Existing law, the Child Care and Development Services Act, administered by the State Department of Education, requires the Superintendent of Public Instruction to administer child care and development programs that offer a full range of services for eligible children from infancy to 13 years of age. Existing law requires the Superintendent to administer all California state preschool programs, including, but not limited to, part-day and full-day age and developmentally appropriate programs for 3- and 4-year-old children.

This bill would, until January 1, 2021, authorize the department, as part of a pilot program, to accept monetary contributions made to the California Preschool Investment Fund, which this bill would create, by a person for purposes of preschool education, as provided. The bill would require the money in the fund to be used to, among other things, fund state preschools part of the California state preschool program located in one of the 5 participating counties, counties participating in the pilot program, as provided. The bill would require participating counties to report to the departments Early Education & Support Division regarding the countys assessment of how the pilot program is performing. The bill would require any moneys remaining in the fund after January 1, 2021, to be transferred to any other state fund identified by the department that provides funding for increased access to preschool programs for low-income children.

The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws.

This bill, under both laws, for taxable years beginning on or after January 1, 2016, and before January 1, 2020, would allow a credit equal to 40% of the amount contributed by the taxpayer during the taxable year to the California Preschool Investment Fund, as provided. The bill would limit the aggregate amount of credit allowed under both laws to not exceed $250,000,000 and would require the State Department of Education to establish a procedure for a person to obtain from the department a receipt indicating specified information, including the amount of monetary contributions made, for purposes of the tax credits allowed under these provisions.

This bill would, until January 1, 2021, require the total annual amount of credits claimed pursuant to these provisions to be treated as though they were proceeds of taxes for purposes of calculating the moneys to be applied by the state for the support of school districts and community college districts pursuant to a specified provision of the California Constitution.

Existing law, the Child Care and Development Services Act, administered by the State Department of Education, requires the Superintendent of Public Instruction to administer child care and development programs that offer a full range of services for eligible children from infancy to 13 years of age. Existing law requires the Superintendent to administer all California state preschool programs, including, but not limited to, part-day and full-day age and developmentally appropriate programs for 3- and 4-year-old children.

This bill would, until January 1, 2021, authorize the department, as part of a pilot program, to accept monetary contributions made to the California Preschool Investment Fund, which this bill would create, by a person for purposes of preschool education, as provided. The bill would require the money in the fund to be used to, among other things, fund state preschools part of the California state preschool program located in one of the 5 participating counties, as provided. The bill would require participating counties to report to the departments Early Education & Support Division regarding the countys assessment of how the pilot program is performing. The bill would require any moneys remaining in the fund after January 1, 2021, to be transferred to any other state fund identified by the department that provides funding for increased access to preschool programs for low-income children.

The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws.

This bill, under both laws, for taxable years beginning on or after January 1, 2016, and before January 1, 2020, would allow a credit equal to 40% of the amount contributed by the taxpayer during the taxable year to the California Preschool Investment Fund, as provided. The bill would limit the aggregate amount of credit allowed under both laws to not exceed $250,000,000 and would require the State Department of Education to establish a procedure for a person to obtain from the department a receipt indicating specified information, including the amount of monetary contributions made, for purposes of the tax credits allowed under these provisions.

The bill would, until January 1, 2021, require the total annual amount of credits claimed pursuant to these provisions to be treated as though they were proceeds of taxes for purposes of calculating the moneys to be applied by the state for the support of school districts and community college districts pursuant to a specified provision of the California Constitution.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 1161 (Olsen) - Preschool: privately funded pilot program: tax credits.

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 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 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 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.

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.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert Hertzberg, Chair

2015 - 2016 Regular

PRESCHOOL: PRIVATELY FUNDED PILOT PROGRAM: TAX CREDITS

Establishes an income tax credit equal to 40% of the amount contributed by a taxpayer to the newly established California Preschool Investment Fund, and requires the California Department of Education to select five counties to participate in the investor-funded preschool pilot program.

Background and Existing Law

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, but for the tax credit, they would otherwise not do.

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% of the taxpayer's net income. Contributions in excess of 10% 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.

Assembly Bill 1161 seeks to establish a similar tax credit program to the College Access Tax Credit established by SB 798 (De Leon, 2014). The College Access Tax Credit allows a specified percentage of cash contributions made to the College Access Credit Fund. The specified percentage is 60% for the 2014 taxable year, and declines by 5% each of the remaining two 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 $6,199,289 in donations.

Proposed Law

Assembly Bill 1161 establishes an income tax credit, under the Personal Income Tax or the Corporation Tax Law, equal to 40% of the amount contributed by a taxpayer to the newly established California Preschool Investment Fund (Fund), and requires the California Department of Education (CDE) to select five counties to participate in the investor-funded preschool pilot program (Program) for the purposes of subsidizing preschool services for eligible families.

The credit must be claimed on a timely filed original return. The credit allows a carryover of the credit to reduce the taxpayer's tax in the following tax year, and the succeeding four years if necessary, until the credit is exhausted. The credit reduces the amount of the charitable deduction, otherwise allowed to the taxpayer, for contributions made to the Fund by the amount of the credit allowable for the same contribution.

AB 1161 limits the aggregate amount of credits to $250 million for each calendar year. The bill provides that credit amounts claimed are factored into the calculation of the state’s Proposition 98 obligation. The bill creates the Fund in the State Treasury and authorizes CDE to accept monetary contributions made by a person to the Fund for purposes of funding the Program.

AB 1161 requires the Franchise Tax Board (FTB) and CDE to place the information relating to the tax credit on their respective web sites, and authorizes FTB to prescribe rules, guidelines, or procedures necessary or appropriate to carry out the purposes of this section.

The bill allows a county to apply to CDE, no later than June 1, 2016, for consideration of inclusion in the Program. The bill requires a county's local child care and development council to submit the application. A county selected to participate in the Program must annually report to CDE's Early Education and Support Division. The report shall contain the county's assessment of the program’s performance.

By September 1, 2016, AB 1161 requires CDE to determine the five counties to be included in the Program, ensure that urban, suburban, and rural counties are represented in the Program, and give priority to counties based on any of the following factors:

• The length of the county's waitlist of individuals seeking public child care assistance;

• The ability to increase the number of preschool slots available to children in the county;

• Whether the county received federal “Race to the Top” funds, with favorable consideration going to the counties that received the funds.

The bill requires CDE to establish a procedure for making monetary contributions to the Fund and obtaining a receipt from CDE indicating the amount of contributions made by the taxpayer. A receipt, at a minimum, must contain the date of the monetary contribution and the contributor’s name. CDE must allocate the tax credits on a first-come, first-served basis, and notify FTB of the credits allocated on at least a monthly basis. The money in the Fund must be allocated as follows:

• First to reimburse the General Fund for the aggregate amount of certified credits allowed;

• To reimburse CDE and FTB for administrative costs associated with the Program;

• To support state preschools located in the five participating counties.

