The Personal Income Tax Law and the Corporation Tax Law authorize various credits against the taxes imposed by those laws, including a credit for an increase in qualified full-time employees of a qualified employer. laws.

This bill would, bill, under both laws, for taxable years beginning on and after January 1, 2015, 2016, and before January 1, 2021, or an earlier date in the event of a specified occurrence, would allow a credit to a taxpayer participating in a lawn replacement rebate program, as defined, in an amount equal to $2 per square foot of 25% of the costs paid or incurred by the taxpayer to replace conventional lawn removed from on the qualified taxpayers property. property during that taxable year, not to exceed $1,500, as specified. The bill would make findings and declarations in this regard.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law and the Corporation Tax Law authorize various credits against the taxes imposed by those laws, including a credit for an increase in qualified full-time employees of a qualified employer.

This bill would, under both laws, for taxable years beginning on and after January 1, 2015, allow a credit to a taxpayer participating in a lawn replacement program, as defined, in an amount equal to $2 per square foot of conventional lawn removed from the taxpayers property. The bill would make findings and declarations in this regard.

This bill would take effect immediately as a tax levy.

Date of Hearing: May 27, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 603

Author:(Salas) – As Amended Ver:May 21, 2015

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

SUMMARY:

This bill allows a tax credit under the personal income and corporation tax laws equal to 25% of the qualified costs incurred for conventional lawn removal by a taxpayer participating in a lawn replacement program offered by a local water agency, subject to a maximum credit of $1,500.

The bill applies to taxable years beginning on or after January 1, 2016, and before January 1, 2021, unless the state of emergency with respect to drought conditions proclaimed by the Governor on January 17, 2014, is terminated, in which case the bill shall only remain in effect until December 1 of the year of termination.

The bill defines qualified costs as those costs eligible for a rebate under the local replacement program in excess of the amounts actually received from the local water agency, and allows any unused credit to be carried forward, up to five years.

FISCAL EFFECT:

1) Potentially significant GF costs to Franchise Tax Board (FTB) to administer the changes to forms and systems.

2) Estimated GF revenue decreases of $23 million, $26 million, and $30 million in FY 2015-16, FY 2016-17, and FY 2017-18, respectively.

COMMENTS:

1) Purpose. According to the author, grass is one of the most water-intensive plants in landscaping, and outdoor irrigation accounts for over 50% of all water used by residential consumers. To encourage water conservation, several local agencies have established rebate programs to support customers who replace traditional laws with drought-resistant plants and landscaping. The author argues the state has reduced water use by 8.8%, but this remains short of the 25% conservation target set by the Governor in his recent executive order. AB 603 is intended to provide an additional incentive for taxpayers to participate in lawn replacement programs offered by local water agencies.

2) Local Water Rebate Programs. Several local governments and agencies offer rebate programs to encourage water conservation. For example, the Metropolitan Water District of Southern California and the City of Sacramento Department of Utilities both offer rebates for water-intensive turf removal based on the square footage of turf removed. The popularity of lawn replacement programs is expected to increase as residents continue to cope with the effects of the drought.

3) Turf Removal Lottery. The tax credit proposed in this bill applies only to taxpayers participating in local water agency lawn replacement programs, providing an additional incentive for customers to apply. Yet these programs are already oversubscribed, with many more customers eager to participate than local agencies can accommodate. Adding a tax credit to the benefits received by participants will incentivize greater competition for participation, bestowing an even greater reward on those who are selected, but will not result in additional lawn removal. The committee may wish to consider whether those who are not selected to participate in local water agency programs should be incentivized to remove their lawns instead of rewarding those who were selected.

4) Is Section 41 Already Doomed? Tax credits are often used to encourage or influence socially beneficial behavior, and provide relief to taxpayers who incur expenses from desired behavior. Tax credits are often more appealing than tax deductions as the taxpayer may take the same credit regardless of income.

This bill expressly ignores Section 41 of the revenue and taxation code, authorized just last year in SB 1335 (Leno), Statutes of 2014, which requires tax credits to articulate specific goals, purposes, and objectives for the credit, as well as establish performance indicators to measure the credit's success in achieving those goals. While the policy goals of this bill may be laudable, there is no indication that 25% or $1,500 is the appropriate credit amount to achieve the desired increase in lawn removal program participation, and there are no metrics proposed with which to evaluate whether the credit is achieving its aims. Ensuring the Legislature conducts some objective and dispassionate evaluation of tax credits was the goal of SB 1335, and the Committee might wish to consider whether this is precisely the type of tax credit for which Section 41 ought to apply.

