Existing sales and use tax laws impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. That law provides various exemptions from those taxes.

This bill, until January 1, 2022, would exempt from those taxes the gross receipts from the sale in this state of, and the storage, use, or other consumption in this state of, diapers for infants and toddlers, designated size 3 or under.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which conforms to the Sales and Use Tax Law. Amendments to state sales and use taxes are incorporated into these laws.

Section 2230 of the Revenue and Taxation Code provides that the state will reimburse counties and cities for revenue losses caused by the enactment of sales and use tax exemptions.

This bill would provide that, notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for sales and use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy, but its operative date would depend on its effective date.

Existing sales and use tax laws impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. That law provides various exemptions from those taxes.

This bill, until January 1, 2021, 2022, would exempt from those taxes the gross receipts from the sale in this state of, and the storage, use, or other consumption in this state of, diapers for infants and toddlers, designated size 3 or under.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which conforms to the Sales and Use Tax Law. Amendments to state sales and use taxes are incorporated into these laws.

Section 2230 of the Revenue and Taxation Code provides that the state will reimburse counties and cities for revenue losses caused by the enactment of sales and use tax exemptions.

This bill would provide that, notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for sales and use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy, but its operative date would depend on its effective date.

Existing sales and use tax laws impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. That law provides various exemptions from those taxes.

This bill bill, until January 1, 2021, would exempt from those taxes the gross receipts from the sale in this state of, and the storage, use, or other consumption in this state of, diapers for infants and toddlers. toddlers, designated size 3 or under.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which conforms to the Sales and Use Tax Law. Amendments to state sales and use taxes are incorporated into these laws.

Section 2230 of the Revenue and Taxation Code provides that the state will reimburse counties and cities for revenue losses caused by the enactment of sales and use tax exemptions.

This bill would provide that, notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for sales and use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy, but its operative date would depend on its effective date.

Existing sales and use tax laws impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. That law provides various exemptions from those taxes.

This bill would exempt from those taxes the gross receipts from the sale in this state of, and the storage, use, or other consumption in this state of, diapers for infants and toddlers.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which conforms to the Sales and Use Tax Law. Amendments to state sales and use taxes are incorporated into these laws.

Section 2230 of the Revenue and Taxation Code provides that the state will reimburse counties and cities for revenue losses caused by the enactment of sales and use tax exemptions.

This bill would provide that, notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for sales and use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy, but its operative date would depend on its effective date.

GOVERNOR'S VETO

GV Bill Id:AB 717

Author:(Gonzalez)

As Enrolled Ver:September 1, 2016

2/3 vote

SUMMARY: Establishes a temporary sales and use tax (SUT) exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by infants and toddlers, designated size 3 or under. Specifically, this bill:

1. Sunsets automatically on January 1, 2022.
2. Provides that, notwithstanding existing law, the state shall not reimburse any local agency for SUT revenues lost as a result of this exemption.
3. Takes immediate effect as a tax levy, but only becomes operative on the first day of the first calendar quarter commencing more than 90 days after this bill's effective date.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state.
2. Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the State Board of Equalization (BOE).

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1) Minor and absorbable costs to the BOE to administer the changes to procedures and systems, and notify affected retailers and other persons.

2) Estimated revenue decreases for the state and local jurisdictions of $36.3 million per year, $17.0 million of which is from the General Fund.

COMMENTS:

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

It is time for California's tax code to reflect the fact that diapers are an absolute health necessity for young children. By updating our tax code to accurately identify diapers as a necessity of life we can also make them more affordable. The high price of diapers has a cost for public health and our economy. Diaper need puts families in the position of changing their children's diapers less often which has unhealthy consequences ranging from diaper rash to infections requiring medical treatment. It also creates a barrier between parents and gainful employment when families cannot afford the number of diapers required by childcare providers.

Assembly Revenue and Taxation Committee staff comments:

1. What would this bill do? This bill would temporarily provide a complete SUT exemption for all diapers made for infants and toddlers, designated size 3 or under. The proposed exemption would apply to both disposable and non-disposable diapers alike.
2. The diaper dilemma: By some estimates, up to 95% of United States families use disposable diapers. Nevertheless, environmental and health concerns have persuaded some parents to purchase cloth diapers that can be reused. Experts, however, are divided on whether reusable diapers are more environmentally friendly. According to WebMD, research suggests that both disposable and cloth diapers impact the environment negatively – albeit in different ways. Disposable diapers require more raw materials to manufacture and generate more solid waste for landfills. Cloth diapers, on the other hand, use up large amounts of electricity and water for laundering. Thus, the American Academy of Pediatrics takes no position in the ongoing debate regarding the relative merits of cloth versus disposable diapers.
3. How are diapers currently taxed? Current law does not provide a SUT exemption for diapers. The BOE notes, however, that businesses providing diaper services, where cloth diapers are furnished in connection with the recurring service of laundering the diapers, are considered "consumers" of the diapers they provide. Thus, the tax applies only to the diaper service's purchases, and the business's diaper rental receipts are not subject to SUT.
4. An inherently regressive tax: The SUT has been widely criticized as a regressive exaction that most heavily impacts those least able to pay. For example, a survey by the Nevada Legislative Counsel Bureau long ago concluded that in the case of a retail sales tax with food exempt, "the lowest income group would experience the highest ratio of tax to income..." (Survey of Sales Taxes Applicable to Nevada 59 (Bull. No. 3, May, 1948).) Others, however, contend that a degree of progressivity is provided via the various exemptions built into most state SUT laws (i.e., for certain necessities of life such as food, housing, and medical care).

