The Personal Income Tax Law, in modified conformity with federal income tax laws, allows various deductions in computing the income that is subject to the taxes imposed by that law, including miscellaneous itemized deductions that are allowed only to the extent that the aggregate amount of those deductions exceed 2% of adjusted gross income.

This bill, for taxable years beginning on or after January 1, 2016, and before January 1, 2021, would allow a deduction, not to exceed $100, under that law for the qualified costs paid or incurred by a taxpayer for the adoption of a qualified pet, as defined, from a qualified animal rescue organization.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law, in modified conformity with federal income tax laws, allows various deductions in computing the income that is subject to the taxes imposed by that law, including miscellaneous itemized deductions that are allowed only to the extent that the aggregate amount of those deductions exceed 2% of adjusted gross income.

This bill, for taxable years beginning on or after January 1, 2016, and before January 1, 2021, would allow a deduction, not to exceed $100, under that law for the qualified costs paid or incurred by a taxpayer for the adoption of a qualified pet, as defined, from a qualified animal rescue organization.

(1)The Personal Income Tax Law, in modified conformity with federal income tax laws, allows various deductions in computing the income that is subject to the taxes imposed by that law, including miscellaneous itemized deductions that are allowed only to the extent that the aggregate amount of those deductions exceed 2% of adjusted gross income.

This bill, for taxable years beginning on or after January 1, 2016, and before January 1, 2021, would allow a deduction, not to exceed $100, under that law for the qualified costs paid or incurred by a taxpayer for the adoption of a pet from a qualified animal rescue organization.

(2)Existing law authorizes an individual to contribute amounts in excess of his or her personal income tax liability for the support of specified funds.

This bill would allow an individual to designate on his or her tax return that a specified amount in excess of his or her tax liability be transferred to the Pet Adoption Cost Deduction Fund, which would be created by this bill. The bill would prohibit a voluntary contribution designation for the Pet Adoption Cost Deduction Fund from being added on the tax return until another voluntary contribution designation is removed.

The bill would require moneys in the Pet Adoption Cost Deduction Fund, upon appropriation by the Legislature, to be allocated to the Franchise Tax Board, to the Controller for reimbursement of losses in connection with providing personal income tax deductions for pet adoptions, as provided, and the balance to the Department of Food and Agriculture for the distribution of grants to eligible municipal shelters, as defined, for the purpose of providing food and shelter to abandoned and impounded animals, as specified.

The bill would provide that these provisions would remain in effect only until January 1 of the 5th taxable year following the first appearance of the Pet Adoption Cost Deduction Fund on the tax return, but would further provide for an earlier repeal if the Franchise Tax Board determines that the amount of contributions estimated to be received during a calendar year will not at least equal the minimum contribution amount, as defined, for that calendar year, in which case these provisions would be repealed on December 1 of that year.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 976 (Steinorth) - Personal income tax: deductions: qualified pet adoption costs

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

Bill Summary:

AB 976 would allow an income tax deduction, not to exceed $100, for qualified costs paid or incurred adopting a pet from a qualified animal rescue organization, as defined.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in annual General Fund revenue losses of $100,000 for fiscal years 2016-17 through 2018-19. The bill would not impact FTB’s administrative costs.

Background:

Current law permits 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 engage in some sort of behavior that would not have occurred on the natural.

California law allows various deductions under the personal income tax (PIT), in modified conformity with federal income tax laws, including miscellaneous itemized deductions that are allowed only to the extent that the aggregate amount of those deductions exceed 2 percent of adjusted gross income (AGI). These deductions are referred to as “below-the-line” deductions.

State law also allows for the deduction of certain expenses to arrive at a taxpayer's adjusted gross income. These expenses include certain trade and business expenses, losses from the sale or exchange of certain property, alimony, and moving expenses. Taxpayers with these types of expenses receive the benefit of a deduction, regardless of whether the taxpayer itemizes deductions or uses the standard deduction. These deductions are known as "above-the-line" deductions.

Proposed Law:

This bill would allow a below-the-line deduction equal to the qualified costs paid or incurred by a taxpayer for the adoption of a qualified pet (as defined) from a qualified animal rescue organization (as defined). The deduction would be claimed as a miscellaneous itemized deduction and would be limited to $100 per taxable year. The bill would (1) take effect immediately as a tax levy, and (2) apply to taxable years 2016 through 2020.