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

Date of Hearing: May 18, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 603 (

Author:Salas) – As Introduced Ver:February 24, 2015

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Income taxes: turf removal tax credit.

SUMMARY: Allows a tax credit, under both the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, equal to $2 per square foot of conventional lawn removed from a "qualified taxpayer's" property. Specifically, this bill:

1. Contains the following legislative findings and declarations:

   1. California has been experiencing more frequent and severe droughts and is currently enduring its worst drought in 200 years;

   2. It is estimated that landscaping accounts for 60% of all water consumed by residential customers. California lawns cover more than 300,000 acres and consume more than 1.5 million acre-feet of water per year;

   3. Californians have already begun to minimize lawn watering by replacing conventional lawns with water-saving and drought-resistant plants or artificial grass. These landscaping alternatives are dependable tools for water conservation; and,

   4. In light of severe drought, California has an interest in encouraging consumers to decrease water usage. Establishing a state tax credit for the removal and replacement of conventional grass landscapes will incentivize water conservation.

2. Allows a credit, for taxable years beginning on or after January 1, 2015, to a "qualified taxpayer" in an amount equal to $2 per square foot of conventional lawn removed from the "qualified taxpayer's" property.

3. Defines a "qualified taxpayer" as a person participating in a "lawn replacement program" offered by a local water agency.

4. Defines a "lawn replacement program" as a local water agency program that offers incentives to customers encouraging the replacement of conventional lawns with artificial lawns, drought-resistant plants, or other water-efficient landscaping.

5. Provides that this credit is allowed notwithstanding Revenue and Taxation Code (R&TC) Section 41.

6. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Allows various tax credits under both the PIT Law and the CT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.

2. Requires any bill authorizing a new credit to contain 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.)

3. Provides, for taxable years beginning on or after January 1, 2014, and before January 1, 2019, a gross income exclusion for amounts received as a rebate, voucher, or other financial incentive issued by a local water agency or supplier for participation in a turf removal water conservation program.

FISCAL EFFECT: The Franchise Tax Board (FTB) estimates General Fund revenue losses of $49 million in fiscal year (FY) 2015-16, $60 million in FY 2016-17, and $85 million in FY 2017-18.

COMMENTS:

1. The author has provided the following statement in support of this bill:

In response to California's worsening drought, last year Governor Brown issued an executive order to double the state's water conservation efforts. The order urged California businesses and residents to avoid wasting water, including limiting lawn watering. Since then, Californians cut water use by 8.8% statewide, falling short of the 20% conservation target that Governor Brown set.

Grass is one of the most water-intensive plants in landscaping. Its high water use and frequent maintenance make it time-consuming and expensive. In fact, outdoor irrigation accounts for over 50 percent of all water used by residential customers.

To encourage water conservation, several local agencies have established successful rebate programs to help customers replace traditional lawns with drought-resistant plants and landscaping. For example, Southern Nevada Water District's initiative resulted in the conversion of 100 million square feet of landscape with savings of over 18 billion gallons on water. The Santa Clara Valley Water District estimates that it saves 36 gallons a year for every square foot of conventional grass that is removed.

These programs are dependable tools for water conservation and at least 26 water agencies currently maintain successful initiatives. However, a statewide incentive to encourage all Californians to take these important steps towards water conservation does not exist.

AB 603 will provide a needed incentive to help Californians conserve water.

2. Proponents of this bill note the following:

AB 603 can provide an additional incentive and relief to those taxpayers who opt for a lawn replacement program to lower water use. Specifically, this bill defines a "lawn replacement program" as a program a local water agency offers with incentives to customers encouraging the replacement of conventional lawns with artificial lawns, drought-resistant plants, or other water-efficient landscaping.

For several years, the City of Pasadena's community-owned utility, Pasadena Water and Power, has run a successful Turf Replacement Program. Our turf replacement program helps all our community-ratepayers, including commercial, institutional, residential and multi-family water customers, switch to a water- and money-saving landscape. Lawns typically use 50 percent more water than other plants. Every year more and more Pasadenans are replacing their thirsty lawns with colorful drought-resistant landscaping that attracts birds and butterflies. Financial incentives such as tax credits motivate that water saving decision.

3. The FTB notes the following implementation and policy concerns in its staff analysis of this bill:
   
   

   1. "The bill lacks administrative details that must be developed in order to implement the bill and determine its impacts to the department's systems, forms, and processes. This bill is silent on the following issues:
      
      

      1. "How would the department verify that a qualified taxpayer 'participated in a lawn replacement program'?
         
