BILL ANALYSIS Ó
SB 798
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Date of Hearing: June 25, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
SB 798 (De Leon) - As Amended: January 6, 2014
2/3 vote. Fiscal committee.
SENATE VOTE : 35-0
SUBJECT : Income taxes: credits: contributions to education
funds
SUMMARY : Allows a credit, for taxable years beginning on or
after January 1, 2014, and before January 1, 2017, based on the
taxpayer's contribution to a newly established College Access
Tax Credit Fund (Fund), as specified. Specifically, this bill :
1)Provides that the credit shall be allowed under both the
Personal Income Tax (PIT) and Corporation Tax (CT) laws and
shall be equal to the following:
a) For taxable years beginning on and after January 1,
2014, and before January 1, 2015, 60% of the amount
contributed by the taxpayer for the 2014 taxable year to
the Fund, as allocated and certified by the California
Educational Facilities Authority (CEF Authority);
b) For taxable years beginning on and after January 1,
2015, and before January 1, 2016, 55% of the amount
contributed by the taxpayer for the 2015 taxable year to
the Fund, as allocated and certified by the CEF Authority;
and,
c) For taxable years beginning on and after January 1,
2016, and before January 1, 2017, 50% of the amount
contributed by the taxpayer for the 2016 taxable year to
the Fund, as allocated and certified by the CEF Authority.
2)Specifies that contributions shall be made only in cash.
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3)Provides that the aggregate amount of credit that may be
allocated and certified shall equal:
a) $500 million in credits for the 2014 calendar year and
each calendar year thereafter; and,
b) The amount of previously unallocated and uncertified
credits.
4)Requires the CEF Authority to do all of the following:
a) On or after January 1, 2014, and before January 1, 2017,
allocate and certify tax credits to taxpayers;
b) Certify the contribution amounts eligible for the credit
within 45 days following receipt of the contribution;
c) Establish a procedure for taxpayers to contribute to the
Fund and to obtain from the CEF Authority a certification
for the credit; and,
d) Provide to the Franchise Tax Board (FTB) a copy of each
credit certificate issued for the calendar year by March 1
of the calendar year immediately following the year in
which those certificates are issued.
5)Directs the CEF Authority to adopt any necessary implementing
regulations. Specifies that the Administrative Procedures Act
shall not apply to such regulations.
6)Provides that, in cases where the credit amount exceeds the
tax owed, the excess credit amount may be carried over to
reduce the tax liability in the following year, and the
succeeding five years if necessary, until the credit is
exhausted.
7)Prohibits a deduction for amounts taken into account in
calculating the credit.
8)Establishes the Fund in the State Treasury.
9)Provides that all revenue in this Fund shall be allocated as
follows:
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a) First, to the General Fund (GF) in an amount equal to
the aggregate amount of certified credits allowed for the
taxable year;
b) Second, upon appropriation by the Legislature, to the:
i) FTB, the CEF Authority, the State Controller, and
the Student Aid Commission for reimbursement of all
administrative costs incurred in connection with their
duties under this bill, and Education Code Section
69432.7 (relating to the Cal Grant Program); and,
ii) Student Aid Commission for purposes of awarding Cal
Grants to students pursuant to Education Code Section
69431.7.
10)Provides that revenues allocated to the GF shall be
considered GF revenues for purposes of Section 8 and 8.5 of
Article XVI of the California Constitution.
11)Becomes operative only if SB 174 (De León) is enacted and
takes effect on or before January 1, 2015.
12)Sunsets the credit provisions on December 1, 2017.
13)Takes effect immediately as an urgency statute.
EXISTING FEDERAL LAW:
1)Does not allow an income tax credit for contributions to an
educational special fund.
2)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, including business practices.
2)Authorizes an individual taxpayer to deduct certain expenses
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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 the Cal Grant A and B Entitlement awards, the
California Community College Transfer Cal Grant Entitlement
awards, the Competitive Cal Grant A and B awards, the Cal
Grant C awards, and the Cal Grant T awards under the
administration of the Student Aid Commission, and establishes
eligibility requirements for awards under these programs for
participating students attending qualifying institutions.
FISCAL EFFECT : The FTB estimates that this bill would reduce GF
revenues by $470 million in fiscal year (FY) 2014-15, by $310
million in FY 2015-16, and by $160 million in FY 2016-17.
Nevertheless, the FTB notes that this estimate reflects the
direct impact on tax collections. Because this bill would
require funds to be transferred from the Fund to the GF, the FTB
states that, "the net impact of College Access Tax Credits on
the [GF] would be zero."
COMMENTS :
1)The Author's Statement . The author provided the following
statement in support of this bill:
"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
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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 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. [Forty-three]
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
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years it should take students to complete their degree and
start contributing to the economy as graduates."
2)Arguments in Support . The proponents of this bill state that
since 1969 the Cal Grant program has helped millions of
low-income Californians afford college. "The Cal Grant B,
awarded primarily to low-income, under-represented students,
provides crucial 'access awards' to help these students pay
for non-tuition related expenses such as textbooks,
transportation, and living expenses. Unfortunately, the
purchasing power of the Cal Grant B award has stagnated in
recent years, while college costs have rapidly escalated.
