BILL ANALYSIS Ó
SB 798
Page A
SENATE THIRD READING
SB 798 (De Leyn)
As Amended January 6, 2014
2/3 vote. Urgency
SENATE VOTE :35-0
REVENUE & TAXATION 9-0 APPROPRIATIONS 17-0
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|Ayes:|Bocanegra, Harkey, Beth |Ayes:|Gatto, Bigelow, |
| |Gaines, Gordon, Bloom, | |Bocanegra, Bradford, Ian |
| |Dahle, Pan, | |Calderon, Campos, |
| |V. Manuel Pérez, Ting | |Donnelly, Eggman, Gomez, |
| | | |Holden, Jones, Linder, |
| | | |Pan, Quirk, |
| | | |Ridley-Thomas, Wagner, |
| | | |Weber |
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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
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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.
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.
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8)Establishes the Fund in the State Treasury.
9)Provides that all revenue in this Fund shall be allocated as
follows:
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 California Constitution
Article XVI, Sections 8 and 8.5.
11)Becomes operative only if SB 174 (De León) of the current
legislative session, 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.
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
1)Administrative costs to CEF Authority in the range of $900,000
to $1.6 million over three years to administer the
certification of tax credits for contributions, reimbursable
from Fund proceeds; minor and absorbable costs to FTB and
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Student Aid Commission.
2)Estimated GF revenue decreases of $470 million, $310 million,
and $160 million in Fiscal Year (FY) 2014-15, FY 2015-16, and
FY 2016-17, respectively, though this bill seeks to reimburse
the GF for those amounts.
3)Potential additional contribution receipts of up to $500
million per year to fund Cal Grants.
COMMENTS : 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 [UCLA] 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 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
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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 years it
should take students to complete their degree and
start contributing to the economy as graduates.
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
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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."
Assembly Revenue and Taxation Committee comments:
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 of 1988, consistent with the
Constitution and subject to all requirements. After the
allocation to the GF, the amounts would be allocated, upon
legislative appropriation, first to: 1) the FTB, the CEF
Authority, the State Controller, and the Student Aid Commission
for reimbursement of administrative costs; and then 2) to the
Student Aid Commission for the awarding of Cal Grants to
eligible students.
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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.
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 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 deduction
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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 Professor 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) of 2013,
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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. 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 million 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 California Constitution and subject to all
requirements. SB 284 reached the Governor's desk but was vetoed
SB 284 the bill, as written, would have impacted Proposition 98
funding guarantee.<2>
"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
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<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 to the Fund.
Contingencies: As noted above, this bill would become operative
only if SB 174 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.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0004841