the state. They use their research to show a
significant benefit to an AMT taxpayer; specifically,
An AMT taxpayer making a $100,000 donation to the
CATCF special fund has a net out-of-pocket cost of
only $12,000-that is, $100,000 minus $28,000 (in
federal tax savings) minus $60,000 (in state tax
savings). Clearly, the tax savings for that type of
donation are far more than the tax savings normally
arising from charitable gifts. AMT payers willing to
make a gross gift of $1 to Cal Grants will be
SB 798 -- 1/6/14 -- Page 7
reimbursed a total of $0.88, consisting of $0.60 from
the state of California and $0.28 from the federal
governments. As structured, S.B. 798 is a powerful
''matching grant'' program that if enacted is likely
to generate significant new funds for the Cal Grants
program. Indeed, the matching rates are so generous
that it is also likely to draw charitable dollars away
from other worthy causes. Even so, it is worth noting
that the program could be made even more attractive to
potential donors. The most obvious way to do that
would be to increase the credit percentage. Any
credit percentage greater than 72 percent would ensure
that donors experience no out-of-pocket costs for
their donations. In states with charitable tax credit
programs already in place, tax planners are beginning
to catch on. One website describing Arizona's tax
credit for school tuition organizations notes that if
you are subject to the AMT, the tax benefits received
exceed the out-of-pocket cost.
The report considers that this "may be too good to be
true," but for the recent IRS ruling, and considers this
tax credit a way to increase federal funds that does not
rely on Congressional actions.
Mr. Blackman and Professor Stark go even farther,
suggesting that the credit would be more lucrative if it
were transferable or allowed against sales taxes. These
changes would create a significant precedent in tax law
that could create unintended consequences.
5. Something for nothing . The bill, as proposed to be
amended in committee, would not have a fiscal effect on the
state as the general fund will be the first fund repaid
from tax proceeds, followed by administrative costs,
followed by the taxpayer's credit, followed by CalGrants.
Given the clear priority order, may there be less funds for
CalGrants depending on the costs associated with the
administration of the program? As administrative costs
become clearer, the author may want to consider capping
these funds while keeping the general fund whole in every
way.
6. Could there be too much ? The bill also doesn't provide
a limit to the creditable amount. For example, five large
taxpayers could contribute $100 million each thereby
SB 798 -- 1/6/14 -- Page 8
discouraging other taxpayers to contribute. The Committee
may wish to consider a mechanism that would allow for
allocations of subsequent year's $500 million caps to allow
for enthusiastic taxpayers to be able to participate.
7. The program . SB 174 (deLeón) is the companion measure
to this bill and lays out the programmatic expenditures
within the Cal Grant program. These two bills must become
operative together or neither bill becomes operative. SB
174 will be heard in the Senate Education Committee on
January 15th.
Support and Opposition (1/9/14)
Support : American Career College ; American Federation of
State, County and Municipal Employees (AFSCME); Association
of Independent California Colleges and Universities
(AICCU); Associated Students of UC Davis; California
Catholic Conference; California Community College
Association of Student Trustees; California Competes;
California Faculty Association; California State Student
Association (CSSA); California Student Aid Commission
(CSAC); Campaign for College Opportunity; Community College
League of California; Education Trust - West; Faculty
Association of California Community Colleges (FACCC); Los
Angeles Community College District (LACCD); Los Angeles
Area Chamber of Commerce; NAACP California; NAACP Los
Angeles; National Council of La Raza; Public Advocates;
Southern California College Access Network; Student Senate
for California Community Colleges (SSCCC); StudentsFirst;
The Institute for College Access and Success (TICAS); West
Coast University; University of California Student
Association (UCSA); Young Invincibles
Opposition : None received.