The Program applies to taxable years beginning on or after January 1, 2016, and before January 1, 2020, and as of that date is repealed. Any moneys remaining in the Fund as of January 1, 2021, shall be transferred to any other state fund identified by CDE that provides funding for increased access to preschool programs for low-income children.

State Revenue Impact

FTB staff estimates that this bill will result in an annual revenue loss of $700,000 in the fiscal year (FY) 2015-16, $23 million in 2016-17, and $30 million in 2017-18. However, this bill requires funds to be transferred from the California Preschool Investment Fund to the General Fund, so that the net impact of Preschool Investment Fund Credits on the General Fund would be zero or a minimal gain due to timing and usage.

Comments

1. Purpose of the bill. According to the author, "The benefits of an early education are not only seen in classrooms – students, businesses, and the entire communities profit when children participate in a preschool education. Although the State does provide access to early education programs, our counties are struggling to meet the demands of current enrollment trends. Due to understandable budget constraints on preschool programs, there are too many families vying for too few spots for their children. Something needs to be done to ensure that families seeking to take advantage of the benefits of early education for their children are access those opportunities. AB 1161 seeks to provide a creative answer to the need to grow early education opportunities by harnessing the power of the private sector. It would create a self-supporting, public/private funding partnership that would increase access to early education for low-income families in order to put our students on the right path in school and in life by preparing them for academic success, ultimately ensuring they are better prepared for the workforce."

2. 2015-2016 Budget. On June 24, 2015, Governor Brown signed a $167.6 billion budget that dedicated over $265 million to expanding the child care system through higher child care reimbursement rates, and more slots. Additionally, the budget included $34.3 million to provide access to full‑day State Preschool for an additional 7,030 low-income children, and $52.6 million General Fund to provide child care vouchers for an additional 6,800 low-income children. AB 1161 would further build on this year’s budget, and provide even more funding for low income families seeking access to early education programs.

3. An Innovative Tax Idea to Capture the Federal Dollars. This bill is based on a very creative idea of "capturing" 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 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 not only to non-profits, but also to a state, are eligible for the federal tax deduction if certain requirements are met.

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 $40 back from the state via the state tax credit and, depending on the taxpayer’s federal tax rate, could save as much as $28 in federal income taxes. In turn, CDE, 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 $32.

4. Have We Seen this Idea Before? This creative idea was incorporated in SB 798 (De Leon, 2014), which established an income tax credit for cash contributions made to a state fund with an aggregate credit cap of $500 million per calendar year. Specifically, SB 798 created a California College Access Tax Fund (CCATF), in the State Treasury, to receive cash contributions from taxpayers and to allow taxpayers making the contributions to receive a state income or franchise tax credit in a specified percentage. The credit is effective for taxable years beginning on or after January 1, 2014 and until January 1, 2017. The amounts contributed to the CCATF would be used first to make the General Fund whole for each taxable year in which the credit was allowed and then awarded, upon appropriation by the Legislature, to the California Student Aid Commission for purposes of awarding Cal Grants to students.

5. How different is this Bill? While based on the same tax concept as SB 798, this bill proposes to leverage federal funds for a very different purpose - preschool education. The credit percentage, while still very generous, would be lower - 40% versus 60%. Furthermore, similarly to SB 798, it would compensate the General Fund for the lost revenues and reimburse CDE and FTB for their administrative costs. Finally, it appears that this bill is intended to alleviate any negative impact on the Proposition 98 funding guarantee by providing that the annual amount of the credits claimed would be counted as "proceeds of taxes" for purposes of Proposition 98 calculations.

6. Generous Incentive. This bill creates one of the most generous tax credits ever allowed in California. Under existing law, taxpayers may only claim a deduction for contributions to charitable organizations. A tax credit, however, may be much more valuable, particularly to corporate taxpayers. While this bill limits 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 easily reach the total cap, thereby discouraging other taxpayers to contribute. As a result, this bill could incentivize many corporate taxpayers to redirect charitable contributions to the Fund, creating a tax planning opportunity for corporate social responsibility programs without necessarily increasing total corporate giving.

7. No double dipping. The credit does not allow any deductions for amounts taken into account in the calculation of the credit, but a deduction may be made on a taxpayer’s federal return. For example, Jane Doe contributes $10,000 to the Fund, thus she is entitled to a $4,000 credit (40% × $10,000). Jane may claim a $4,000 credit on her California tax return. She can also claim a $10,000 charitable contribution on her federal return. However, she will not be able to claim a charitable contribution on her California return.

8. Related Legislation;

• SB 295 (De Leon), extends the College Access Tax Credit program by one year and raises the credit percentage amount 5% per year. The bill is currently in Assembly Revenue and Taxation.

• SB 798 (De Leon), Chapter 367, Statutes of 2014, created the College Access Tax Credit program, a tax credit program for cash contributions made to the California College Access Tax Fund with an aggregated cap of $500 million per calendar year. The tax credit is available to taxpayers for taxable years beginning on or after January 1, 2014 and until January 1, 2017.
  SB 284 (De Leon), of the 2013-14 Legislative Session, was similar to SB 798. SB 284 would have created the California College Access Tax Fund program and would have allowed a temporary tax credit for cash contributions made to the Fund. SB 284 was vetoed.

• AB 2107 (Gorell and Olsen), of the 2013-14 Legislative Session, was similar to AB 1161. AB 2107 would have created a temporary tax credit for cash contributions made to the California Preschool Investment Fund. AB 2107 was held on the Assembly Appropriations Committee's Suspense File.

• AB 1261 (Gorell), of the 2013-14 Legislative Session, was similar to AB 1161. AB 1261 would have created a temporary tax credit for cash contributions made to the California Preschool Investment Fund. AB 1261 was never heard by the Assembly Revenue and Taxation Committee.

Assembly Actions

Assembly Revenue and Taxation 8-0

Assembly Appropriations 17-0

Assembly Floor 75-0

Support and Opposition

(6/25/15)

Support: California Catholic Conference; County of San Bernardino; First 5 Association of California; Junior Leagues of California, the State Public Affairs Committee.

Opposition: California Federation of Teachers; California Tax Reform Association.

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ASSEMBLY THIRD READING

ATR Bill Id:AB 1161

Author:(Olsen and Atkins)

As Introduced Ver:February 27, 2015

Majority vote

SUMMARY: Allows an income tax credit equal to 40% of the amount contributed by a taxpayer to the newly established California Preschool Investment Fund (Fund) and requires the California Department of Education (CDE) to select five counties to participate in the investor-funded preschool pilot program (Program) for the purposes of subsidizing preschool services for eligible families. Specifically, this bill:

1. Declares that, by providing an additional source of funding, California can expand the number of preschool slots and subsidies needed to reduce the waitlist for parents seeking prekindergarten childcare assistance.