Related Legislation: AB 2326 (Dickinson, 2014), also would have allowed taxpayers a

miscellaneous itemized deduction, up to $100 per taxable year, for the qualified costs paid or incurred for the adoption of pets from a qualified animal rescue organization. AB 2326 was held on suspense by the Assembly Appropriations Committee.

Staff Comments:

FTB’s revenue estimate is based on an assumption that 100,000 qualified pets would be adopted in 2016. In addition, FTB assumes that (1) 60 percent of adopters would itemize their deductions, and (2) 30 percent of itemizers exceed the two percent floor for miscellaneous deductions. Consequently, approximately 18,000 taxpayers would take the proposed deduction.

As noted above, Tax expenditures such as the one proposed in this bill typically are enacted to encourage socially beneficial behavior that would not exist without financial incentive. However, because this bill caps its deduction at $100, the decrease in a taxpayer’s tax liability would be roughly $10, which could limit its impact with respect to increased animal adoptions over what would happen on the natural.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

PERSONAL INCOME TAX: DEDUCTIONS: QUALIFIED PET ADOPTION COSTS

Allows a deduction, not to exceed $100, for qualified costs paid or incurred adopting a pet from a qualified animal rescue organization.

Background and Existing Law

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.

California law allows various deductions under the personal income tax (PIT), in modified conformity with federal income tax laws, including miscellaneous itemized deductions that are allowed only to the extent that the aggregate amount of those deductions exceed 2% of adjusted gross income (AGI). These deductions are known as “below-the-line” deductions.

State law also allows for the deduction of certain expenses to arrive at a taxpayer's AGI. These expenses include certain trade and business expenses, losses from the sale or exchange of certain property, alimony, and moving expenses. Taxpayers with these types of expenses receive the benefit of a deduction, regardless of whether the taxpayer itemizes deductions or uses the standard deduction. These deductions are known as "above-the-line" deductions.

Proposed Law

Assembly Bill 976 allows a below-the-line deduction equal to the qualified costs paid or incurred during the taxable year by a taxpayer for the adoption of a qualified pet from a qualified animal rescue organization. The deduction would be claimed as a miscellaneous itemized deduction and would be limited to $100 per taxable year.

AB 976 defines the following terms as follows:

• “Qualified animal rescue organization” means a public animal control agency or shelter, a humane society shelter, or rescue group.

• “Qualified costs” means amounts paid or incurred to a qualified animal rescue organization to adopt a pet, not to exceed one hundred dollars ($100).

• “Qualified pet” means a pet over four years of age or a cat, and that is not used by the taxpayer in a trade or business or for the production of income.

• “Rescue group” means an organization, exempt from federal income taxation under Internal Revenue Code (IRC) section 501(c) (3), whose primary purpose is to place dogs, cats, or other animals removed from a public animal control agency or shelter, society for the prevention of cruelty to animals shelter, or humane society, or that have been surrendered or relinquished to the rescue group by the previous owner.

AB 976 takes effect immediately as a tax levy, and applies to taxable years beginning on or after January 1, 2016, and before January 1, 2021.

State Revenue Impact

The Franchise Tax Board (FTB) estimates General Fund revenue loss of $100,000 in fiscal year (FY) 2016-17, and $100,000 in FY 2017-18, and $100,000 in FY 2018-19.

Comments

1. Purpose of the bill. According to the author, “AB 976 takes a modest step to help shelter animals most in need. By establishing a tax deduction for the adoption of cats and older dogs, we encourage persons interested in adoption to consider pets which might otherwise be overlooked. Shelters throughout the state have testified that offering any financial incentive for adoption is effective. However, shelters are already strapped for funds, and are limited in the number and size of discounts they can provide. AB 976 allows us to do our part to assist shelters, benefitting California’s animals and taxpayers. With over $120 million tax dollars directly supporting animal shelters each year, reducing shelter overcrowding and lowering euthanasia rates will reduce local government costs and save lives.”

2. Incentive? Generally, tax expenditures are enacted to encourage socially beneficial behavior that would not take place without a financial incentive. AB 976 establishes a deduction to encourage the adoption of pets from qualified animal rescue organizations. Yet, because this bill limits the deduction amount to $100 per taxable year, applying a marginal tax rate of 9.3%, this bill would only translate to a tax break of less than $10.