         

      2. "If a taxpayer removes the conventional lawn without replacing the lawn with artificial lawn or drought-resistant plants would they qualify for a tax credit?
         
         

   2. "This bill uses a term that is undefined, i.e., 'conventional lawn.' The absence of definitions to clarify these terms could lead to disputes with taxpayers and would complicate the administration of this credit.
      
      

   3. "This bill would allow a credit for a person participating in a lawn replacement program without requiring verification of expenses incurred to participate in a lawn replacement program. If this is contrary to the author's intent, the author may wish to amend the bill.
      
      

   4. "This bill would allow a credit for lawn replacement expenses that are currently deductible as business expenses to taxpayers engaged in a trade or business under the Corporation Tax Law. Generally, a credit is allowed in lieu of a deduction in order to eliminate multiple tax benefits for the same item of expense."
      
      

4. 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, U.S. 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 (in the form of foregone revenues).
      
      

   2. How is a tax expenditure different from a 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. While this affords taxpayers greater financial predictability, it can also result in tax expenditures remaining a 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, effectively resulting in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy, without a supermajority vote.
      
      

   3. California's drought enters its fourth year: California is currently facing a fourth year of severe drought. The Sierra Nevada snowpack, which provides roughly 30% of the state's water supply, is currently at its second-lowest level on record. The Federal Government has informed farmers for the second year in a row that it will not be providing any water from its Central Valley Project reservoir system. State regulators, in turn, recently voted to impose a new round of water conservation rules, including severe restrictions on landscape watering. According to climate change simulations, droughts are only likely to increase in both frequency and severity.
      
      

   4. Where does our limited water go? According to the Public Policy Institute of California, California agriculture is largely dependent on irrigation, which accounts for roughly 80% of the state's human water use. Households and non-farm businesses, in turn, account for about 20% of human water use in California. Major metropolitan regions in Southern California and the Bay Area are still relatively well supplied, owing to significant investments in conservation, infrastructure, and supply diversification. In the northern and central parts of the state, however, communities without diverse water supplies have faced dramatic cutbacks in water use, with some communities receiving emergency supplies from the state. One important key to conservation is reducing the amount of water used for landscaping, which currently accounts for roughly 50% of all urban water use.
      
      

   5. Local water rebate programs: In recent years, a number of local governments and agencies have established rebate programs to encourage conservation. For example, in an effort to reduce water consumption, the Metropolitan Water District of Southern California offers a rebate based on each square foot of water-intensive turf removed.¹ To be eligible for this rebate, customers must first apply for and receive project approval. The approval, in turn, specifies the square footage approved and the reserved rebate amount.

The City of Sacramento Department of Utilities, in turn, is currently offering cash to help customers remove their front yard turf and replace it with native and drought tolerant plants. Qualified applicants are eligible to receive up to $1,000 ($0.50 per square foot of turf removed) for their new landscapes. The popularity of such programs is only expected to increase as California continues to grapple with one of the worst droughts in its recorded history.

1. Undefined terms: This bill would likely benefit from greater definitional guidance. For example, this bill defines a "qualified taxpayer" as a "person participating in a lawn replacement program offered by a local water agency." This bill, however, does not define the term "local water agency." A "local water agency" would almost certainly include the Metropolitan Water District of Southern California, but it is unclear to Committee staff whether it would also include municipal entities such as the City of Sacramento's Department of Utilities. To avoid confusion and ease administration of this credit, the author may wish to consider further defining key terms.

6. Keep calm and carry forward: Statutes allowing new credits are typically drafted to include standard "carry forward" provisions. These provisions state that, in cases where there is no further tax liability to offset for a given taxable year, the taxpayer may carry forward the remaining credit amount for a specified number of years. The author may wish to consider amendments adding such a provision.
   
   

7. Section 41 shall not apply: On September 29, 2014, Governor Brown signed SB 1335 (Leno), Chapter 845, Statutes of 2014, which added R&TC Section 41. SB 1335 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 introduced on or after January 1, 2015 that allows a new income tax 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 shall not apply to this credit. The Committee may wish to consider the appropriateness of this Section 41 exemption. Advocates of the exemption may argue that obtaining useful performance data (e.g., year-over-year increases in turf removal participation rates) would be cumbersome in light of the relatively modest per-customer financial subsidy proposed. Critics of a Section 41 exemption, however, might argue that the carve-out exacerbates one of the primary problems inherent in crafting tax expenditure measures – namely, it is often unclear what objectives the Legislature is aiming to achieve and how it plans to measure the attainment of such objectives.