Proponents of this bill might argue that an exemption for diapers would further promote a degree of progressivity in an already regressive tax regime. Critics, however, might contend that SUT exemptions are a blunt instrument for affecting social policy. While this bill would provide meaningful financial relief to low-income parents struggling to make ends meet, it would also provide relief indiscriminately to wealthy consumers who might not even notice the exemption. In addition, critics might question why diapers are being singled out for preferential tax treatment as opposed to other items of TPP indispensable to raising a child (e.g., car seats, cribs, baby clothes, bottles, strollers, etc.).

GOVERNOR'S VETO MESSAGE:

I am returning the following seven bills without my signature:

Assembly Bill 717

Assembly Bill 724

Assembly Bill 1561

Assembly Bill 2127

Assembly Bill 2728

Senate Bill 898

Senate Bill 907

Each of these bills creates a new tax break or expands an existing tax break. In total, these bills would reduce revenues by about $300 million through 2017-18.

As I said last year, tax breaks are the same as new spending – they both cost the General Fund money. As such, they must be considered during budget deliberations so that all spending proposals are weighed against each other at the same time. This is even more important when the state's budget remains precariously balanced.

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0005054

 THIRD READING  

Bill No: AB 717

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 5/11/16

AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach, Pavley

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/11/16

AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

ASSEMBLY FLOOR: 76-0, 1/28/16 - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST: This bill provides a temporary sales and use tax (SUT) exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by infants and toddlers, designated size 3 or under.

ANALYSIS:

Existing law:

1. Imposes a SUT on the sale, storage, or use of tangible personal property unless exempted by state law.
2. Provides that the current state SUT is 7.5%, but beginning January 1, 2017, the state SUT rate on tangible personal property will be 7.25%.
3. Allows cities and counties to increase the SUT rate up to 2% as a transactions and use tax for either specific or general purposes with voter approval as required by the California Constitution.

This bill:

1. Establishes a temporary SUT exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by infants and toddlers, designated size 3 or under.
2. Provides that the state shall not reimburse any local agency for SUT revenues lost as a result of this exemption.
3. Remains in effect until January 1, 2022.

Background

Existing federal law classifies diapers with cigarettes, alcohol, and pet food as disallowed purchases under CalFresh and the California Special Supplemental Food Program for Women, Infants, and Children. However, both the Head Start (serving children three to five years old) and Early Head Start (serving children under three years) programs must provide diapers and formula to participants who need them. The state can supplement this benefit by providing TANF (Temporary Assistance for Needy Families), CalWORKs, CalFresh, and California Special Supplemental Food Program for Women, Infants, and Children recipients with diapers.

In 2014, AB 1516 (Gonzalez) would have established a young child special needs supplement of $80 per month within the CalWORKs program for each child younger than two years of age in an assistance unit. AB 1516 was held on the Senate Appropriations Committee's Suspense File. This year’s AB 492 (Gonzalez) provides that necessary supportive services would include vouchers in the amount of $50 per month for diaper products for every child two years of age or younger enrolled in child care, as specified. AB 492 is currently pending in the Senate Committee on Human Services. A targeted approach, like that in AB 492 may aid more low income families, while an SUT exemption benefits all families, regardless of income, that purchase diapers.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, BOE estimates that this bill would result in an annual state and local revenue loss of $35 million, $17 million of which would be General Fund. The agency would incur absorbable implementation costs.

SUPPORT: (Verified 8/12/16)

9 to 5 California

ACCESS Women's Health Justice

Alliance of Californians for Community Empowerment

American Academy of Pediatrics, California District IX

American Association of University Women

A Stronger California Network

Black Women for Wellness

Board of Equalization

California Employer Law Center

California Immigrant Policy Center

California Latinas for Reproductive Justice

California Partnership

California Primary Care Association

California Retailer’s Association

California Women's Law Center

California Work and Family Coalition

Career Ladders Project

Child Care Law Center

City of Glendale

Common Sense Kids Action

Courage Campaign

Diane L. Harkey, Board of Equalization Member

Equal Rights Advocates

Fiona Ma, Board of Equalization Member

Forward Together

George Runner, Board of Equalization Member

Help a Mother Out

Mujeres Unidas Y Activas

National Center for Youth Law

National Council of Jewish Women California Policy Advocacy Network

National Diaper Bank Network

National Domestic Workers Alliance

Next Generation

Parent Voices

Raising California Together

San Diego County Taxpayers Association

The Center for Popular Democracy

TradesWomen Inc.

UC Berkeley Center on Reproductive Rights and Justice

UltraViolet

Western Center on Law and Poverty

Women’s Foundation of California

OPPOSITION: (Verified 8/12/16)

California State Association of Counties

California Tax Reform Association

ARGUMENTS IN SUPPORT: According to the author, “It is time for California's tax code to reflect the fact that diapers are an absolute health necessity for young children. By updating our tax code to accurately identify diapers as a necessity of life we can also make them more affordable. The high price of diapers has a cost for public health and our economy. Diaper need puts families in the position of changing their children's diapers less often which has unhealthy consequences ranging from diaper rash to infections requiring medical treatment. It also creates a barrier between parents and gainful employment when families cannot afford the number of diapers required by childcare providers.”

ARGUMENTS IN OPPOSITION: Opponents argue that SUT exemptions continue to erode the already shrinking local sales tax base. Cities and counties continue to struggle financially, and SUT exemptions only further exacerbate the issue.

ASSEMBLY FLOOR: 76-0, 1/28/16

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, O'Donnell, Olsen, Patterson, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins

NO VOTE RECORDED: Jones-Sawyer, Mathis, Obernolte

Prepared by:

8/15/16 20:01:56

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 717 (Gonzalez) - Sales and use taxes: exemption: diapers

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

Bill Summary:

AB 717 would provide a temporary sales and use tax (SUT) exemption for diapers used by infants and toddlers.