2. Creates the Program, which is a five-county investor funded preschool program to be administered by the CDE and allows a county to apply to the CDE, no later than June 1, 2016, for consideration of inclusion in the Program. Requires a county's local child care and development planning council to be responsible for making the application.

3. Requires a county selected to participate in the Program to annually report to the CDE's Early Education and Support Division. The report shall contain the county's assessment of how the program is performing.

4. Creates the Fund in the State Treasury to receive monetary contributions.

5. Authorizes the CDE to accept monetary contributions made by a person to the Fund for purposes of funding the Program.

6. Requires the CDE to do all of the following:

   1. Determine, no later than September 1, 2016, the five counties to be included in the Program.

   2. In making this determination, ensure that urban, suburban, and rural counties are represented in the Program and give priority to counties that meet any of the following factors:

      1. The length of the county's waitlist of individuals seeking public child care assistance;

      2. The ability to increase the number of preschool slots available to children in the county;

      3. Whether the county received federal Race to the Top funds authorized under the federal American Recovery and Reinvestment Act of 2009 (Public Law 111-5), with favorable consideration going to the counties that received the funds.

   3. Establishes a procedure for making monetary contributions to the Fund and obtaining a receipt from the CDE indicating the amount of contributions made by the person. A receipt, at a minimum, must contain the date of the monetary contribution and the contributor’s name.

   4. Subject to the prescribed annual cap, allocates tax credits to taxpayers on a first-come, first-served basis.

   5. Notifies the FTB of the credits allocated on at least a monthly basis.

7. Requires that the money in the Fund be allocated as follows:

   1. Be used first to reimburse the General Fund for the aggregate amount of certified credits allowed;

   2. Upon appropriation, to the CDE and Franchise Tax Board (FTB) to reimburse administrative costs associated with the Program; and,

   3. Last, upon appropriation, to support state preschools located in the five participating counties.

8. Provides that the Program shall remain in effect only until January 1, 2021, and as of that date is repealed unless a later enacted statute deletes or extends that date.

9. Specifies that any moneys remaining in the Fund as of January 1, 2021, shall be transferred to any other state fund identified by the CDE that provides funding for increased access to preschool programs for low-income children.

10. Allows a tax credit for taxable years beginning on or after January 1, 2016, and before January 1, 2020, under either the Personal Income Tax (PIT) or the Corporation Tax (CT) Law, in an amount equal to 40% of the amount contributed by the taxpayer during the taxable year to the Fund.

11. Allows the credit only if the taxpayer has:

    1. Contributed to the Fund and received a receipt from the CDE indicating that the taxpayer has made the contribution; and,

    2. Claimed the credit on a timely filed original return.

12. Requires the taxpayer to provide the receipt to the FTB, upon request.

13. Allows a carryover of the credit to reduce the taxpayer's tax in the following tax year, and the succeeding four years if necessary, until the credit is exhausted.

14. Reduces the amount of the charitable deduction, otherwise allowed to the taxpayer, for contributions made to the Fund by the amount of the credit allowable for the same contribution.

15. Requires the FTB and CDE to place the information relating to the tax credit on their respective Web sites, as provided.

16. Authorizes the FTB to prescribe rules, guidelines, or procedures necessary or appropriate to carry out the purposes of this section.

17. Exempts the FTB administrative pronouncements regarding the credit and its implementation from the requirements of the Administrative Procedures Act (Government Code Chapter 3.5 (commencing with Section 11340).)

18. Limits the aggregate amount of credits that may be allowed under both the PIT and CT laws to $250 million for each calendar year.

19. Specifies that, for purposes of California Constitution Article XVI, Section 8(b), the total annual amount of the credit claimed shall be included in the definition of "the General Fund revenues that are the proceeds of taxes," as though they were proceeds of taxes.

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1) Significant costs, likely in the hundreds of thousands of dollars, to CDE to administer the Fund and provide contribution receipts; potentially significant costs to FTB to administer the tax credit, though the bill seeks to reimburse the departments for these costs.

2) Estimated decrease to General Fund revenue of $0.7 million, $23 million, and $30 million in Fiscal Year (FY) 2015-16, FY 2016-17, and FY 2017-18, respectively, though this bill seeks to reimburse the General Fund for those amounts, resulting in a neutral or possible minor gain in revenue due to timing effects.

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:

"The benefits of an early education are not only seen in classrooms – students, businesses, and the entire communities profit when children participate in a preschool education.

"Although the state does provide access to early education programs, our counties are struggling to meet the demands of current enrollment trends. Due to understandable budget constraints on preschool programs, there are too many families vying for too few spots for their children. Something needs to be done to ensure that families seeking to take advantage of the benefits of early education for their children are access those opportunities.

"AB 1161 seeks to provide a creative answer to the need to grow early education opportunities by harnessing the power of the private sector. It would create a self-supporting, public/private funding partnership that would increase access to early education for low-income families in order to put our students on the right path in school and in life by preparing them for academic success, ultimately ensuring they are better prepared for the workforce."

2. What Would this Bill Do? For years beginning on January 1, 2016, and before January 1, 2021, this bill would create the California Preschool Investment Pilot Program, would establish the Fund, and would authorize the CDE to administer the Program and to accept monetary contributions made to the Fund. This bill would also establish a process whereby an individual, partnership, corporation, limited liability company, association, or other group, however organized, may donate to the Fund to subsidize preschool slots in five counties. The moneys in the Fund would be disbursed by the CDE to provide for the specific purpose of funding the California state preschool programs and supporting state preschools locating in one of the five counties selected by the CDE to participate in the Program.

In addition, this bill would allow taxpayers, upon the issuance of the receipt by the CDE, to claim a credit for contributions made to the Fund. This bill would cap the total aggregate amount of credit that may be claimed by the taxpayers to $250 million for each calendar year. The percentage used to calculate the credit would be 40% of the amount contributed during any of the taxable years beginning on or after January 1, 2016, and before January 1, 2020.

3. The Child Care and Development Services Act. The CDE administers a child care and development system, maintaining 1,401 service contracts with approximately 758 public and private agencies supporting and providing services to children from birth through 12 years of age. The California State Preschool Program (CSPP) offers part-day and full-day preschool programs through contracts with local educational agencies, private contractors, and colleges. These programs are required to comply with not just health and safety standards under Title 22 regulations, but also higher developmental and teacher qualification standards under Title 5 regulations adopted by the CDE. Priority for enrollment goes to four- or three-year-old neglected or abused children who are recipients of Child Protective Services or recipients who are at risk of being neglected or abused, without regard to income. Second priority goes to four-year-old children who were enrolled in CSPP as a three-year-old, followed by four-year-old children with the lowest income ranking. Three-year-old children may be enrolled after four-year-olds are enrolled. Income eligibility is 70% of the SMI ($46,896 for a family of four).