3. 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 $100,000 dollars in foregone revenue each year. The tradeoff for providing a new tax expenditure, resulting in revenue losses, is higher taxes or reductions to other services or programs.

4. 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. 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. 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, without a supermajority vote.

5. Above/Below the Line Deduction. An above-the-line deduction is a deduction that allows a taxpayer to subtract amounts from gross income when calculating their "adjusted gross income." If the deduction is taken above the line, it is used to determine the taxpayer’s AGI. An above-the-line deduction can be taken by any taxpayer regardless of whether the taxpayer itemizes. Moreover, an above-the-line deduction reduces AGI, and having a smaller AGI can lower many subsequent calculations which will further reduce taxes. As a result, above-the-line deductions are more advantageous than those taken below the line. Once AGI is determined, a taxpayer can either itemize deductions or take the standard deduction, whichever is greater. Once itemized deductions exceed the standard deduction, other smaller below-the-line deductions, such as miscellaneous expenses, can be applied to increase tax savings. However, in order to take advantage of a miscellaneous below-the-line deduction, total expenses must exceed 2% of AGI and all deductions in total must exceed the standard deduction. Currently, less than one-half of California individuals itemize their deductions.

6. Reverse nonconformity. California law does not automatically conform to changes to federal tax law, except under specified circumstances. Instead, the Legislature must affirmatively conform to federal changes. Generally, when the federal government changes its tax laws, California catches up by enacting its own legislation the following year to reduce differences between the two codes, thereby easing the tax preparation burden on taxpayers, tax preparers, and the Franchise Tax Board. Currently, under federal tax law there is no pet deduction. If AB 976 becomes law, taxpayers would be entitled to a deduction for state tax purposes, but not for federal tax purposes.

7. Kittens, but not puppies. The tax deduction allowed in AB 976 applies to all cats, but all other pets adopted must be over 4 years old to qualify. According to the author, in 2013 54% of cats and 30% of dogs in shelter care were ultimately euthanized. The bill seeks to mitigate the disparity by incentivizing the adoption of cats over other pets.

Assembly Actions

Assembly Revenue and Taxation 7-2

Assembly Appropriations 15-1

Assembly Floor 66-8

Support and Opposition

(6/17/15)

Support: American Society for the Prevention of Cruelty to Animals; Animal Rescue Media and Education; Humane Society of the United States; State Humane Association of California.

Opposition: American Federation of State, County, and Municipal Employees; California Tax Reform Association.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 976

Author:(Steinorth)

As Amended Ver:May 7, 2015

Majority vote. Tax levy

SUMMARY: Allows a deduction, not to exceed $100, for qualified costs paid or incurred adopting a pet from a qualified animal rescue organization. Specifically, this bill:

1. Allows, for taxable years beginning on or after January 1, 2016, and before January 1, 2021, a deduction, under the Personal Income Tax (PIT) Law, equal to the "qualified costs" paid or incurred by a taxpayer for the adoption of a "qualified pet" from a "qualified animal rescue organization."

2. Limits the deduction allowed for a taxable year to $100.

3. Defines a "qualified pet" as either of the following animals adopted from a qualified animal rescue organization that is not used by the taxpayer in a trade or business or for the production of income:

   1. A pet over the age of four, as determined by the qualified animal rescue organization; or,

   2. A cat.

4. Defines a "qualified animal rescue organization" as a public animal control agency or shelter, humane society shelter, or rescue group.

5. Defines "qualified costs" as amounts paid or incurred to a qualified animal rescue organization to adopt a pet, not to exceed $100.

6. Defines "rescue group" as an organization exempt from federal income taxation, pursuant to Internal Revenue Code (IRC) Section 501(c)(3), whose primary purpose is the placement of dogs, cats, or other animals that have been removed from a public animal control agency or shelter, society for the prevention of cruelty to animals shelter, or humane society, or that have been surrendered or relinquished to the rescue group by the previous owner.

7. Repeals the statutory provision authorizing the deduction on December 1, 2021.

8. Takes effect immediately as a tax levy.

FISCAL EFFECT: According to the Assembly Appropriations Committee, estimated annual General Fund revenue decrease of approximately $100,000.

COMMENTS:

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

AB 976 represents a modest investment towards supporting our local governments and animal shelters. California taxpayers currently spend over $120 million to support local animal shelters for the approximately 800,000 pets they serve each year. Overcrowding poses constant pressure upon shelters to reduce their intake and holding time; the simplest way to combat the problem is to increase adoption rates.