Fiscal Impact:

The Board of Equalization (BOE) indicates that this bill would result in an annual state and local revenue loss of $35 million, $17 million of which would be General Fund. The agency would incur absorbable implementation costs.

Background:

Except where a specific exemption or exclusion is provided, current law imposes the SUT on all retailers for the privilege of selling tangible personal property (TPP) at retail in California, or on the storage, use, or other consumption in this state of TPP purchased from a retailer.

After the State collects SUT revenue ($48 billion in 2013-14), it allocates the money to various state and local funds. Roughly half—collected from an approximately 3.9 percent rate—goes to the General Fund and can be spent on any state program, such as education, health care, and criminal justice. Another 1.25 percent, known as the Bradley-Burns rate, goes to cities and counties for general purposes. Three sales tax funds have uniform state rates and support specified programs—an approximately 1.1 percent rate for 2011 realignment (county-administered criminal justice, mental health, and social service programs); a 0.5 percent rate for 1991 realignment (county-administered health and social services programs); and a 0.5 percent rate for city and county public safety programs pursuant to Proposition 172 (1993). Additionally, some local governments levy optional local rates—known as Transactions and Use Taxes (TUTs)—and a small portion of these funds are used for general purposes. As of January 1, 2017, the average statewide SUT rate will be 8.21 percent.

State law fully exempts many items from SUT (such as prescription drugs, food, electricity, and poultry litter), while other items are exempted from the state sales tax, but not the local share, such as farm equipment and machinery, diesel fuel used for farming and food processing, teleproduction and postproduction equipment, timber harvesting equipment and machinery, and racehorse breeding stock. Partial SUT exemptions are difficult for both retailers and the BOE, and complicate return preparation and processing. Moreover, errors attributable to these partial exemptions occur frequently, resulting in additional return processing workload for BOE.

Proposed Law:

This bill would establish a temporary SUT exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by infants and toddlers, designated size 3 or under. The bill provides that (1) the State shall not reimburse any local agency for SUT revenues lost as a result of this exemption, and (2) the exemption shall remain in effect until January 1, 2022.

Related Legislation: AB 1291 (Hollingsworth, 2001), provided a SUT exemption for diapers. The bill was held on the Suspense File in the Assembly Committee on Revenue and Taxation.

Staff Comments:

The BOE revenue estimate assumes that 92.5 percent of diapers sold in the State are disposable, while the other 7.5 percent are cloth. BOE assumes disposable diaper usage of 6.7 diapers per day. The Department of Finance currently estimates that there are about 1 million Californians under the age of two. Put together, BOE estimates that total diaper sales for newborn to size three totals about $431 million annually. Of this amount, about $2 million represent sales of cloths diapers.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

Sales and use taxes: exemption: diapers

Provides a temporary sales and use tax exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by infants and toddlers, designated size 3 or under.

Background

California law allows various income tax credits, deductions, and sales and use tax exemptions to provide incentives to compensate taxpayers that incur certain expenses, such as child adoption, or to influence behavior, including business practices and decisions, such as research and development credits. The Legislature typically enacts such tax incentives to encourage taxpayers to do something that but for the tax credit, they would not do. The Department of Finance is required to annually publish a list of tax expenditures. Currently, tax expenditures exceed $57 billion dollars.

State law imposes a sales and use tax (SUT) on the sale, storage, or use of tangible personal property unless exempted by state law. Cities and Counties may increase the SUT rate up to 2% as a transactions and use tax for either specific or general purposes with voter approval as required by the California Constitution.

The current state SUT is 7.5%, but beginning January 1, 2017, the state SUT rate on tangible personal property will be 7.25% and imposed as follows:

Proposed Law

Assembly Bill 717 establishes a temporary sales and use tax (SUT) exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by infants and toddlers, designated size 3 or under. AB 717 provides that the state shall not reimburse any local agency for SUT revenues lost as a result of this exemption and shall remain in effect until January 1, 2022.

State Revenue Impact

According to BOE, AB 717 would result in an annual state revenue loss of almost $17 million.

Comments

1. Purpose of the bill. According to the author, “It is time for California's tax code to reflect the fact that diapers are an absolute health necessity for young children. By updating our tax code to accurately identify diapers as a necessity of life we can also make them more affordable. The high price of diapers has a cost for public health and our economy. Diaper need puts families in the position of changing their children's diapers less often which has unhealthy consequences ranging from diaper rash to infections requiring medical treatment. It also creates a barrier between parents and gainful employment when families cannot afford the number of diapers required by childcare providers.”

2. A new 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). This bill would create a new tax expenditure, costing the general fund almost $17 million dollars in foregone revenue each year. The tradeoff for providing new tax expenditure, resulting in revenue losses, is higher taxes or reductions to other services or programs.

3. How is 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. This can offer taxpayers greater certainty, but 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, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. AB 717 has a 5 year sunset.

4. Regressive tax. The sales tax is considered by most tax experts to be regressive, meaning that the incidence falls more on low-income individuals than high-income individuals. While this bill would provide important financial relief to low-income parents struggling to make ends meet, it would also provide relief to wealthy parents, as families of all incomes purchase diapers.

5. Another way? Existing federal law classifies diapers with cigarettes, alcohol, and pet food as disallowed purchases under CalFresh and the California Special Supplemental Food Program for Women, Infants, and Children. However, both the Head Start (serving children three to five years old) and Early Head Start (serving children under three years) programs must provide diapers and formula to participants who need them. The state can supplement this benefit by providing TANF, CalWORKs, CalFresh, and California Special Supplemental Food Program for Women, Infants, and Children recipients with diapers.