8. An incentive or a reward? Generally, tax credits are provided as a matter of legislative grace to encourage socially beneficial behavior that likely would not occur absent a financial incentive. Because this bill applies to taxable years beginning on or after January 1, 2015, this bill would be providing a credit for behavior that had already taken place before this bill's enactment. The Committee may wish to consider the policy implications of providing such an incentive.

9. Absence of a sunset date: In its current form, this bill's proposed tax expenditures lack automatic sunset provisions. This Committee has a longstanding policy favoring the inclusion of sunset dates to allow the Legislature periodically to review the efficacy and cost of such programs. The author may wish to consider the addition of appropriate sunset provisions.

10. Setting an example: Last summer, Arijeet and Rajvarun Grewal, brothers and students from Pioneer Middle School and Sierra Pacific High School in Hanford, wrote to the author to propose their idea for saving "California one drop at a time." The young students asked the author to introduce a bill to incentivize the installation of synthetic grass for California homeowners. On February 24, 2015, the Grewal family travelled to Sacramento to see this bill, the outgrowth of their idea, introduced as legislation.

11. Related legislation: The following related bills have been introduced in the current legislative session:

    1. AB 585 (Melendez) would, for taxable years beginning on or after January 1, 2015, and before January 1, 2021, allow a credit equal to 25% of the amount paid by a qualified taxpayer for water-efficiency improvements made to outdoor landscapes on qualified real property in California, not to exceed $2,500 per taxable year, as specified. AB 585 is pending on this Committee's Suspense File.

    2. AB 1139 (Campos) would, for taxable years beginning on or after January 1, 2015, allow a credit to a taxpayer participating in a lawn replacement program, as defined, in an amount equal to $2 per square foot of conventional lawn removed from the taxpayer's property, up to $50,000 per taxable year, as provided. AB 1139 is currently a two-year bill.

REGISTERED SUPPORT / OPPOSITION:

Support

Association of California Water Agencies

California Apartment Association

California Building Industry Association

California Landscape Contractors Association

California Municipal Utilities Association

City of Pasadena

Desert Water Agency

Metropolitan Water District of Southern California

San Diego County Water Authority

Opposition

California Tax Reform Association

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

Date of Hearing: April 13, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 603

Author:(Salas) – As Introduced Ver:February 24, 2015

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Income taxes: turf removal tax credit

SUMMARY: Allows a tax credit, under both the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, equal to $2 per square foot of conventional lawn removed from a "qualified taxpayer's" property. Specifically, this bill:

1. Contains the following legislative findings and declarations:

   1. California has been experiencing more frequent and severe droughts and is currently enduring its worst drought in 200 years;

   2. It is estimated that landscaping accounts for 60% of all water consumed by residential customers. California lawns cover more than 300,000 acres and consume more than 1.5 million acre-feet of water per year;

   3. Californians have already begun to minimize lawn watering by replacing conventional lawns with water-saving and drought-resistant plants or artificial grass. These landscaping alternatives are dependable tools for water conservation; and,

   4. In light of severe drought, California has an interest in encouraging consumers to decrease water usage. Establishing a state tax credit for the removal and replacement of conventional grass landscapes will incentivize water conservation.

2. Allows a credit, for taxable years beginning on or after January 1, 2015, to a "qualified taxpayer" in an amount equal to $2 per square foot of conventional lawn removed from the "qualified taxpayer's" property.

3. Defines a "qualified taxpayer" as a person participating in a "lawn replacement program" offered by a local water agency.

4. Defines a "lawn replacement program" as a local water agency program that offers incentives to customers encouraging the replacement of conventional lawns with artificial lawns, drought-resistant plants, or other water-efficient landscaping.

5. Provides that this credit is allowed notwithstanding Revenue and Taxation Code (R&TC) Section 41.

6. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Allows various tax credits under both the PIT Law and the CT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.

2. Requires any bill authorizing a new credit to contain 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.)

3. Provides, for taxable years beginning on or after January 1, 2014, and before January 1, 2019, a gross income exclusion for amounts received as a rebate, voucher, or other financial incentive issued by a local water agency or supplier for participation in a turf removal water conservation program.

