The Personal Income Tax Law allows various credits against the taxes imposed by that law.

This bill, for taxable years beginning on or after January 1, 2017, and before January 1, 2019, would allow a credit under the Personal Income Tax Law in an amount equal to 50% of the amounts paid or incurred during the taxable year by a qualified disabled veteran for the ownership and maintenance of a qualified animal, not to exceed $2,000 $1,500 for a taxable year. The bill would require the amount of the credit to be multiplied by the tax credit adjustment factor, as specified.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law allows various credits against the taxes imposed by that law.

This bill, for taxable years beginning on or after January 1, 2017, and before January 1, 2022, 2019, would allow a credit under the Personal Income Tax Law in an amount equal to 50% of the amounts paid or incurred during the taxable year by a qualified disabled veteran for the ownership and maintenance of a qualified animal, not to exceed $2,000 for a taxable year. The bill would require the amount of the credit to be multiplied by the tax credit adjustment factor, as specified.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law allows various credits against the taxes imposed by that law.

This bill, for taxable years beginning on or after January 1, 2017, and before January 1, 2022, would allow a credit under the Personal Income Tax Law in an amount equal to 50% of the amounts paid or incurred during the taxable year by a qualified disabled veteran for the ownership and maintenance of a qualified animal, not to exceed $2,000 for a taxable year.

Existing law, the Corporation Tax Law, in modified conformity with federal law, makes a corporation subject to the alternative minimum tax under specified circumtances. Existing law provides that a corporation electing to be treated as an S corporation is not subject to the alternative minimum tax.

This bill would make a nonsubstantive change to that provision.

Date of Hearing: May 25, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 2472

Author:(Linder) – As Amended May 18Ver:, 2016

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

SUMMARY:

This bill allows a credit under the Personal Income Tax (PIT) Law for disabled veterans with a disability rating of 30% or higher for the cost of ownership and maintenance of a service animal. Specifically, this bill:

1. Allows a credit worth 50% of qualified costs, not to exceed $1,500, against PIT liability, from tax years beginning on or after January 1, 2017 and before January 1, 2019
2. Specifies that the availability of this this credit is contingent upon an appropriation to the Franchise Board (FTB) to implement the credit.
3. Specifies that the size of the credit will depend on the “adjustment factor” established during the annual budget process, but that the default is 0%.

FISCAL EFFECT:

1. Annual GF cost pressure of up to $29 million in FY 2017-18 and $18 million in FY 2018-19. The costs of this credit depend on the adjustment factor set during the annual budget process.
2. Minor and absorbable administrative costs to FTB to change existing tax forms, instructions, and information systems.

COMMENTS:

1. Purpose. AB 2472 is intended to be a modest tax credit that assists with the high costs of service animals for disabled veterans. The author argues that veterans face significant challenges when they re-enter society after their time in service, and this bill is in a response to the growing body of research that demonstrated the many health benefits of service animals.
2. Background. There are approximately 1.8 million veterans living in California. Of that number, it is estimated that approximately 270,000 have service-related disability ratings that would make them eligible for the credit proposed in AB 2497 (a rating of 30% or higher).
3. The cost of service animals. AB 2472 was amended on May 18 to limit the size of the credit, bringing it more in line with the expected costs of providing for and caring for a service animal. Previous versions of the bill had a credit cap of $2,000, which assumed that costs incurred caring for a service animal amount to $4,000 annually (the credit is worth 50% of the costs to take care of a service animal). The May 18 amendment now assumes the costs of caring for a service animal to be closer to $3,000 annually. According to the American Kennel Club, the average cost the first year raising a dog is estimated to be $3,085.
4. How would this credit work? The bill was amended policy committee with two provisions that affect the availability and size of the credit. Specifically:
5. The availability of the credit is contingent upon an appropriation to FTB to administer the credit. While administrative costs are expected to be minor, there must nevertheless be a specific appropriation for the agency to administer the service animal credit. Without one, the credit is not made available to qualified taxpayers.
6. The Budget Act must set an adjustment factor for the credit, which determines its size. Similar to the California earned income tax credit (EITC), the size of the service animal credit would be based on the size of this adjustment factor. The adjustment factor is set at a default of 0%, meaning that unless otherwise specified through the budget process, this credit is not available. An adjustment factor of 0.5 would mean that the credit would be half of large as it normally would be (up to a $750).

These amendments will help policymakers manage costs and require a newly created tax expenditure to be considered along with other spending items. Generally, tax expenditures are considered outside the budget process, even though they have a direct impact on the availability of funds for other programs.