In 2014, AB 1516 (Gonzalez), would have established a young child special needs supplement of $80 per month within the CalWORKs program for each child younger than two years of age in an assistance unit. AB 1516 was held on the Senate Appropriations Committee's Suspense File. This year’s AB 492 (Gonzalez), would provide that necessary supportive services would include vouchers in the amount of $50 per month for diaper products for every child two years of age or younger enrolled in child care, as specified. AB 492 is currently pending in the Senate Committee on Human Services. A targeted approach, like that in AB 492 may aid more low income families, while a sales and use tax exemption benefits all families, regardless of income, that purchase diapers.

6. Prior legislation:

• AB 1291 (Hollingsworth, 2001), provided a SUT exemption for diapers. AB 1291 was held on Suspense in the Assembly Committee on Revenue and Taxation.
• AB 5 (Battin, 1998), provided a SUT exemption for baby diapers, whether disposable or not, and over-the-counter, nonprescription drugs. AB 5 was never heard by the Assembly Committee on Revenue and Taxation.
• AB 13 (Dickerson, 1998), provided a SUT exemption for, among other things, products for incontinence, including disposable and reusable diapers, pads, and briefs. AB 13 was never heard by the Assembly Committee on Revenue and Taxation.

Assembly Actions

Assembly Revenue and Taxation 9-0

Assembly Appropriations 17-0

Assembly Floor 76-0

Support and Opposition

(5/4/16)

Support: 9 to 5 California; ACCESS Women's Health Justice; Alliance of Californians for Community Empowerment; American Academy of Pediatrics, California District IX; American Association of University Women; A Stronger California Network; Black Women for Wellness; Board of Equalization Member Diane L. Harkey; Black Women for Wellness; California Employer Law Center; California Immigrant Policy Center; California Latinas for Reproductive Justice; California Partnership; California Primary Care Association; California Retailer’s Association; California Women's Law Center; California Work and Family Coalition; Career Ladders Project; Child Care Law Center; City of Glendale, CA; Common Sense Kids Action; Courage Campaign; Equal Rights Advocates; Forward Together; Help a Mother Out; Mujeres Unidas Y Activas; National Center for Youth Law; National Council of Jewish Women California Policy Advocacy Network; National Diaper Bank Network; National Domestic Workers Alliance; Next Generation; Parent Voices; Raising California Together; San Diego County Taxpayers Association; The Center for Popular Democracy; TradesWomen Inc.; UC Berkeley Center on Reproductive Rights and Justice; UltraViolet; Western Center on Law and Poverty; Women’s Foundation of California

Opposition: California State Association of Counties; California Tax Reform Association.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 717

Author:(Gonzalez)

As Amended Ver:January 21, 2016

Majority vote. Tax levy

SUMMARY: Establishes a temporary sales and use tax (SUT) exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by infants and toddlers, designated size 3 or under. Specifically, this bill:

1. Sunsets automatically on January 1, 2022.
2. Provides that, notwithstanding existing law, the state shall not reimburse any local agency for SUT revenues lost as a result of this exemption.
3. Takes immediate effect as a tax levy, but only becomes operative on the first day of the first calendar quarter commencing more than 90 days after this bill's effective date.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state.
2. Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the State Board of Equalization (BOE).

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1) Minor and absorbable costs to the BOE to administer the changes to procedures and systems, and notify affected retailers and other persons.

2) Estimated revenue decreases for the state and local jurisdictions of $36.3 million per year, $17.0 million of which is from the General Fund.

COMMENTS:

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

It is time for California's tax code to reflect the fact that diapers are an absolute health necessity for young children. By updating our tax code to accurately identify diapers as a necessity of life we can also make them more affordable. The high price of diapers has a cost for public health and our economy. Diaper need puts families in the position of changing their children's diapers less often which has unhealthy consequences ranging from diaper rash to infections requiring medical treatment. It also creates a barrier between parents and gainful employment when families cannot afford the number of diapers required by childcare providers.

Assembly Revenue and Taxation Committee staff comments:

1. What would this bill do? This bill would temporarily provide a complete SUT exemption for all diapers made for infants and toddlers, designated size 3 or under. The proposed exemption would apply to both disposable and non-disposable diapers alike.
2. The diaper dilemma: By some estimates, up to 95% of United States families use disposable diapers. Nevertheless, environmental and health concerns have persuaded some parents to purchase cloth diapers that can be reused. Experts, however, are divided on whether reusable diapers are more environmentally friendly. According to WebMD, research suggests that both disposable and cloth diapers impact the environment negatively – albeit in different ways. Disposable diapers require more raw materials to manufacture and generate more solid waste for landfills. Cloth diapers, on the other hand, use up large amounts of electricity and water for laundering. Thus, the American Academy of Pediatrics takes no position in the ongoing debate regarding the relative merits of cloth versus disposable diapers.
3. How are diapers currently taxed? Current law does not provide a SUT exemption for diapers. The BOE notes, however, that businesses providing diaper services, where cloth diapers are furnished in connection with the recurring service of laundering the diapers, are considered "consumers" of the diapers they provide. Thus, the tax applies only to the diaper service's purchases, and the business's diaper rental receipts are not subject to SUT.
4. An inherently regressive tax: The SUT has been widely criticized as a regressive exaction that most heavily impacts those least able to pay. For example, a survey by the Nevada Legislative Counsel Bureau long ago concluded that in the case of a retail sales tax with food exempt, "the lowest income group would experience the highest ratio of tax to income . . . ." (Survey of Sales Taxes Applicable to Nevada 59 (Bull. No. 3, May, 1948).) Others, however, contend that a degree of progressivity is provided via the various exemptions built into most state SUT laws (i.e., for certain necessities of life such as food, housing, and medical care).

