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 --