BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 1161 (Olsen) - Preschool: privately funded pilot program: tax  
          credits.
          
           ----------------------------------------------------------------- 
          |                                                                 |
          |                                                                 |
          |                                                                 |
           ----------------------------------------------------------------- 
          |--------------------------------+--------------------------------|
          |                                |                                |
          |Version: July 2, 2015           |Policy Vote: GOV. & F. 6 - 0    |
          |                                |                                |
          |--------------------------------+--------------------------------|
          |                                |                                |
          |Urgency: No                     |Mandate: No                     |
          |                                |                                |
          |--------------------------------+--------------------------------|
          |                                |                                |
          |Hearing Date: August 17, 2015   |Consultant: Robert Ingenito     |
          |                                |                                |
           ----------------------------------------------------------------- 


          This bill meets the criteria for referral to the Suspense File.




          


          Bill  
          Summary: AB 1161 would (1) establish an income tax credit equal  
          to 40 percent of the amount contributed by a taxpayer to the  
          newly established California Preschool Investment Fund, and (2)  
          require the California Department of Education (CDE) to select  
          five counties to participate in the funded preschool pilot  
          program. 


          Fiscal  
          Impact: 
                 CDE would likely incur significant General Fund costs,  
               potentially in the hundreds of thousands of dollars  
               annually, to administer the Fund and provide contribution  







          AB 1161 (Olsen)                                        Page 1 of  
          ?
          
          
               receipts.

                 FTB also would potentially experience significant  
               General Fund costs administer the tax credit. 

                 FTB estimates that the bill would result in General Fund  
               revenue losses of $0.7 million in 2015-16, $23 million in  
               2016-17, and $30 million 2017-18.

                 Contributions to the Fund would be used to hold the  
               General Fund harmless for all noted costs. 



          Background: State law allows taxpayers to claim tax credits designed as  
          incentives for taxpayers to incur certain expenses, such as  
          child adoption, or to influence behavior, including business  
          practices and decisions, such as research and development  
          credits and Geographically Targeted Economic Development Area  
          (GTEDA) credits.  The Legislature typically enacts such tax  
          incentives to encourage taxpayers to do something that, absent  
          the credit, they would not do on the natural. 
          State law authorizes an individual taxpayer to deduct certain  
          expenses as itemized deductions, such as medical expenses,  
          charitable contributions, interest, and taxes.  Also, a  
          corporate taxpayer may deduct charitable contributions but state  
          law limits the amount of those deductions to 10 percent of the  
          taxpayer's net income.  Contributions in excess of this amount  
          can be carried forward to the following five succeeding taxable  
          years. 


          Federal law treats contributions to a state government fund,  
          such as an educational special fund, as charitable  
          contributions.  These contributions may be deducted as itemized  
          deductions. 


          This bill would establish a similar tax credit program to the  
          College Access Tax Credit (CATC) established by SB 798 (De Leon,  
          2014).  The CATC allows a specified percentage of cash  
          contributions made to the College Access Credit Fund.  The  
          specified percentage is 60 percent for taxable year 2014, and  
          declines by 5 percentage points during each of the remaining two  








          AB 1161 (Olsen)                                        Page 2 of  
          ?
          
          
          years the credit is available.  The maximum aggregate amount of  
          credit that may be allocated and certified for each calendar  
          year is $500 million plus any previously unallocated and  
          uncertified amounts.  In 2014, the College Access Tax Credit  
          Fund received a total of $6.2 million in donations.  




          Proposed Law:  
            This bill would, among other things, do the following:
           Require CDE to select, no later than September 1, 2016, the  
            five counties to be included in the Program, as specified. 


           Require CDE to establish a procedure for making contributions  
            to the Fund and issuing receipts to donors containing  
            specified information. 


           Allow the taxpayer to claim the credit only if the taxpayer  
            provides the receipt from CDE to FTB and claims the credit on  
            a timely filed original return.  The bill would allow the  
            taxpayer to carry forward any unused credit for up to four  
            years.


           Require that moneys distributed from the Fund be used first to  
            reimburse the General Fund for the aggregate amount of  
            certified credits allowed; second, upon appropriation, to CDE  
            and FTB to reimburse administrative costs; and finally, upon  
            appropriation, to support state preschools located in the five  
            participating counties.


           Limit the aggregate amount of credits that may be allowed to  
            $250 million per calendar year, and specify that credits would  
            be allocated to contributors on a first come, first served  
            basis. 


           Require CDE to notify FTB of the credits allocated on a  
            monthly basis, and require both entities to post that  
            information quarterly on their respective websites, together  








          AB 1161 (Olsen)                                        Page 3 of  
          ?
          
          
            with the amount of remaining credits and an indication of  
            whether the cap on credits may be reached, as specified.


           Specify that, for purposes of Article XVI, Section 8(b) of the  
            California Constitution, the total annual amount of the credit  
            claimed shall be included in the definition of General Fund  
            revenues as though they were proceeds of taxes, effectively  
            maintaining Proposition 98 funding as if this tax credit were  
            not in place.




          



          Related  
          Legislation: This bill is substantially similar to AB 2107  
          (Gorell and Olsen) of 2014.  AB 2107 was held on the Suspense  
          File of the Assembly Appropriations Committee.


          Staff  
          Comments: This bill is based on an idea to "capture" federal  
          dollars by enacting a state charitable tax credit.  Based on IRS  
          guidance that charitable contributions to a state fund are  
          eligible for the federal tax deduction in the same manner as  
          contributions to a charitable non-profit organization, the  
          structure allows a taxpayer to benefit from both the state tax  
          credit as well as a full deduction on the contribution amount  
          from federal taxes.  Such a favorable structure could result in  
          the State raising significant money for this Fund, serving as a  
          model to future programs.
          For example, for every $1 that a taxpayer donates to the Fund,  
          60 cents (less administrative costs), would be used for State  
          Preschool, and 40 cents will be used to backfill the General  
          Fund. The leveraging of federal dollars is achieved since a  
          charitable contribution to a state agency can be deductible for  
          federal tax purposes. Consequently, the actual cost to donate  
          for a taxpayer is considerably less than typical donations where  
          a taxpayer only receives a federal and state deduction.









          AB 1161 (Olsen)                                        Page 4 of  
          ?
          
          


          Based on California public school donation data from the Public  
          Policy Institute, FTB estimated that there would be $194 million  
          in preschool donations in 2016. This amount was then (1) split  
          between personal income and corporate donations based on ratios  
          of 2012 return contribution data (90 percent and 10 percent,  
          respectively), and (2) grown  through 2019.


          This bill would amend the same statute (Education Code Section  
          41202) as AB 104 (the Education Omnibus Trailer Bill for the  
          2015 Budget Act). AB 104 defines fullday State Preschool funding  
          as a qualifying Proposition 98 General Fund appropriation.  
          Chaptering this bill would repeal AB 104 amendments and result  
          in the State having to backfill approximately $177 million in  
          Proposition 98 General Fund with a like amount of  
          non-Proposition 98 General Fund. 







                                      -- END --