Proponents of this bill might argue that an exemption for diapers would further promote a degree of progressivity in an already regressive tax regime. Critics, however, might contend that SUT exemptions are a blunt instrument for affecting social policy. While this bill would provide meaningful financial relief to low-income parents struggling to make ends meet, it would also provide relief indiscriminately to wealthy consumers who might not even notice the exemption. In addition, critics might question why diapers are being singled out for preferential tax treatment as opposed to other items of TPP indispensable to raising a child (e.g., car seats, cribs, baby clothes, bottles, strollers, etc.).

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0002585

Date of Hearing: May 27, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 717

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

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

SUMMARY:

This bill establishes, for taxable years beginning on or after January 1, 2016, and before January 1, 2021, a sales and use tax exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by toddlers size 3 or under.

FISCAL EFFECT:

1) Minor and absorbable costs to the Board of Equalization (BOE) to administer the changes to procedures and systems, and notify affected retailers and other persons.

2) Estimated revenue decreases for the state and local jurisdictions of $36.3 million per year, $17.0 million of which is from the General Fund.

COMMENTS:

1) Purpose. According to the author, diapers are a health necessity for young children, and the tax code should be updated to make diapers more affordable. The author claims the high cost of diapers creates public health problems, causing families to change their children's diapers less often, leading to unhealthy consequences requiring medical treatment. Diaper cost can also create a barrier to employment, as certain families cannot afford the requisite number of diapers needed to place their children in daycare. Supporters, led by the American Academy of Pediatrics, California, notes seven other states exempt diapers from sales tax.

2) County Opposition. The California State Association of Counties (CSAC) opposes the bill because it exempts diapers from all state and local sales and use taxes. Total revenue losses are estimated to be $36.3 million per year, with local governments suffering the majority of those losses. CSAC argues almost half of county revenue is derived from sales and use tax, and much of that revenue is used to provide local public safety services, criminal justice and rehabilitation services, and child welfare services. CSAC has requested AB 717 be further narrowed to apply only to the state portion of the sales tax on diapers.

3) Cloth: The Tax-Free Alternative? The vast majority of American families use disposable diapers, not reusable cloth diapers. Experts appear divided, however, on the relative environmental benefits of the two. Cloth diapers are reusable, and therefore do not contribute as much to landfill waste or manufacturing waste and energy use. However, cloth diapers are often transported and collected from residences, creating transportation costs and emissions, and use large amounts of energy and water for laundering. For tax purposes, however, consumer use of cloth diapers is treated as a service, and therefore is not taxed under the sales and use tax. Diaper services pay sales tax on new cloth diapers, but that cost is, in effect, spread out over the lifetime of the diaper for the consumer.

4) Size 3 Bums. This bill provides a sales and use tax exemption only for diapers size 3 and smaller. According to the author, the American Academy of Pediatrics defines toddlers as between 1 and 3 years, and the average age of potty training is approximately 2.5 years. The author further believes it is reasonable for toddlers to be potty trained at 2 years. This bill, therefore, targets toddlers 2 years and younger, an age range that correlates with size 3 diapers and smaller. Size 3 diapers are typically rated for children up to 28 pounds in weight.

5) Progressive Solution, But Not Targeted. The sales and use tax is inherently regressive. Those with the lowest incomes pay the highest percentage of their income in sales and use tax. To balance the tax's regressivity, various exemptions are built in to provide relief for certain necessities, such as food. Allowing an additional exemption for a product like diapers will undoubtedly help low-income parents, but it will also provide equal or greater tax relief to higher-income taxpayers who arguably do not need it. As a result, the revenue spent on a tax exemption benefits wealthy taxpayers as much or more than it does those in need. A more targeted approach, such as subsidies directed at low-income parents, could produce the same benefit for that population but at lower cost to the state. The committee may wish to consider whether a wholesale exemption for a product used by all parents regardless of income is a prudent use of state and local resources, and whether a more targeted approach would be more appropriate.

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 717 (

Author:Gonzalez) – As Introduced Ver:February 25, 2015

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemption: diapers.

SUMMARY: Establishes a sales and use tax (SUT) exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by infants and toddlers. Specifically, this bill:

1. Provides that, notwithstanding existing law, the state shall not reimburse any local agency for SUT revenues lost as a result of this exemption.

2. Takes immediate effect as a tax levy, but only becomes operative on the first day of the first calendar quarter commencing more than 90 days after this bill's effective date.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state.

2. Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the State Board of Equalization (BOE).

FISCAL EFFECT: The BOE estimates that this bill would reduce state and local revenues by $46.7 million annually.

COMMENTS:

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

It is time for California's tax code to reflect the fact that diapers are an absolute health necessity for young children. By updating our tax code to accurately identify diapers as a necessity of life we can also make them more affordable. The high price of diapers has a cost for public health and our economy. Diaper need puts families in the position of changing their children's diapers less often which has unhealthy consequences ranging from diaper rash to infections requiring medical treatment. It also creates a barrier between parents and gainful employment when families cannot afford the number of diapers required by childcare providers.

2. This bill is supported by the American Academy of Pediatrics, California, which notes:

This legislation would follow the lead of seven other states and exempt diapers from sales tax to enable low-income families to better afford this necessity in the care of their children.

An attempt to economize on diaper expense by less frequent changes can lead to medical consequences for the baby, from uncomfortable and inconvenient diaper rash, to more serious conditions including abscesses and urine infections. Moreover, low-income parents are less able to take advantage of free or subsidized childcare if they cannot afford to leave disposable diapers at child care centers, a requirement for most childcare centers. Thus, lack of sufficient diapers can lead to multiple problems for families in need, including unhappy babies, unhealthy communities, undereducated toddlers, and underemployed adults.