4. County Waitlist. This bill requires the CDE to give priority to counties based on the length of the county's waitlist of individuals seeking public child care assistance, the ability to increase the number of preschool slots, and whether the county received federal Race to the Top funds, with favorable consideration given to counties that received the funds. With regard to a waitlist, each contractor maintains a list, but there is no longer a centralized list in each county. From 2005 to 2011, funds were provided to establish centralized eligibility lists in each county, but were terminated in 2011. It is unclear how CDE will determine the waitlist in each county.

5. Have We Seen this Idea Before? SB 798 (De Leon), Chapter 367, Statutes of 2014, established an income tax credit for cash contributions made to a state fund with an aggregate credit cap of $500 million per calendar year. Specifically, SB 798 created a California College Access Tax Fund (CCATF), in the State Treasury, to receive cash contributions from taxpayers and to allow taxpayers making the contributions to receive a state income or franchise tax credit in a specified percentage. The credit is effective for taxable years beginning on or after January 1, 2014 and until January 1, 2017. The amounts contributed to the CCATF would be used first to make the General Fund whole for each taxable year in which the credit was allowed and then would have been awarded, upon appropriation by the Legislature, to the California Student Aid Commission for purposes of awarding Cal Grants to students.

6. How Different is this Bill? While based on the same tax concept as SB 798, this bill proposes to leverage federal funds for a very different purpose - preschool education. The credit percentage, while still very generous, would be lower – 40% versus 60%. Furthermore, similarly to SB 798, it would compensate the General Fund for the lost revenues and reimburse the CDE and the FTB for their administrative costs. Finally, it appears that this bill is intended to alleviate a negative impact on Proposition 98 (1988) funding guarantee by providing that the annual amount of the credits claimed would be counted as "proceeds of taxes" for purposes of Proposition 98 calculations.

7. New Money for Preschool Programs? This bill encourages taxpayers to make charitable donations to the state's preschool program through a 40% income and franchise tax credits. If enacted, this credit would be one the most generous tax credits California allows. 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. 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, it is generally 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. Furthermore, in light of the new program created by SB 798, it is unclear how many taxpayers will forgo an opportunity to receive a 60% tax credit in favor of a 40% tax credit offered by this bill.

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0000666

Date of Hearing: May 6, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 1161

Author:(Olsen) – As Introduced Ver:February 27, 2015

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill creates the California Preschool Investment Pilot Program (Program) to incentivize private contribution to state preschools through a tax credit. The bill establishes the California Preschool Investment Fund (Fund) and allows an income tax credit equal to 40% of the amount contributed by an individual or corporate taxpayer to the Fund. The bill requires the California Department of Education (CDE) to use the contributions to fund state preschool programs in five select counties after reimbursing the General Fund for credits issued and reimbursing costs to CDE and the Franchise Tax Board (FTB). In summary, this bill:

1) Requires the CDE to select, no later than September 1, 2016, the five counties to be included in the Program, ensuring that urban, suburban, and rural counties are all represented. Applications shall be made by county child care and development planning councils.

2) Requires the CDE to establish a procedure for making contributions to the Fund and issuing receipts to contributors indicating the amount contributed, the name of the contributor, the date the contribution is made, and whether the person has been allocated a tax credit.

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

4) Requires 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 the CDE and FTB to reimburse administrative costs associated with the Program; and last, upon appropriation, to support state preschools located in the five participating counties.

5) Limits the aggregate amount of credits that may be allowed to $250 million per calendar year; specifies that credits will be allocated to contributors on a first come, first served basis.

6) Requires the CDE to notify the FTB of the credits allocated on a monthly basis, and requires the CDE and FTB to post that information quarterly on their respective websites, together with the amount of remaining credits and an indication of whether the cap on credits may be reached at least every calendar quarter.

7) Requires that any moneys remaining in the Fund as at January 1, 2021, be transferred to any other state fund identified by the CDE that provides funding for increased access to preschool programs for low-income children.

8) Specifies 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.

FISCAL EFFECT:

1) Significant costs, likely in the hundreds of thousands of dollars, to CDE to administer the Fund and provide contribution receipts; potentially significant costs to FTB to administer the tax credit, though the bill seeks to reimburse the departments for these costs.

2) Estimated decrease to GF revenue of $0.7 million, $23 million, and $30 million in FY 2015-16, FY 2016-17, and FY 2017-18, respectively, though this bill seeks to reimburse the GF for those amounts, resulting in a neutral or possible minor gain in revenue due to timing effects.

COMMENTS:

1) Purpose. According to the author, demand for early learning programs outstrips supply, with many families on waitlists for state programs. The author indicates that several studies have shown the beneficial impact to students of early learning, and that early investment in child learning yields long-term economic benefit to the state. The author contends the program will create a self-supporting public-private funding partnership for the state's early learning programs, allowing more families to send their children to preschools.

2) Interaction with Federal Charitable Contributions. 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.

3) Generous Incentive. This bill creates one of the most generous tax credits ever allowed in California. Under existing law, taxpayers may only claim a deduction for contributions to charitable organizations. A tax credit, however, may be much more valuable, particularly to corporate taxpayers. Furthermore, this bill contains no individual cap on contributions or credits, and a few contributions from large corporate taxpayers could reach the total cap. As a result, this bill could incentivize many corporate taxpayers to redirect charitable contributions to the Fund, creating a tax planning opportunity for corporate social responsibility programs without necessarily increasing total corporate giving.

4) Previous Legislation. This bill is substantially similar to AB 2107 (Gorell and Olsen) of 2014. AB 2107 was held on the Suspense File of this committee.

Analysis Prepared by: Joel Tashjian / APPR. / (916) 319-2081

Date of Hearing: April 27, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 1161

Author:(Olsen and Atkins) – As Introduced Ver:February 27, 2015

SUSPENSE

Majority Vote. Fiscal Committee.

SUBJECT: Preschool: privately funded pilot program: tax credits

SUMMARY: Allows an income tax credit equal to 40% of the amount contributed by a taxpayer to the newly established California Preschool Investment Fund (Fund) and requires the California Department of Education (CDE) to select five counties to participate in the investor-funded preschool pilot program (Program) for the purposes of subsidizing preschool services for eligible families. Specifically, this bill:

1. Declares that, by providing an additional source of funding, California can expand the number of preschool slots and subsidies needed to reduce the waitlist for parents seeking prekindergarten childcare assistance.
   
   

2. Creates the Program, which is a five-county investor funded preschool program to be administered by the CDE and allows a county to apply to the CDE, no later than June 1, 2016, for consideration of inclusion in the Program. Requires a county's local child care and development planning council to be responsible for making the application.
   