These amendments also create practical complications for ensuring the credit is effective. New tax credits can take some time to get started in part because taxpayers need to be educated about the program and FTB needs time to develop systems and processes. If the availability and size of the credit change annually, this can undermine the goal of providing relief to disabled veterans.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: May 9, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 2472 (

Author:Linder) – As Amended Ver:April 28, 2016

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: credits: disabled veterans: service animals

SUMMARY: Creates a tax credit under the Personal Income Tax (PIT) Law in an amount equal to 50% of the "qualified costs" incurred by a "qualified disabled veteran" owning a service animal. Specifically, this bill:

1. Makes findings and declarations about the assistance service animals may provide war veterans.
2. Allows a tax credit under the PIT Law for taxable years beginning on or after January 1, 2017 and before January 1, 2022, in an amount equal to 50% of "qualified costs" incurred by a "qualified disabled veteran," not to exceed $2,000 for the taxable year.
3. Defines "qualified costs" as the following costs incurred during the taxable year by a "qualified disabled veteran" for the ownership and maintenance of a "qualified animal":
   1. Local fees for animal licenses;
   2. Veterinary care and medical-related expenses, such as vaccinations, annual check-ups, and drug prescriptions;
   3. Pet insurance coverage expenses;
   4. Expenses for specialty equipment, such as vests, leads, and harnesses;
   5. Grooming expenses; and,
   6. Food expenses.
4. Defines a "qualified animal" as a guide dog, signal dog, or service dog as defined in Civil Code Section 54.1(b)(6)(C).
5. Defines a "qualified disabled veteran" as an individual meeting both of the following conditions:
   1. Has served on active duty with the Armed Forces of the United States and received an honorable discharge for all periods of active service; and,
   2. Has a service-connected disability rating of at least 30%, as determined by the United States Department of Veterans Affairs (VA), with which a qualified animal assists.
6. Provides that the costs accounted for in calculating the credit cannot also be accounted for to claim any other tax credit or deduction.
7. Allows the credit to be carried over for seven years, or until the credit is exhausted.
8. Provides that Revenue and Taxation Code (R&TC) Section 41 does not apply to the credit.
9. Repeals the credit on December 1, 2022.
10. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Allows various tax credits under the PIT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
2. Allows a deduction under the PIT Law for medical and dental expenses that exceed 7.5% of federal adjusted gross income (AGI), including expenses related to the costs of buying, training, and maintaining a guide dog or other service animal to assist a visually impaired or hearing disabled person, or a person with other physical disabilities. Eligible costs include food, grooming, and veterinary care incurred in maintaining the health and vitality of the animal so it may perform its duties. Federal law allows a deduction for expenses that exceed 10% of federal AGI.
3. Applies performance measurement standards to any new tax credit under either the PIT Law or Corporation Tax Law if enacted by a bill introduced on or after January 1, 2015.  Specifically, existing law requires all of the following:
   1. Specific goals, purposes, and objectives that the tax credit will achieve;
   2. Detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives stated in the bill; and,
   3. Data collection requirements to enable the Legislature to determine whether the tax credit is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the credit is in effect, for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data. (R&TC Section 41)

FISCAL EFFECT: Pending. The Franchise Tax Board (FTB) estimated that a previous version of this bill would have resulted in General Fund revenue losses of $0 in fiscal year (FY) 2016-17, $47 million in 2017-18, and $50 million in 2018-19. The scope of this bill has been slightly narrowed, so the revenue impact should be slightly reduced but still substantial.

COMMENTS:

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

Veterans face significant challenges when they re-enter society after their time in service. We owe it to the community of veterans in California to provide them with as many tools as possible to aid them in their transition out of the military. AB 2472 is in response to a growing body of research that demonstrates the many health benefits service animals offer veterans with war-related disabilities. AB 2472 seeks to ensure that costs don't act as a barrier to veterans who would benefit from the healing power of a service animal.

1. Arguments in Support: Proponents of this bill state that "[m]any of our disabled veterans benefit from the aid of a service animal, but the cost of the animal can be a burden to them. We strongly support this modest tax credit to assist with the costs associated with the service animal of a disabled veteran."
2. Arguments in Opposition: Opponents of this bill believe that the program is "worthwhile" but it should be amended to "be more carefully targeted to reduce the cost" or "[a]lternately, a program which pays directly for those expenses is likely to be more efficient and cost-effective."
3. Committee Staff Comments:
   1. What is a "Tax Expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures," since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each of them (in the form of forgone revenues). This bill would enact a new tax expenditure program in the form of a tax credit for disabled veterans who own a service dog.
   2. Tax Expenditure vs. Direct Expenditure: As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining part of the tax code without demonstrating any public benefit. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This bill includes a five-year sunset date for the tax credit as generally recommended by this Committee.
   3. A Veteran's Best Friend: According to the author's office, non-profit organizations throughout the country have formed to connect veterans with service animals. However, these organizations primarily focus on adoption and training, and do not help alleviate the annual costs of pet ownership. Pets are generally expensive to care for and service animals may require specialty equipment to perform their requisite duties – these costs can be a burden to veterans, especially those who struggle to find employment post-service.

This bill provides a tax credit for a veteran with a service-connected disability rating of at least 30% as determined by the VA whose disability is assisted by a qualified animal. VA disability ratings indicate the extent to which a disability impacts a veteran's average earning capacity. According to the author's office, the disability rating threshold of 30% represents the typical disability rating for a post-traumatic stress disorder (PTSD) related diagnosis and the numeric value that results in medical discharge from the military.