FISCAL EFFECT: The Franchise Tax Board (FTB) estimates General Fund revenue losses of $49 million in fiscal year (FY) 2015-16, $60 million in FY 2016-17, and $85 million in FY 2017-18.

COMMENTS:

1. The author has provided the following statement in support of this bill:

In response to California's worsening drought, last year Governor Brown issued an executive order to double the state's water conservation efforts. The order urged California businesses and residents to avoid wasting water, including limiting lawn watering. Since then, Californians cut water use by 8.8% statewide, falling short of the 20% conservation target that Governor Brown set.

Grass is one of the most water-intensive plants in landscaping. Its high water use and frequent maintenance make it time-consuming and expensive. In fact, outdoor irrigation accounts for over 50 percent of all water used by residential customers.

To encourage water conservation, several local agencies have established successful rebate programs to help customers replace traditional lawns with drought-resistant plants and landscaping. For example, Southern Nevada Water District's initiative resulted in the conversion of 100 million square feet of landscape with savings of over 18 billion gallons on water. The Santa Clara Valley Water District estimates that it saves 36 gallons a year for every square foot of conventional grass that is removed.

These programs are dependable tools for water conservation and at least 26 water agencies currently maintain successful initiatives. However, a statewide incentive to encourage all Californians to take these important steps towards water conservation does not exist.

AB 603 will provide a needed incentive to help Californians conserve water.

2. Proponents of this bill note the following:

AB 603 can provide an additional incentive and relief to those taxpayers who opt for a lawn replacement program to lower water use. Specifically, this bill defines a "lawn replacement program" as a program a local water agency offers with incentives to customers encouraging the replacement of conventional lawns with artificial lawns, drought-resistant plants, or other water-efficient landscaping.

For several years, the City of Pasadena's community-owned utility, Pasadena Water and Power, has run a successful Turf Replacement Program. Our turf replacement program helps all our community-ratepayers, including commercial, institutional, residential and multi-family water customers, switch to a water- and money-saving landscape. Lawns typically use 50 percent more water than other plants. Every year more and more Pasadenans are replacing their thirsty lawns with colorful drought-resistant landscaping that attracts birds and butterflies. Financial incentives such as tax credits motivate that water saving decision.

3. The FTB notes the following implementation and policy concerns in its staff analysis of this bill:
   
   

   1. "The bill lacks administrative details that must be developed in order to implement the bill and determine its impacts to the department's systems, forms, and processes. This bill is silent on the following issues:
      
      

      1. "How would the department verify that a qualified taxpayer 'participated in a lawn replacement program'?
         
         

      2. "If a taxpayer removes the conventional lawn without replacing the lawn with artificial lawn or drought-resistant plants would they qualify for a tax credit?
         
         

   2. "This bill uses a term that is undefined, i.e., 'conventional lawn.' The absence of definitions to clarify these terms could lead to disputes with taxpayers and would complicate the administration of this credit.
      
      

   3. "This bill would allow a credit for a person participating in a lawn replacement program without requiring verification of expenses incurred to participate in a lawn replacement program. If this is contrary to the author's intent, the author may wish to amend the bill.
      
      

   4. "This bill would allow a credit for lawn replacement expenses that are currently deductible as business expenses to taxpayers engaged in a trade or business under the Corporation Tax Law. Generally, a credit is allowed in lieu of a deduction in order to eliminate multiple tax benefits for the same item of expense."
      
      

4. 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, U.S. 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 (in the form of foregone revenues).
      
      

   2. How is a tax expenditure different from a 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. While this affords taxpayers greater financial predictability, it can also result in tax expenditures remaining a 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, effectively resulting in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy, without a supermajority vote.
      
      

   3. California's drought enters its fourth year: California is currently facing a fourth year of severe drought. The Sierra Nevada snowpack, which provides roughly 30% of the state's water supply, is currently at its second-lowest level on record. The Federal Government has informed farmers for the second year in a row that it will not be providing any water from its Central Valley Project reservoir system. State regulators, in turn, recently voted to impose a new round of water conservation rules, including severe restrictions on landscape watering. According to climate change simulations, droughts are only likely to increase in both frequency and severity.
      
      

   4. Where does our limited water go? According to the Public Policy Institute of California, California agriculture is largely dependent on irrigation, which accounts for roughly 80% of the state's human water use. Households and non-farm businesses, in turn, account for about 20% of human water use in California. Major metropolitan regions in Southern California and the Bay Area are still relatively well supplied, owing to significant investments in conservation, infrastructure, and supply diversification. In the northern and central parts of the state, however, communities without diverse water supplies have faced dramatic cutbacks in water use, with some communities receiving emergency supplies from the state. One important key to conservation is reducing the amount of water used for landscaping, which currently accounts for roughly 50% of all urban water use.
      