   

3. Requires a county selected to participate in the Program to annually report to the CDE's Early Education and Support Division. The report shall contain the county's assessment of how the program is performing.
   
   

4. Creates the Fund in the State Treasury to receive monetary contributions.
   
   

5. Authorizes the CDE to accept monetary contributions made by a person to the Fund for purposes of funding the Program.
   
   

6. Requires the CDE to do all of the following:
   
   

   1. Determine, no later than September 1, 2016, the five counties to be included in the Program.
      
      

   2. In making this determination, ensure that urban, suburban, and rural counties are represented in the Program and give priority to counties that meet any of the following factors:
      
      

      1. The length of the county's waitlist of individuals seeking public child care assistance;
         
         

      2. The ability to increase the number of preschool slots available to children in the county;
         
         

      3. Whether the county received federal Race to the Top funds authorized under the federal American Recovery and Reinvestment Act of 2009 (Public Law 111-5), with favorable consideration going to the counties that received the funds.
         
         

   3. Establish a procedure for making monetary contributions to the Fund and obtaining a receipt from the CDE indicating the amount of contributions made by the person. A receipt, at a minimum, must contain the date of the monetary contribution and the contributor’s name.
      
      

   4. Subject to the prescribed annual cap, allocate tax credits to taxpayers on a first-come, first-served basis.
      
      

   5. Notify the FTB of the credits allocated on at least a monthly basis.
      
      

7. Requires that the money in the Fund be allocated as follows:

1. Be used first to reimburse the General Fund for the aggregate amount of certified credits allowed;
   
   

2. Upon appropriation, to the CDE and Franchise Tax Board (FTB) to reimburse administrative costs associated with the Program;
   
   

3. Last, upon appropriation, to support state preschools located in the five participating counties.
   
   

1. Provides that the Program shall remain in effect only until January 1, 2021, and as of that date is repealed, unless a later enacted statute deletes or extends that date.
   
   

2. Specifies that any moneys remaining in the Fund as of January 1, 2021, shall be transferred to any other state fund identified by the CDE that provides funding for increased access to preschool programs for low-income children.
   
   

3. Allows a tax credit for taxable years beginning on or after January 1, 2016, and before January 1, 2020, under either the Personal Income Tax (PIT) or the Corporation Tax (CT) Law, in an amount equal to 40% of the amount contributed by the taxpayer during the taxable year to the Fund.
   
   

4. Allows the credit only if the taxpayer has:
   
   

   1. Contributed to the Fund and received a receipt from the CDE indicating that the taxpayer has made the contribution; and,
      
      

   2. Claimed the credit on a timely filed original return.
      
      

5. Requires the taxpayer to provide the receipt to the FTB, upon request.
   
   

6. Allows a carryover of the credit to reduce the taxpayer's tax in the following tax year, and the succeeding four years if necessary, until the credit is exhausted.
   
   

7. Reduces the amount of the charitable deduction, otherwise allowed to the taxpayer, for contributions made to the Fund by the amount of the credit allowable for the same contribution.
   
   

8. Requires the FTB and CDE to place the information relating to the tax credit on their respective web sites, as provided.
   
   

9. Authorizes the FTB to prescribe rules, guidelines, or procedures necessary or appropriate to carry out the purposes of this section.
   
   

10. Exempts the FTB administrative pronouncements regarding the credit and its implementation from the requirements of the Administrative Procedures Act (Chapter 3.5 (commencing with Section 11340) of the Government Code.)
    
    

11. Limits the aggregate amount of credits that may be allowed under both the PIT and CT laws to $250 million for each calendar year.
    
    

12. Specifies 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 "the General Fund revenues that are the proceeds of taxes," as though they were proceeds of taxes.

EXISTING 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.

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.
   
   

2. Authorizes an individual taxpayer to deduct certain expenses 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. Allows a tax credit for a specified percentage of cash contributions made to the College Access Credit Fund upon the receipt of certification from the California Educational Facilities Authority. The specified percentage is 60% of the amount contributed that is certified and allocated for the 2014 taxable year. The specified percentage declines by 5% for each of the remaining two 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.
   
   

5. Establishes eligibility for child care services and child development programs administered by the CDE and requires the Superintendent of Public Instruction to adopt rules and regulations on eligibility, enrollment and priority of services needed for implementation.
   
   

6. Establishes the California State Preschool Program (CSPP) and provides that the programs shall include, but not be limited to, part-day age and developmentally appropriate programs designed to facilitate the transition to kindergarten for three- and four-year-old children in educational development, health services, social services, nutritional services, parent education and parent participation, evaluation, and staff development. (EC Section 8235).

7. Defines "income eligible" as a family whose adjusted monthly income is at or below 70% of the state median income (SMI), adjusted for family size, and adjusted annually. For the 2014-15 fiscal year, the income eligibility limits shall be 70% of the SMI that was in use for the 2007-08 fiscal year, adjusted to family size. (EC Code Section 8263.1).

FISCAL EFFECT: The FTB staff estimates that this bill will result in an annual revenue loss of $0.7 million in the fiscal year (FY) 2015-16, $23 million in FY 2016-17, and $30 million in FY 2017-18. However, this bill would require funds to be transferred from the California Preschool Investment Fund to the General Fund so that the net impact of Preschool Investment Fund Credits on the General Fund would be zero or a minimal gain due to timing and usage.

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:

"The benefits of an early education are not only seen in classrooms – students, businesses, and the entire communities profit when children participate in a preschool education.

"Although the State does provide access to early education programs, our counties are struggling to meet the demands of current enrollment trends. Due to understandable budget constraints on preschool programs, there are too many families vying for too few spots for their children. Something needs to be done to ensure that families seeking to take advantage of the benefits of early education for their children are access those opportunities.

"AB 1161 seeks to provide a creative answer to the need to grow early education opportunities by harnessing the power of the private sector. It would create a self-supporting, public/private funding partnership that would increase access to early education for low-income families in order to put our students on the right path in school and in life by preparing them for academic success, ultimately ensuring they are better prepared for the workforce."

2. What Would this Bill Do? For years beginning on January 1, 2016, and before January 1, 2021, this bill would create the California Preschool Investment Pilot Program, would establish the Fund, and would authorize the CDE to administer the Program and to accept monetary contributions made to the Fund. This bill would also establish a process whereby an individual, partnership, corporation, limited liability company, association, or other group, however organized, may donate to the Fund to subsidize preschool slots in five counties. The moneys in the Fund would be disbursed by the CDE to provide for the specific purpose of funding the California state preschool programs and supporting state preschools locating in one of the five counties selected by the CDE to participate in the Program.
   
   In addition, this bill would allow taxpayers, upon the issuance of the receipt by the CDE, to claim a credit for contributions made to the Fund. This bill would cap the total aggregate amount of credit that may be claimed by the taxpayers to $250 million for each calendar year. The percentage used to calculate the credit would be 40% of the amount contributed during any of the taxable years beginning on or after January 1, 2016, and before January 1, 2020.
   