Shelters have testified that providing discounted prices for adoption have effectively increased their adoption rates. While not an identical offer, it is reasonable to infer that an ongoing financial incentive in the form of a tax deduction will have a similarly positive effect in increasing animal adoptions.

Increasing animal adoptions will help to relieve local governments of the substantial cost pressure placed upon them to support shelters. Rather than distributing additional local government dollars to animal shelters, a tax deduction places the power in the taxpayer's hands to reduce their cost share. It is critical that the state do its part in encouraging animal adoptions in an effort to both reduce the cost to the public and save lives.

2. Arguments in Support: The Humane Society states that "[w]hile the tax deduction provision that AB 976 would create cannot address all that ails our state’s homeless pets and the agencies vested with looking out for their interests, it is a relatively inexpensive and efficient way to send a strong message to California taxpayers: that never before has their compassion been more critical to improving the chances for animals who have done nothing wrong other than prove too expensive for their downtrodden owners. AB 976 asks Californians to help out, and by promoting the benefits – to the animals and to the government and charitable sectors – of adopting rather than purchasing dogs and cats, the deduction would increase the ability of municipal and charitable animal protection organizations to continue their life-saving work." The Humane Society further states that "the cost associated with AB 976's provisions is modest when compared to the potential for increased economic activity, reduced animal sheltering costs and improved agency revenues, and lower health and welfare expenses. Only very small increases in the number of pet adoptions would be necessary to demonstrate the investment value of providing this deduction."

3. Arguments in Opposition: The California Tax Reform Association states that "[w]hile the intention of this bill is reasonable, the legislature has previously rejected the use of tax credits and deductions for animal adoption. Promoting the adoption of animals from animal rescue organizations through the mechanism of a tax deduction is poor public policy." The California Tax Reform Association further states that the deduction is poor public policy because the deduction is only relevant to those who earn enough income to itemize, and the choice of adopting a pet is properly motivated by compassion, not finances.

4. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). This bill enacts a new tax expenditure program, in the form of a PIT deduction, to encourage the adoption of pets from qualified animal rescue organizations.

5. 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. 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, 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, without a supermajority vote.

6. Above/Below the Line Deduction: An above-the-line deduction is a deduction that allows a taxpayer to subtract amounts from gross income when calculating their "adjusted gross income." If the deduction is taken above the line, it is used to determine the taxpayer’s adjusted gross income (AGI). An above-the-line deduction can be taken by any taxpayer regardless of whether the taxpayer itemizes. Moreover, an above-the-line deduction reduces AGI, and having a smaller AGI can lower many subsequent calculations which will further reduce taxes. As a result, above-the-line deductions are more advantageous than those taken below the line. Once AGI is determined, a taxpayer can either itemize deductions or take the standard deduction, whichever is greater. Once itemized deductions exceed the standard deduction, other smaller deductions, such as miscellaneous expenses, can be applied to increase tax savings. However, in order to take advantage of a miscellaneous deduction, total expenses must exceed 2% of AGI. Other deductions provide their own AGI threshold.

7. Incentive or reward? Generally, tax expenditures are enacted to encourage socially beneficial behavior that would not take place without a financial incentive. As noted above, this bill establishes a deduction to encourage the adoption of pets from qualified animal rescue organizations. It would be difficult to find a person who did not consider this a worthy goal. At the same time, however, this bill limits the deduction amount to $100 per taxable year. Applying a marginal tax rate of 9.3%, this would translate to a tax break of less than $10. The Legislature may wish to consider whether such an incentive is likely to encourage people to engage in "new" behavior, or whether it would simply reward people who would have adopted a pet in the absence of a deduction. Additionally, given that less than one-half of individual California taxpayers itemize their deductions; and given the overall cap on total itemized deductions under the personal income tax law, this clarification would result in many fewer taxpayers being eligible to claim the deduction, and therefore significantly lower impact to General Fund revenue.

8. Prior Legislation:

   1. AB 2326 (Dickinson) of the 2013-14 Regular Session, would have allowed a deduction for qualified costs paid or incurred adopting a pet from a qualified animal rescue organization. AB 2326 was held on the Assembly Appropriations Committee's Suspense File.