3. This bill is opposed by the California State Association of Counties, which notes:

The State Board of Equalization has estimated state and local losses due to AB 717 would total $46.7 million annually. After the past thirty years of changes to sales and use tax allocations, counties now receive almost half of sales and use tax revenues. Approximately two-thirds of that revenue is constitutionally dedicated to providing local public safety services and federal and state programs including social services, like CalWorks, and criminal justice and rehabilitation services.

Therefore, we respectfully request that the local portion of sales and use tax be unaltered by AB 717 and vital dollars continue to flow to critical county service needs. We have no concern with the state using their portion of sales and use tax revenue to advance the policy goals set forth by this measure.

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. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy or cost, without a supermajority vote.

   3. An overview of the SUT Law: California's SUT Law imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon a retailer's gross receipts from TPP sales in California. The SUT Law also imposes a mirror "use tax" on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the BOE.

The SUT represents the state's second largest source of General Fund (GF) revenues. Nevertheless, the past 60 years have seen a dramatic reduction in the state's reliance on the SUT and a corresponding increase in its reliance on personal income tax revenues. In fiscal year (FY) 2014-15, SUT revenues are estimated to comprise 23% of the state's GF revenues, down from nearly 60% in FY 1950-51.

4. What accounts for the state's reduced reliance on SUT revenues? The SUT Law was enacted in a very different era. In the 1930s, California's economy was largely dominated by manufacturing, and residents mostly bought and sold tangible goods. Thus, in establishing the base for a new consumption tax, it made sense to impose the tax on sales of TPP, defined as personal property that may be "seen, weighed, measured, felt, or touched." Over the past 80 years, however, California's economy has seen a dramatic growth in the service and information sectors, resulting in a significant erosion of the SUT base. For example, the Commission on the 21^st Century Economy noted that spending on taxable goods represented 34.6% of personal income in 2008, down from 55.4% in 1980. As a result, tax experts and economists from across the political spectrum argue that California should expand its SUT base.

It could be argued that, while well-intentioned, additional SUT exemptions further erode an already shrinking SUT base. This, in turn, increases fiscal pressures to maintain or even increase California's relatively high SUT rate. High rates arguably promote non-compliance and encourage out-of-state purchases, placing California retailers at a competitive disadvantage. High rates also risk impacting consumer decision-making, which runs counter to widely accepted principles of sound tax policy.

5. What would this bill do? This bill would provide a complete SUT exemption for all diapers made for infants and toddlers. The proposed exemption would apply to both disposable and non-disposable diapers alike.

6. The diaper dilemma: By some estimates, up to 95% of U.S. families use disposable diapers. Nevertheless, environmental and health concerns have persuaded some parents to purchase cloth diapers that can be reused. Experts, however, are divided on whether reusable diapers are more environmentally friendly. According to WebMD, research suggests that both disposable and cloth diapers impact the environment negatively – albeit in different ways. Disposable diapers require more raw materials to manufacture and generate more solid waste for landfills. Cloth diapers, on the other hand, use up large amounts of electricity and water for laundering. Thus, the American Academy of Pediatrics takes no position in the ongoing debate regarding the relative merits of cloth versus disposable diapers.

7. How are diapers currently taxed? Current law does not provide a SUT exemption for diapers. The BOE notes, however, that businesses providing diaper services, where cloth diapers are furnished in connection with the recurring service of laundering the diapers, are considered "consumers" of the diapers they provide. Thus, the tax applies only to the diaper service's purchases, and the business's diaper rental receipts are not subject to SUT.

8. An inherently regressive tax: The SUT has been widely criticized as a regressive exaction that most heavily impacts those least able to pay. For example, a survey by the Nevada Legislative Counsel Bureau long ago concluded that in the case of a retail sales tax with food exempt, "the lowest income group would experience the highest ratio of tax to income . . . ." (Survey of Sales Taxes Applicable to Nevada 59 (Bull. No. 3, May, 1948).) Others, however, contend that a degree of progressivity is provided via the various exemptions built into most state SUT laws (i.e., for certain necessities of life such as food, housing, and medical care).

Proponents of this bill might argue that an exemption for diapers would further promote a degree of progressivity in an already regressive tax regime. Critics, however, might contend that SUT exemptions are a blunt instrument for affecting social policy. While this bill would provide meaningful financial relief to low-income parents struggling to make ends meet, it would also provide relief indiscriminately to wealthy consumers who might not even notice the exemption. In addition, critics might question why diapers are being singled out for preferential tax treatment as opposed to other items of TPP indispensable to raising a child (e.g., car seats, cribs, baby clothes, bottles, strollers, etc.).

9. A more targeted approach? To better target the low-income parents this bill is aiming to assist, the Committee may wish to consider whether a slightly more tailored approach would be preferable. Specifically, if the Legislature chooses to dedicate a certain amount of money (e.g., $50 million annually) to help parents purchase diapers, it might be preferable to channel this money directly and exclusively to the beneficiaries of an existing means-tested program. For example, existing law provides for the California Work Opportunity and Responsibility to Kids (CalWORKs) program, under which each county provides cash assistance and other benefits to qualified low-income families and individuals. AB 1516 (Gonzalez), of the 2013-14 Legislative Session, would have established a young child special needs supplement of $80 per month within the CalWORKs program for each child younger than two years of age in an assistance unit. AB 1516 was held on the Senate Appropriations Committee's Suspense File. AB 492 (Gonzalez), in turn, would provide that necessary supportive services would include vouchers in the amount of $50 per month for diaper products for every child two years of age or younger enrolled in child care, as specified. AB 492 is currently pending by the Assembly Committee on Human Services.