   

3. The Child Care and Development Services Act. The CDE administers a child care and development system, maintaining 1,401 service contracts with approximately 758 public and private agencies supporting and providing services to children from birth through 12 years of age. The California State Preschool Program (CSPP) offers part-day and full-day preschool programs through contracts with local educational agencies, private contractors, and colleges. These programs are required to comply with not just health and safety standards under Title 22 regulations, but also higher developmental and teacher qualification standards under Title 5 regulations adopted by the CDE. Priority for enrollment goes to four- or three-year-old neglected or abused children who are recipients of Child Protective Services or recipients who are at risk of being neglected or abused, without regard to income. Second priority goes to four-year-old children who were enrolled in CSPP as a three-year-old, followed by four-year-old children with the lowest income ranking. Three-year-old children may be enrolled after four-year-olds are enrolled. Income eligibility is 70% of the SMI ($46,896 for a family of four).

4. County Waitlist. This bill requires the CDE to give priority to counties based on the length of the county's waitlist of individuals seeking public child care assistance, the ability to increase the number of preschool slots, and whether the county received federal Race to the Top funds, with favorable consideration given to counties that received the funds. With regard to a waitlist, each contractor maintains a list, but there is no longer a centralized list in each county. From 2005 to 2011, funds were provided to establish centralized eligibility lists in each county, but were terminated in 2011. It is unclear how CDE will determine the waitlist in each county.
   
   

5. Annual Report. This bill requires a county selected to participate in the program to annually report to the CDE regarding the county's assessment of how the program is performing. It is unclear who "county" is in reference to. This bill directs local child care planning councils to submit applications. The author may wish to consider amending the bill to require planning councils to submit the report to the CDE.

6. An Innovative Tax Idea to Capture the Federal Dollars. This bill is based on a very creative idea of "capturing" 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 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 not only to non-profits, but also to a state, are eligible for the federal tax 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 $40 back from the state via the state tax credit and, depending on the taxpayer’s federal tax rate, could save as much as $28 in federal income taxes. In turn, the CDE, 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 $32.

7. Have We Seen this Idea Before? This creative idea was incorporated in SB 798 (De Leon), Chapter 367, Statutes of 2014, which established an income tax credit for cash contributions made to a state fund with an aggregate credit cap of $500 million per calendar year. Specifically, SB 798 created a California College Access Tax Fund (CCATF), in the State Treasury, to receive cash contributions from taxpayers and to allow taxpayers making the contributions to receive a state income or franchise tax credit in a specified percentage. The credit is effective for taxable years beginning on or after January 1, 2014 and until January 1, 2017. The amounts contributed to the CCATF would be used first to make the General Fund whole for each taxable year in which the credit was allowed and then would have been awarded, upon appropriation by the Legislature, to the California Student Aid Commission for purposes of awarding Cal Grants to students.

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 the program could have been made even more attractive to potential donors by either increasing the credit percentage or making the credit transferrable or allowable against the sales tax. The Legislature, however, declined the invitation and kept the credit percentage at 60% and below.²

8. How Different is this Bill? While based on the same tax concept as SB 798, this bill proposes to leverage federal funds for a very different purpose - preschool education. The credit percentage, while still very generous, would be lower - 40% versus 60%. Furthermore, similarly to SB 798, it would compensate the General Fund for the lost revenues and reimburse the CDE and the FTB for their administrative costs. Finally, it appears that this bill is intended to alleviate a negative impact on Proposition 98 funding guarantee by providing that the annual amount of the credits claimed would be counted as "proceeds of taxes" for purposes of Proposition 98 calculations.

9. New Money for Preschool Programs? This bill encourages taxpayers to make charitable donations to the state's preschool program through a 40% income and franchise tax credits. If enacted, this credit would be one the most generous tax credits California allows. 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, it is generally 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. Furthermore, in light of the new program created by SB 798, it is unclear how many taxpayers will forgo an opportunity to receive a 60% tax credit in favor of a 40% tax credit offered by this bill. The Committee may wish to consider whether this bill will result in new revenue or would simply redirect charitable funds from other charities to the preschool program.
   
   

10. The Sky is 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 easily reach the total cap, thereby discouraging other taxpayers to contribute. The Committee may wish to consider whether there should be a limit on the amount of the credit claimed by a taxpayer.
    
    

11. Prior Legislation.
    
    

    1. SB 798 (De Leon), Chapter 367, Statutes of 2014, created the College Access Tax Credit program, a tax credit program for cash contributions made to the California College Access Tax Fund with an aggregated cap of $500 million per calendar year. The tax credit is available to taxpayers for taxable years beginning on or after January 1, 2014 and until January 1, 2017.
       
       

    2. SB 284 (De Leon), of the 2013-14 Legislative Session, was similar to SB 798. SB 284 would have created the California College Access Tax Fund program and would have allowed a temporary tax credit for cash contributions made to the Fund. SB 284 was vetoed.
       
       

    3. AB 2107 (Gorell and Olsen), of the 2013-14 Legislative Session, was similar to AB 1161. AB 2107 would have created a temporary tax credit for cash contributions made to the California Preschool Investment Fund. AB 2107 was held on the Assembly Appropriations Committee's Suspense File.
       
       

    4. AB 1261 (Gorell), of the 2013-14 Legislative Session, was similar to AB 1161. AB 1261 would have created a temporary tax credit for cash contributions made to the California Preschool Investment Fund. AB 1261 was never heard by this Committee.
       
       

REGISTERED SUPPORT / OPPOSITION:

Support

California Catholic Conference

First 5 Association of California

Junior Leagues of California, the State Public Affairs Committee

Opposition

California Federation of Teachers

Analysis Prepared by: Sophia Kwong Kim / ED. / Oksana Jaffe / REV. & TAX. / (916) 319-2098

Date of Hearing: April 20, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 1161

Author:(Olsen and Atkins) – As Introduced Ver:February 27, 2015

Majority Vote. Fiscal Committee.

SUBJECT: Preschool: privately funded pilot program: tax credits

SUMMARY: Allows an income tax credit equal to 40% of the amount contributed by a taxpayer to the newly established California Preschool Investment Fund (Fund) and requires the California Department of Education (CDE) to select five counties to participate in the investor-funded preschool pilot program (Program) for the purposes of subsidizing preschool services for eligible families. Specifically, this bill:

1. Declares that, by providing an additional source of funding, California can expand the number of preschool slots and subsidies needed to reduce the waitlist for parents seeking prekindergarten childcare assistance.
   
   

2. Creates the Program, which is a five-county investor funded preschool program to be administered by the CDE and allows a county to apply to the CDE, no later than June 1, 2016, for consideration of inclusion in the Program. Requires a county's local child care and development planning council to be responsible for making the application.
   