This year's $1,473 award represents just a quarter of the
original Cal Grant B purchasing power." The proponents argue
that is important to increase the value of the Cal Grant B
award "in order to help our neediest students succeed in
higher education. Increasing the award amount would enable
students to limit the number of hours they work, and enroll in
more credit hours, both of which contribute to greater
completion rates." The proponents believe that at a time
"when California needs to dramatically increase the number of
college educated workers it produces in order to meet
workforce demands," increasing financial aid awards "for the
lowest income students will not only contribute to their own
success," but will help our state "remain economically
competitive as well."
3)What Would this Bill Do ? For taxable years beginning on or
after January 1, 2014, and before January 1, 2017, this bill
would allow taxpayers, upon certification by the CEF
Authority, to receive an income tax credit for contributions
made to the Fund. This bill caps the aggregate amount of the
credit that may be allocated and certified at $500 million for
each calendar year. The specified percentage used to
calculate the credit would be 60% of the amount contributed
during the 2014 taxable year, 55% of the amount contributed
during the 2015 taxable year, and 50% of the amount
contributed during the 2016 taxable year.
Amounts contributed to the Fund would be allocated first to
the GF in an amount equal to the aggregate amount of certified
credits. These revenue amounts that allocated to the GF are
subject to Proposition 98, consistent with the Constitution
and subject to all requirements. After the allocation to the
GF, the amounts would be allocated, upon legislative
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appropriation, first to: (a) the FTB, the CEF Authority, the
State Controller, and the Student Aid Commission for
reimbursement of administrative costs; and then (b) to the
Student Aid Commission for the awarding of Cal Grants to
eligible students.
4)The CEF Authority : The CEF Authority was established in 1973,
and operates pursuant to the California Education Facilities
Authority Act. According to its Web site:
[The CEF Authority] was created for the purpose of issuing
revenue bonds to assist private non-profit institutions of
higher learning, in the expansion and construction of
educational facilities. Because it is authorized to issue
tax-exempt bonds, the [CEF Authority] may provide more
favorable financing to such private institutions than might
otherwise be obtainable.
Financing proceeds may be used for specified project-related
costs, including construction, remodeling, land acquisition,
and the refinancing or refunding of prior debt.
5)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 to non-profits,
and also to a state, are eligible for the federal tax
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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 $60 back from the state via the state tax
credit. Furthermore, depending on the taxpayer's federal tax
rate, the taxpayer could receive as much as $28 back from the
Federal Government by deducting $100 as a charitable
contribution for federal income tax purposes. In turn, the
CEF, 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 $12. As noted by Prof.
Stark and Mr. Blackman, 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 it may
be made even more attractive to potential donors by 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.
This creative idea was incorporated in SB 284 (De Leyn) in 2013,
---------------------------
<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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which would have established an income tax credit for cash
contributions made to a state fund with an aggregate credit
cap of $500 mi6)llion per calendar year. This bill is
identical to SB 284, with one caveat. In contrast to SB 284,
this bill contains a clarification that contributions will be
included in Proposition 98 calculations and are subject to
Proposition 98 consistent with the Constitution and subject to
all requirements. SB 284 reached the Governor's desk but was
vetoed because the bill, as written, would have impacted
Proposition 98 funding guarantee.<2>
7)"Newly Found" Money ? This bill encourages taxpayers to make
charitable donations to the state's Fund through a 60%, 55%,
and 50% 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 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, a tax credit is generally
---------------------------
<2> The Governor's veto message stated, "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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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.
The Committee may wish to consider whether this bill would
result in new revenue or would simply redirect charitable
funds from other charities to the Fund to support the Cal
Grants programs.
8)The Sky's 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
potentially reach the total cap, thereby discouraging other
taxpayers to contribute. The Committee may wish to consider
if there should be a limit on the amount of the credit claimed
by each taxpayer.
9)Implementation Concerns . The FTB noted the following policy
concerns in its staff analysis of this bill:
a) "This bill could create differences between federal and
California tax law if a taxpayer chooses to utilize this
credit, instead of taking the charitable deduction for
state purposes, thereby increasing the complexity of
California tax return preparation."
b) "This bill would create a credit for certain charitable
contributions that are currently deductible. As a result,
because the credit's dollar-for-dollar reduction of tax is
a more generous tax benefit than a deduction, there could
be a redirection of existing, planned charitable giving to
obtain the tax credit allowed under this bill."
10)Contingencies : As noted above, this bill would become
operative only if SB 174 (De León) is also enacted. SB 174
would provide a mechanism for the distribution of Fund moneys
to students to supplement Cal Grant B access cost awards, as
specified.
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11)Related Legislation :
a) SB 284 (De Leyn) was substantially similar to this bill.
SB 284 was vetoed by the Governor:
"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
98b) 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."
c) AB 2107 (Gorrell) would have allowed an income tax
credit equal to 40% of the amount contributed by a taxpayer
to the newly established California Preschool Investment
Fund and would require the California Department of
Education to disburse the money annually to an alternative
payment provider, as specified, for purposes of subsidizing
preschool services for eligible families in five counties
chosen to participate in the California Preschool
Investment Pilot program. AB 2107 was held on the Assembly
Committee on Appropriations' Suspense File.
REGISTERED SUPPORT / OPPOSITION :
Support
California Catholic Conference
California State Student Association
Californians for Shared Prosperity Coalition
Campaign for College Opportunity
EARN
Education Trust-West
Institute for College Access & Success
Los Angeles Area, Chamber of Commerce
California Competes
National Council of La Raza
Southern California College Access Network
Student Senate for California Community Colleges
University of California Student Association
Young Invincibles
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Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098