Alternatively, the Committee may wish to consider whether it would be preferable to provide a SUT exemption for diapers sold directly to nonprofit entities that, in turn, provide free diapers to low-income and homeless families. The nonprofit Help a Mother Out organization notes that it has provided diapers to low-income and homeless families through a network of social service partners since 2009. At the same time, this nonprofit notes:

For the present fiscal year, the sales tax assessed for bulk purchasing diapers for our programs is close to $22,000.00. That's critical funding that takes away from our organization distributing more diapers to vulnerable families through life changing programs.

10. Filling in the details: As noted above, this bill would establish a SUT exemption for diapers designed and manufactured for "infants and toddlers". This bill, however, lacks definitions for these terms. Thus, it might be challenging for retailers to determine with any degree of precision which specific products qualify for the exemption and which do not. The Committee may wish to consider whether it would be beneficial to provide greater definitional clarity through references to specific age or weight ranges.

11. Absence of a sunset date: In its current form, this bill's proposed tax expenditure lacks an automatic sunset provision. 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 an appropriate sunset provision.

12. Prior legislation:

    1. AB 1291 (Hollingsworth), of the 2001-02 Legislative Session, would have provided a SUT exemption for diapers. AB 1291 was held on this Committee's Suspense File.

    2. AB 5 (Battin), of the 1999-2000 Legislative Session, would have provided a SUT exemption for baby diapers, whether disposable or not, and over-the-counter, nonprescription drugs. AB 5 was never heard by this committee.

    3. AB 13 (Dickerson), of the 1999-00 Legislative Session, would have provided a SUT exemption for, among other things, products for incontinence, including disposable and reusable diapers, pads, and briefs. AB 13 was never heard by this Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

ACCESS Women's Health Justice

American Academy of Pediatrics, California

Board of Equalization Member Diane L. Harkey

Black Women for Wellness

California Latinas for Reproductive Justice

Forward Together

Help a Mother Out

National Center for Youth Law

National Diaper Bank Network

San Diego County Taxpayers Association

Opposition

California State Association of Counties

California Tax Reform Association

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

Date of Hearing: May 4, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 717

Author:(Gonzalez) – As Introduced Ver:February 25, 2015

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemption: diapers

SUMMARY: Establishes a sales and use tax (SUT) exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by infants and toddlers. Specifically, this bill:

1. Provides that, notwithstanding existing law, the state shall not reimburse any local agency for SUT revenues lost as a result of this exemption.

2. Takes immediate effect as a tax levy, but only becomes operative on the first day of the first calendar quarter commencing more than 90 days after this bill's effective date.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state.

2. Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the State Board of Equalization (BOE).

FISCAL EFFECT: The BOE estimates that this bill would reduce state and local revenues by $46.7 million annually.

COMMENTS:

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

It is time for California's tax code to reflect the fact that diapers are an absolute health necessity for young children. By updating our tax code to accurately identify diapers as a necessity of life we can also make them more affordable. The high price of diapers has a cost for public health and our economy. Diaper need puts families in the position of changing their children's diapers less often which has unhealthy consequences ranging from diaper rash to infections requiring medical treatment. It also creates a barrier between parents and gainful employment when families cannot afford the number of diapers required by childcare providers.

2. This bill is supported by the American Academy of Pediatrics, California, which notes:

This legislation would follow the lead of seven other states and exempt diapers from sales tax to enable low-income families to better afford this necessity in the care of their children.

An attempt to economize on diaper expense by less frequent changes can lead to medical consequences for the baby, from uncomfortable and inconvenient diaper rash, to more serious conditions including abscesses and urine infections. Moreover, low-income parents are less able to take advantage of free or subsidized childcare if they cannot afford to leave disposable diapers at child care centers, a requirement for most childcare centers. Thus, lack of sufficient diapers can lead to multiple problems for families in need, including unhappy babies, unhealthy communities, undereducated toddlers, and underemployed adults.

3. This bill is opposed by the California State Association of Counties, which notes:

The State Board of Equalization has estimated state and local losses due to AB 717 would total $46.7 million annually. After the past thirty years of changes to sales and use tax allocations, counties now receive almost half of sales and use tax revenues. Approximately two-thirds of that revenue is constitutionally dedicated to providing local public safety services and federal and state programs including social services, like CalWorks, and criminal justice and rehabilitation services.

Therefore, we respectfully request that the local portion of sales and use tax be unaltered by AB 717 and vital dollars continue to flow to critical county service needs. We have no concern with the state using their portion of sales and use tax revenue to advance the policy goals set forth by this measure.

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. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy or cost, without a supermajority vote.

   3. An overview of the SUT Law: California's SUT Law imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon a retailer's gross receipts from TPP sales in California. The SUT Law also imposes a mirror "use tax" on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the BOE.

The SUT represents the state's second largest source of General Fund (GF) revenues. Nevertheless, the past 60 years have seen a dramatic reduction in the state's reliance on the SUT and a corresponding increase in its reliance on personal income tax revenues. In fiscal year (FY) 2014-15, SUT revenues are estimated to comprise 23% of the state's GF revenues, down from nearly 60% in FY 1950-51.

4. What accounts for the state's reduced reliance on SUT revenues? The SUT Law was enacted in a very different era. In the 1930s, California's economy was largely dominated by manufacturing, and residents mostly bought and sold tangible goods. Thus, in establishing the base for a new consumption tax, it made sense to impose the tax on sales of TPP, defined as personal property that may be "seen, weighed, measured, felt, or touched." Over the past 80 years, however, California's economy has seen a dramatic growth in the service and information sectors, resulting in a significant erosion of the SUT base. For example, the Commission on the 21^st Century Economy noted that spending on taxable goods represented 34.6% of personal income in 2008, down from 55.4% in 1980. As a result, tax experts and economists from across the political spectrum argue that California should expand its SUT base.