   

3. Requires a county selected to participate in the Program to annually report to the CDE's Early Education and Support Division. The report shall contain the county's assessment of how the program is performing.
   
   

4. Creates the Fund in the State Treasury to receive monetary contributions.
   
   

5. Authorizes the CDE to accept monetary contributions made by a person to the Fund for purposes of funding the Program.
   
   

6. Requires the CDE to do all of the following:
   
   

   1. Determine, no later than September 1, 2016, the five counties to be included in the Program.
      
      

   2. In making this determination, ensure that urban, suburban, and rural counties are represented in the Program and give priority to counties that meet any of the following factors:
      
      

      1. The length of the county's waitlist of individuals seeking public child care assistance;
         
         

      2. The ability to increase the number of preschool slots available to children in the county;
         
         

      3. Whether the county received federal Race to the Top funds authorized under the federal American Recovery and Reinvestment Act of 2009 (Public Law 111-5), with favorable consideration going to the counties that received the funds.
         
         

   3. Establish a procedure for making monetary contributions to the Fund and obtaining a receipt from the CDE indicating the amount of contributions made by the person. A receipt, at a minimum, must contain the date of the monetary contribution and the contributor’s name.
      
      

   4. Subject to the prescribed annual cap, allocate tax credits to taxpayers on a first-come, first-served basis.
      
      

   5. Notify the FTB of the credits allocated on at least a monthly basis.
      
      

7. Requires that the money in the Fund be allocated as follows:

1. Be used first to reimburse the General Fund for the aggregate amount of certified credits allowed;
   
   

2. Upon appropriation, to the CDE and Franchise Tax Board (FTB) to reimburse administrative costs associated with the Program;
   
   

3. Last, upon appropriation, to support state preschools located in the five participating counties.
   
   

1. Provides that the Program shall remain in effect only until January 1, 2021, and as of that date is repealed, unless a later enacted statute deletes or extends that date.
   
   

2. Specifies that any moneys remaining in the Fund as of January 1, 2021, shall be transferred to any other state fund identified by the CDE that provides funding for increased access to preschool programs for low-income children.
   
   

3. Allows a tax credit for taxable years beginning on or after January 1, 2016, and before January 1, 2020, under either the Personal Income Tax (PIT) or the Corporation Tax (CT) Law, in an amount equal to 40% of the amount contributed by the taxpayer during the taxable year to the Fund.
   
   

4. Allows the credit only if the taxpayer has:
   
   

   1. Contributed to the Fund and received a receipt from the CDE indicating that the taxpayer has made the contribution; and,
      
      

   2. Claimed the credit on a timely filed original return.
      
      

5. Requires the taxpayer to provide the receipt to the FTB, upon request.
   
   

6. Allows a carryover of the credit to reduce the taxpayer's tax in the following tax year, and the succeeding four years if necessary, until the credit is exhausted.
   
   

7. Reduces the amount of the charitable deduction, otherwise allowed to the taxpayer, for contributions made to the Fund by the amount of the credit allowable for the same contribution.
   
   

8. Requires the FTB and CDE to place the information relating to the tax credit on their respective web sites, as provided.
   
   

9. Authorizes the FTB to prescribe rules, guidelines, or procedures necessary or appropriate to carry out the purposes of this section.
   
   

10. Exempts the FTB administrative pronouncements regarding the credit and its implementation from the requirements of the Administrative Procedures Act (Chapter 3.5 (commencing with Section 11340) of the Government Code.)
    
    

11. Limits the aggregate amount of credits that may be allowed under both the PIT and CT laws to $250 million for each calendar year.
    
    

12. Specifies 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 "the General Fund revenues that are the proceeds of taxes," as though they were proceeds of taxes.

EXISTING 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.

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.
   
   

2. Authorizes an individual taxpayer to deduct certain expenses 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. Allows a tax credit for a specified percentage of cash contributions made to the College Access Credit Fund upon the receipt of certification from the California Educational Facilities Authority. The specified percentage is 60% of the amount contributed that is certified and allocated for the 2014 taxable year. The specified percentage declines by 5% for each of the remaining two 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.
   
   

5. Establishes eligibility for child care services and child development programs administered by the CDE and requires the Superintendent of Public Instruction to adopt rules and regulations on eligibility, enrollment and priority of services needed for implementation.
   
   

6. Establishes the California State Preschool Program (CSPP) and provides that the programs shall include, but not be limited to, part-day age and developmentally appropriate programs designed to facilitate the transition to kindergarten for three- and four-year-old children in educational development, health services, social services, nutritional services, parent education and parent participation, evaluation, and staff development. (EC Section 8235).

7. Defines "income eligible" as a family whose adjusted monthly income is at or below 70% of the state median income (SMI), adjusted for family size, and adjusted annually. For the 2014-15 fiscal year, the income eligibility limits shall be 70% of the SMI that was in use for the 2007-08 fiscal year, adjusted to family size. (EC Code Section 8263.1).

FISCAL EFFECT: The FTB staff estimates that this bill will result in an annual revenue loss of $0.7 million in the fiscal year (FY) 2015-16, $23 million in FY 2016-17, and $30 million in FY 2017-18.

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:

"The benefits of an early education are not only seen in classrooms – students, businesses, and the entire communities profit when children participate in a preschool education.

"Although the State does provide access to early education programs, our counties are struggling to meet the demands of current enrollment trends. Due to understandable budget constraints on preschool programs, there are too many families vying for too few spots for their children. Something needs to be done to ensure that families seeking to take advantage of the benefits of early education for their children are access those opportunities.

"AB 1161 seeks to provide a creative answer to the need to grow early education opportunities by harnessing the power of the private sector. It would create a self-supporting, public/private funding partnership that would increase access to early education for low-income families in order to put our students on the right path in school and in life by preparing them for academic success, ultimately ensuring they are better prepared for the workforce."

2. Arguments in Support. The proponent of this bill state that, according to recent numbers, over 200,000 families in California are currently waiting for the state preschool slots. The proponent note that a "number of studies have shown clear evidence of the substantial benefits of early education" and argue that AB 1161 "will ensure increased access to preschool that will ultimately lead to academic success." The proponent argues that this bill will "incentivize corporate America to invest into a newly established state fund named the California Preschool Investment Fund (CalPIF)" and "will ensure increased access to preschool that will ultimately lead to academic success."
   
   

3. Arguments in Opposition. The opponent argues that AB 1161 "would not properly allocate funding to programs in need of aid and would unnecessarily subsidize programs that are already being funded." The opponent also notes that "AB 1161 would add redundancies by giving taxpayers 40 percent tax credits for contributions that they are already allowed to make tax deductions on." And, while this bill "has noble intentions," it fails "to properly target the populations that would most benefit from such additional funding." The opponent asserts that "there are more effective ways of assisting Californian preschoolers."
   