      

   5. Local water rebate programs: In recent years, a number of local governments and agencies have established rebate programs to encourage conservation. For example, in an effort to reduce water consumption, the Metropolitan Water District of Southern California offers a rebate based on each square foot of water-intensive turf removed.¹ To be eligible for this rebate, customers must first apply for and receive project approval. The approval, in turn, specifies the square footage approved and the reserved rebate amount.

The City of Sacramento Department of Utilities, in turn, is currently offering cash to help customers remove their front yard turf and replace it with native and drought tolerant plants. Qualified applicants are eligible to receive up to $1,000 ($0.50 per square foot of turf removed) for their new landscapes. The popularity of such programs is only expected to increase as California continues to grapple with one of the worst droughts in its recorded history.

1. Undefined terms: This bill would likely benefit from greater definitional guidance. For example, this bill defines a "qualified taxpayer" as a "person participating in a lawn replacement program offered by a local water agency." This bill, however, does not define the term "local water agency." A "local water agency" would almost certainly include the Metropolitan Water District of Southern California, but it is unclear to Committee staff whether it would also include municipal entities such as the City of Sacramento's Department of Utilities. To avoid confusion and ease administration of this credit, the author may wish to consider further defining key terms.

6. Keep calm and carry forward: Statutes allowing new credits are typically drafted to include standard "carry forward" provisions. These provisions state that, in cases where there is no further tax liability to offset for a given taxable year, the taxpayer may carry forward the remaining credit amount for a specified number of years. The author may wish to consider amendments adding such a provision.
   
   

7. Section 41 shall not apply: On September 29, 2014, Governor Brown signed SB 1335 (Leno), Chapter 845, Statutes of 2014, which added R&TC Section 41. SB 1335 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 introduced on or after January 1, 2015 that allows a new income tax 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 shall not apply to this credit. The Committee may wish to consider the appropriateness of this Section 41 exemption. Advocates of the exemption may argue that obtaining useful performance data (e.g., year-over-year increases in turf removal participation rates) would be cumbersome in light of the relatively modest per-customer financial subsidy proposed. Critics of a Section 41 exemption, however, might argue that the carve-out exacerbates one of the primary problems inherent in crafting tax expenditure measures – namely, it is often unclear what objectives the Legislature is aiming to achieve and how it plans to measure the attainment of such objectives.

8. An incentive or a reward? Generally, tax credits are provided as a matter of legislative grace to encourage socially beneficial behavior that likely would not occur absent a financial incentive. Because this bill applies to taxable years beginning on or after January 1, 2015, this bill would be providing a credit for behavior that had already taken place before this bill's enactment. The Committee may wish to consider the policy implications of providing such an incentive.

9. Absence of a sunset date: In its current form, this bill's proposed tax expenditures lack automatic sunset provisions. This Committee has a longstanding policy favoring the inclusion of sunset dates to allow the Legislature periodically to review the efficacy and cost of such programs. The author may wish to consider the addition of appropriate sunset provisions.

10. Setting an example: Last summer, Arijeet and Rajvarun Grewal, brothers and students from Pioneer Middle School and Sierra Pacific High School in Hanford, wrote to the author to propose their idea for saving "California one drop at a time." The young students asked the author to introduce a bill to incentivize the installation of synthetic grass for California homeowners. On February 24, 2015, the Grewal family travelled to Sacramento to see this bill, the outgrowth of their idea, introduced as legislation.

11. Related legislation: The following related bills have been introduced in the current legislative session:

    1. AB 585 (Melendez) would, for taxable years beginning on or after January 1, 2015, and before January 1, 2021, allow a credit equal to 25% of the amount paid by a qualified taxpayer for water-efficiency improvements made to outdoor landscapes on qualified real property in California, not to exceed $2,500 per taxable year, as specified. AB 585 is pending hearing by this Committee.

    2. AB 1139 (Campos) would, for taxable years beginning on or after January 1, 2015, allow a credit to a taxpayer participating in a lawn replacement program, as defined, in an amount equal to $2 per square foot of conventional lawn removed from the taxpayer's property, up to $50,000 per taxable year, as provided. AB 1139 is pending hearing by this Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

City of Pasadena

San Diego County Water Authority

Sierra Club California

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098