It could be argued that, while well-intentioned, additional SUT exemptions further erode an already shrinking SUT base. This, in turn, increases fiscal pressures to maintain or even increase California's relatively high SUT rate. High rates arguably promote non-compliance and encourage out-of-state purchases, placing California retailers at a competitive disadvantage. High rates also risk impacting consumer decision-making, which runs counter to widely accepted principles of sound tax policy.

5. What would this bill do? This bill would provide a complete SUT exemption for all diapers made for infants and toddlers. The proposed exemption would apply to both disposable and non-disposable diapers alike.

6. The diaper dilemma: By some estimates, up to 95% of U.S. families use disposable diapers. Nevertheless, environmental and health concerns have persuaded some parents to purchase cloth diapers that can be reused. Experts, however, are divided on whether reusable diapers are more environmentally friendly. According to WebMD, research suggests that both disposable and cloth diapers impact the environment negatively – albeit in different ways. Disposable diapers require more raw materials to manufacture and generate more solid waste for landfills. Cloth diapers, on the other hand, use up large amounts of electricity and water for laundering. Thus, the American Academy of Pediatrics takes no position in the ongoing debate regarding the relative merits of cloth versus disposable diapers.

7. How are diapers currently taxed? Current law does not provide a SUT exemption for diapers. The BOE notes, however, that businesses providing diaper services, where cloth diapers are furnished in connection with the recurring service of laundering the diapers, are considered "consumers" of the diapers they provide. Thus, the tax applies only to the diaper service's purchases, and the business's diaper rental receipts are not subject to SUT.

8. An inherently regressive tax: The SUT has been widely criticized as a regressive exaction that most heavily impacts those least able to pay. For example, a survey by the Nevada Legislative Counsel Bureau long ago concluded that in the case of a retail sales tax with food exempt, "the lowest income group would experience the highest ratio of tax to income . . . ." (Survey of Sales Taxes Applicable to Nevada 59 (Bull. No. 3, May, 1948).) Others, however, contend that a degree of progressivity is provided via the various exemptions built into most state SUT laws (i.e., for certain necessities of life such as food, housing, and medical care).

Proponents of this bill might argue that an exemption for diapers would further promote a degree of progressivity in an already regressive tax regime. Critics, however, might contend that SUT exemptions are a blunt instrument for affecting social policy. While this bill would provide meaningful financial relief to low-income parents struggling to make ends meet, it would also provide relief indiscriminately to wealthy consumers who might not even notice the exemption. In addition, critics might question why diapers are being singled out for preferential tax treatment as opposed to other items of TPP indispensable to raising a child (e.g., car seats, cribs, baby clothes, bottles, strollers, etc.).

9. A more targeted approach? To better target the low-income parents this bill is aiming to assist, the Committee may wish to consider whether a slightly more tailored approach would be preferable. Specifically, if the Legislature chooses to dedicate a certain amount of money (e.g., $50 million annually) to help parents purchase diapers, it might be preferable to channel this money directly and exclusively to the beneficiaries of an existing means-tested program. For example, existing law provides for the California Work Opportunity and Responsibility to Kids (CalWORKs) program, under which each county provides cash assistance and other benefits to qualified low-income families and individuals. AB 1516 (Gonzalez), of the 2013-14 Legislative Session, would have established a young child special needs supplement of $80 per month within the CalWORKs program for each child younger than two years of age in an assistance unit. AB 1516 was held on the Senate Appropriations Committee's Suspense File. AB 492 (Gonzalez), in turn, would provide that necessary supportive services would include vouchers in the amount of $50 per month for diaper products for every child two years of age or younger enrolled in child care, as specified. AB 492 is currently pending by the Assembly Committee on Human Services.

Alternatively, the Committee may wish to consider whether it would be preferable to provide a SUT exemption for diapers sold directly to nonprofit entities that, in turn, provide free diapers to low-income and homeless families. The nonprofit Help a Mother Out organization notes that it has provided diapers to low-income and homeless families through a network of social service partners since 2009. At the same time, this nonprofit notes:

For the present fiscal year, the sales tax assessed for bulk purchasing diapers for our programs is close to $22,000.00. That's critical funding that takes away from our organization distributing more diapers to vulnerable families through life changing programs.

10. Filling in the details: As noted above, this bill would establish a SUT exemption for diapers designed and manufactured for "infants and toddlers". This bill, however, lacks definitions for these terms. Thus, it might be challenging for retailers to determine with any degree of precision which specific products qualify for the exemption and which do not. The Committee may wish to consider whether it would be beneficial to provide greater definitional clarity through references to specific age or weight ranges.

11. Absence of a sunset date: In its current form, this bill's proposed tax expenditure lacks an automatic sunset provision. 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 an appropriate sunset provision.

12. Prior legislation:

    1. AB 1291 (Hollingsworth), of the 2001-02 Legislative Session, would have provided a SUT exemption for diapers. AB 1291 was held on this Committee's Suspense File.

    2. AB 5 (Battin), of the 1999-2000 Legislative Session, would have provided a SUT exemption for baby diapers, whether disposable or not, and over-the-counter, nonprescription drugs. AB 5 was never heard by this committee.

    3. AB 13 (Dickerson), of the 1999-00 Legislative Session, would have provided a SUT exemption for, among other things, products for incontinence, including disposable and reusable diapers, pads, and briefs. AB 13 was never heard by this Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

ACCESS Women's Health Justice

American Academy of Pediatrics, California

Black Women for Wellness

California Latinas for Reproductive Justice

Forward Together

Help a Mother Out

National Center for Youth Law

National Diaper Bank Network

San Diego County Taxpayers Association

Opposition

California State Association of Counties

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