   

4. What Would this Bill Do? For years beginning on January 1, 2016, and before January 1, 2021, this bill would create the California Preschool Investment Pilot Program, would establish the Fund, and would authorize the CDE to administer the Program and to accept monetary contributions made to the Fund. This bill would also establish a process whereby an individual, partnership, corporation, limited liability company, association, or other group, however organized, may donate to the Fund to subsidize preschool slots in five counties. The moneys in the Fund would be disbursed by the CDE to provide for the specific purpose of funding the California state preschool programs and supporting state preschools locating in one of the five counties selected by the CDE to participate in the Program.
   
   In addition, this bill would allow taxpayers, upon the issuance of the receipt by the CDE, to claim a credit for contributions made to the Fund. This bill would cap the total aggregate amount of credit that may be claimed by the taxpayers to $250 million for each calendar year. The percentage used to calculate the credit would be 40% of the amount contributed during any of the taxable years beginning on or after January 1, 2016, and before January 1, 2020.
   
   

5. The Child Care and Development Services Act. The CDE administers a child care and development system, maintaining 1,401 service contracts with approximately 758 public and private agencies supporting and providing services to children from birth through 12 years of age. The California State Preschool Program (CSPP) offers part-day and full-day preschool programs through contracts with local educational agencies, private contractors, and colleges. These programs are required to comply with not just health and safety standards under Title 22 regulations, but also higher developmental and teacher qualification standards under Title 5 regulations adopted by the CDE. Priority for enrollment goes to four- or three-year-old neglected or abused children who are recipients of Child Protective Services or recipients who are at risk of being neglected or abused, without regard to income. Second priority goes to four-year-old children who were enrolled in CSPP as a three-year-old, followed by four-year-old children with the lowest income ranking. Three-year-old children may be enrolled after four-year-olds are enrolled. Income eligibility is 70% of the SMI ($46,896 for a family of four).

6. County Waitlist. This bill requires the CDE to give priority to counties based on the length of the county's waitlist of individuals seeking public child care assistance, the ability to increase the number of preschool slots, and whether the county received federal Race to the Top funds, with favorable consideration given to counties that received the funds. With regard to a waitlist, each contractor maintains a list, but there is no longer a centralized list in each county. From 2005 to 2011, funds were provided to establish centralized eligibility lists in each county, but were terminated in 2011. It is unclear how CDE will determine the waitlist in each county.
   
   

7. Annual Report. This bill requires a county selected to participate in the program to annually report to the CDE regarding the county's assessment of how the program is performing. It is unclear who "county" is in reference to. This bill directs local child care planning councils to submit applications. The author may wish to consider amending the bill to require planning councils to submit the report to the CDE.

8. An Innovative Tax Idea to Capture the Federal Dollars. This bill is based on a very creative idea of "capturing" 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 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 not only to non-profits, but also to a state, are eligible for the federal tax 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 $40 back from the state via the state tax credit and, depending on the taxpayer’s federal tax rate, could save as much as $28 in federal income taxes. In turn, the CDE, 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 $32.

9. Have We Seen this Idea Before? This creative idea was incorporated in SB 798 (De Leon), Chapter 367, Statutes of 2014, which established an income tax credit for cash contributions made to a state fund with an aggregate credit cap of $500 million per calendar year. Specifically, SB 798 created a California College Access Tax Fund (CCATF), in the State Treasury, to receive cash contributions from taxpayers and to allow taxpayers making the contributions to receive a state income or franchise tax credit in a specified percentage. The credit is effective for taxable years beginning on or after January 1, 2014 and until January 1, 2017. The amounts contributed to the CCATF would be used first to make the General Fund whole for each taxable year in which the credit was allowed and then would have been awarded, upon appropriation by the Legislature, to the California Student Aid Commission for purposes of awarding Cal Grants to students.

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 the program could have been made even more attractive to potential donors by either increasing the credit percentage or making the credit transferrable or allowable against the sales tax. The Legislature, however, declined the invitation and kept the credit percentage at 60% and below.²

10. How Different is this Bill? While based on the same tax concept as SB 798, this bill proposes to leverage federal funds for a very different purpose - preschool education. The credit percentage, while still very generous, would be lower - 40% versus 60%. Furthermore, similarly to SB 798, it would compensate the General Fund for the lost revenues and reimburse the CDE and the FTB for their administrative costs. Finally, it appears that this bill is intended to alleviate a negative impact on Proposition 98 funding guarantee by providing that the annual amount of the credits claimed would be counted as "proceeds of taxes" for purposes of Proposition 98 calculations.

11. New Money for Preschool Programs? This bill encourages taxpayers to make charitable donations to the state's preschool program through a 40% income and franchise tax credits. If enacted, this credit would be one the most generous tax credits California allows. 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, it is generally 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. Furthermore, in light of the new program created by SB 798, it is unclear how many taxpayers will forgo an opportunity to receive a 60% tax credit in favor of a 40% tax credit offered by this bill. The Committee may wish to consider whether this bill will result in new revenue or would simply redirect charitable funds from other charities to the preschool program.
    
    

12. The Sky is 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 easily reach the total cap, thereby discouraging other taxpayers to contribute. The Committee may wish to consider whether there should be a limit on the amount of the credit claimed by a taxpayer.
    
    

13. Prior Legislation.
    
    

    1. SB 798 (De Leon), Chapter 367, Statutes of 2014, created the College Access Tax Credit program, a tax credit program for cash contributions made to the California College Access Tax Fund with an aggregated cap of $500 million per calendar year. The tax credit is available to taxpayers for taxable years beginning on or after January 1, 2014 and until January 1, 2017.
       
       

    2. SB 284 (De Leon), of the 2013-14 Legislative Session, was similar to SB 798. SB 284 would have created the California College Access Tax Fund program and would have allowed a temporary tax credit for cash contributions made to the Fund. SB 284 was vetoed.
       
       

    3. AB 2107 (Gorell and Olsen), of the 2013-14 Legislative Session, was similar to AB 1161. AB 2107 would have created a temporary tax credit for cash contributions made to the California Preschool Investment Fund. AB 2107 was held on the Assembly Appropriations Committee's Suspense File.
       
       

    4. AB 1261 (Gorell), of the 2013-14 Legislative Session, was similar to AB 1161. AB 1261 would have created a temporary tax credit for cash contributions made to the California Preschool Investment Fund. AB 1261 was never heard by this Committee.
       
       

REGISTERED SUPPORT / OPPOSITION:

Support

Junior Leagues of California, the State Public Affairs Committee

Opposition

American Federation of State, County and Municipal Employees (AFSCME), AFL-CIO

Analysis Prepared by: Sophia Kwong Kim / ED. / Oksana Jaffe / REV. & TAX. / (916) 319-2098