   2. AB 233 (Smyth) of the 2009-10 Regular Session, would have allowed a deduction for qualified costs paid or incurred by a taxpayer for the adoption of a pet from a qualified animal rescue organization. AB 233 was held on the Assembly Appropriations Committee's Suspense File.

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0000541

Date of Hearing: May 27, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 976

Author:(Steinorth) – As Amended Ver:May 7, 2015

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

SUMMARY:

This bill allows, for tax years beginning on or after January 1, 2016, and before January 1, 2021, a deduction, not to exceed $100, from personal income tax for costs incurred adopting either (i) a pet over the age of 4, or (ii) a cat from a public animal control agency or shelter, humane society shelter, or rescue group.

FISCAL EFFECT:

Estimated annual GF revenue decrease of approximately $100,000.

COMMENTS:

1) Purpose. According to the author, local animal shelters in California serve approximately 800,000 pets a year, and many suffer from overcrowding. The author contends the easiest way to alleviate overcrowding pressure is to increase adoption rates, and this bill is intended to be a modest investment toward that goal. The author believes discounted prices for adoption have been effective in increasing adoption rates, so by inference, a tax incentive ought to have a similarly positive effect.

Supporters, led by the Humane Society, believe a tax deduction sends an effective message about the importance of compassion for homeless pets, arguing even a small increase in the number of pet adoptions will demonstrate the investment value of the deduction.

2) Modest incentive. This bill is intended to encourage the adoption of pets from qualified animal rescue organizations with a maximum deduction of $100, and only for those taxpayers who itemize their deductions. Even at the top marginal income tax rate of 12.3%, the deduction results in a total tax savings of less than $13, and for most families, the tax savings would be less than $10. In opposition, the California Tax Reform Association argues promoting animal adoption through a tax deduction is poor public policy, arguing pet adoption is properly motivated through compassion and not financial incentives.

3) More actual adoptions? Tax incentives are usually intended to incentivize socially beneficial behavior that would not occur without the incentive. While pet adoption is certainly a laudable goal, for the vast majority of taxpayers, the maximum incentive will be less than $10. The Committee may wish to consider whether that is a sufficient incentive to encourage anyone who would not otherwise have considered adopting a rescued animal to do so, and if so, whether that incentive created justifies the cost to the state.

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 976

Author:Steinorth – As Amended Ver:May 7, 2015

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income tax: deductions: qualified pet adoption costs.

SUMMARY: Allows a deduction, not to exceed $100, for qualified costs paid or incurred adopting a pet from a qualified animal rescue organization. Specifically, this bill:

1. Allows, for taxable years beginning on or after January 1, 2016, and before January 1, 2021, a deduction, under the Personal Income Tax (PIT) Law, equal to the "qualified costs" paid or incurred by a taxpayer for the adoption of a "qualified pet" from a "qualified animal rescue organization."

2. Limits the deduction allowed for a taxable year to $100.

3. Defines a “qualified pet” as either of the following animals adopted from a qualified animal rescue organization that is not used by the taxpayer in a trade or business or for the production of income:

   1. A pet over that age of four, as determined by the qualified animal rescue organization; or,

   2. A cat.

4. Defines a “qualified animal rescue organization” as a public animal control agency or shelter, humane society shelter, or rescue group.

5. Defines “qualified costs” as amounts paid or incurred to a qualified animal rescue organization to adopt a pet, not to exceed $100.

6. Defines "rescue group" as an organization exempt from federal income taxation, pursuant to Internal Revenue Code (IRC) Section 501(c)(3), whose primary purpose is the placement of dogs, cats, or other animals that have been removed from a public animal control agency or shelter, society for the prevention of cruelty to animals shelter, or humane society, or that have been surrendered or relinquished to the rescue group by the previous owner.

7. Repeals the statutory provision authorizing the deduction on December 1, 2021.

8. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Allows, under the PIT, in modified conformity with federal income tax laws various deductions in computing the income that is subject to the taxes imposed by that law, including miscellaneous itemized deductions that are allowed only to the extent that the aggregate amount of those deductions exceed 2% of adjusted gross income (AGI).

2. Allows for the deduction of certain expenses to arrive at a taxpayer's AGI. These expenses include certain trade and business expenses, losses from the sale or exchange of certain property, alimony, and moving expenses. Thus, all taxpayers with these types of expenses receive the benefit of a deduction, regardless of whether the taxpayer itemizes deductions or uses the standard deduction. These deductions are known as "above-the-line" deductions.
   