To receive the tax credit, a veteran's qualified animal must be a guide dog trained to lead the blind or vision impaired; a signal dog trained to alert an individual who is deaf or hearing impaired; or a service dog individual trained to the requirements of the individual with a disability, including minimal protection work, rescue work, pulling a wheelchair, or fetching dropped items. Although this definition of a "service dog" is vaguely broad, it is not clear whether dogs assisting veterans with PTSD or related diagnoses would qualify, as intended by the author, since the enumerated services primarily relate to physical disabilities.

According to regulations implementing the Americans with Disabilities Act (ADA), however, a service dog includes individually trained (whether formally or informally) dogs providing specific services for people with physical, developmental, or psychiatric disabilities. Some examples of tasks that psychiatric service animals may perform include preventing or interrupting impulsive or destructive behaviors, reminding individuals to take medicine, providing safety checks or room searches for persons with PTSD, interrupting self-mutilation, and removing disoriented individuals from dangerous situations. The mere provision of emotional support, well-being, comfort, or companionship by a dog does not constitute service. Although the ADA uses different standards than the VA in determining disability, many service-connected disabilities are also considered disabilities under the ADA, including major depressive disorder and PTSD. To avoid any ambiguity, however, the author may wish to consider further harmonizing eligibility of a veteran and service dog for purposes of this tax credit.

• 1. Other Implementation Considerations: A disabled veteran's service dog is not subject to a prescription or any formal regulation, as neither is required by the ADA. A service dog could be trained by a non-certified professional, friend, family member, or the individual with a disability, and is not required to be registered as a service dog or wear any special identification. Even if it can be demonstrated that the service dog was provided by an organization with a mission to assist veterans, it would be difficult to readily demonstrate that the service dog has been individually trained to satisfy the specific needs of the veteran. As noted in the FTB's analysis of this bill, the FTB lacks the expertise to determine whether a veteran is eligible for the proposed service dog tax credit. Credits involving areas for which the FTB lacks expertise are generally certified by another state agency that possesses the relevant expertise. The Committee may wish to consider tasking another agency to work with the FTB in implementing the proposed tax credit.
  2. Tax Credit vs. Tax Deduction: A tax credit is generally more appealing to taxpayers than a deduction because the value of a tax credit is the same, regardless of the taxpayers' tax rate. Additionally, a tax deduction generally applies only to taxpayers who itemize their deductions in lieu of taking the standard deduction. Although veterans with service dogs may already be able to write off related costs via the existing tax deduction for medical expenses, the monetary benefit may not be as impactful as a credit. This bill specifies that overlapping deductions cannot be simultaneously claimed with this proposed tax credit. However, since this credit is nonrefundable, disabled veterans still may not see a benefit if their tax liability is insufficient to be offset by a credit. Since a veteran's disability rating is based on the extent the disability impacts a veteran's average earning capacity, and lower income earners often have little to no tax liability, disabled veterans with lower income levels may not be able to take advantage of the proposed credit as readily as disabled veterans with higher income levels.

While providing a tax credit specifically for veterans with service dogs recognizes the personal sacrifices made by members of the military, it is important to highlight the fact that this bill would favor one group of taxpayers over others, such as other individuals with service-related disabilities who may benefit from extra financial support. Additionally, the credit provides relief for one expense that veterans may experience, but there are other expenses with which veterans may need greater assistance, such as education, housing, and other health-related issues. Lastly, the credit assumes that that costs incurred caring for a service animal amount to $4,000 annually (covers 50% of qualified costs capped at $2,000). According to the American Kennel Club, the average cost the first year raising a dog is estimated to be $3,085. While service dogs may incur greater costs than average pets, the credit amount may also be higher than average. Since this bill does not distinguish between high-income earners who may not realize the effect of the credit and low-income earners for whom the credit may make a real difference, the Committee may wish to consider whether the proposed tax credit supports the most vulnerable veterans.

• 1. R&TC Section 41: SB 1335 (Leno), Chapter 845, Statutes of 2014 added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax preference programs, including tax credits.  Thus, Section 41 requires any bill that is introduced on or after January 1, 2015 and allows a new PIT or CT credit to contain specific goals, purposes, and objectives that the tax credit will achieve.  In addition, Section 41 requires detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives so-identified. This bill provides that R&TC Section 41 does not apply to the proposed tax credit. The Committee may wish to consider the appropriateness of this exemption.

1. Technical Amendment: Committee staff suggests adoption of the following amendments:
   1. On Page 2, strike Lines 27-29 and insert:

"amount as determined by paragraph (2).

(2) The credit amount allowed pursuant to this section shall be the lesser of the following:

(A) 50 percent of the qualified costs of a qualified disabled veteran during the taxable year.

(B) Two thousand dollars ($2,000)."

• 1. On Page 3, Lines 8-9, strike "Armed Forces of the United States" and insert "United States Armed Forces".

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: Irene Ho / REV. & TAX. / (916) 319-2098