   

FISCAL EFFECT: The Franchise Tax Board (FTB) estimates General Fund revenue loss of $100,000 in fiscal year (FY) 2016-17, and $100,000 in FY 2017-18, and $100,000 in FY 2018-19.

COMMENTS:

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

AB 976 represents a modest investment towards supporting our local governments and animal shelters. California taxpayers currently spend over $120 million to support local animal shelters for the ~ 800,000 pets they serve each year. Overcrowding poses constant pressure upon shelters to reduce their intake and holding time; the simplest way to combat the problem is to increase adoption rates.

Shelters have testified that providing discounted prices for adoption have effectively increased their adoption rates. While not an identical offer, it is reasonable to infer that an ongoing financial incentive in the form of a tax deduction will have a similarly positive effect in increasing animal adoptions.

Increasing animal adoptions will help to relieve local governments of the substantial cost pressure placed upon them to support shelters. Rather than distributing additional local government dollars to animal shelters, a tax deduction places the power in the taxpayer's hands to reduce their cost share. It is critical that the state do its part in encouraging animal adoptions in an effort to both reduce the cost to the public and save lives.

2. Arguments in Support: The Humane Society states that “[w]hile the tax deduction provision that AB 976 would create cannot address all that ails our state’s homeless pets and the agencies vested with looking out for their interests, it is a relatively inexpensive and efficient way to send a strong message to California taxpayers: that never before has their compassion been more critical to improving the chances for animals who have done nothing wrong other than prove too expensive for their downtrodden owners. AB 976 asks Californians to help out, and by promoting the benefits – to the animals and to the government and charitable sectors – of adopting rather than purchasing dogs and cats, the deduction would increase the ability of municipal and charitable animal protection organizations to continue their life-saving work.” The Humane Society further states that “the cost associated with AB 976’s provisions is modest when compared to the potential for increased economic activity, reduced animal sheltering costs and improved agency revenues, and lower health and welfare expenses. Only very small increases in the number of pet adoptions would be necessary to demonstrate the investment value of providing this deduction.”

3. Arguments in Opposition: The California Tax Reform Association states that “[w]hile the intention of this bill is reasonable, the legislature has previously rejected the use of tax credits and deductions for animal adoption. Promoting the adoption of animals from animal rescue organizations through the mechanism of a tax deduction is poor public policy.” The California Tax Reform Association further states that the deduction is poor public policy because the deduction is only relevant to those who earn enough income to itemize, and the choice of adopting a pet is properly motivated by compassion, not finances.

4. 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). This bill enacts a new tax expenditure program, in the form of a PIT deduction, to encourage the adoption of pets from qualified animal rescue organizations.

5. 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. 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, 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, without a supermajority vote.

6. Above/Below the Line Deduction: An above-the-line deduction is a deduction that allows a taxpayer to subtract amounts from gross income when calculating their "adjusted gross income." If the deduction is taken above the line, it is used to determine the taxpayer’s AGI. An above-the-line deduction can be taken by any taxpayer regardless of whether the taxpayer itemizes. Moreover, an above-the-line deduction reduces AGI, and having a smaller AGI can lower many subsequent calculations which will further reduce taxes. As a result, above-the-line deductions are more advantageous than those taken below the line. Once AGI is determined, a taxpayer can either itemize deductions or take the standard deduction, whichever is greater. Once itemized deductions exceed the standard deduction, other smaller deductions, such as miscellaneous expenses, can be applied to increase tax savings. However, in order to take advantage of a miscellaneous deduction, total expenses must exceed 2% of AGI. Other deductions provide their own AGI threshold.

7. Incentive or reward? Generally, tax expenditures are enacted to encourage socially beneficial behavior that would not take place without a financial incentive. As noted above, this bill establishes a deduction to encourage the adoption of pets from qualified animal rescue organizations. It would be difficult to find a person who did not consider this a worthy goal. At the same time, however, this bill limits the deduction amount to $100 per taxable year. Applying a marginal tax rate of 9.3%, this would translate to a tax break of less than $10. The Committee may wish to consider whether such an incentive is likely to encourage people to engage in "new" behavior, or whether it would simply reward people who would have adopted a pet in the absence of a deduction. Additionally, given that less than one-half of individual California taxpayers itemize their deductions; and given the overall cap on total itemized deductions under the personal income tax law, this clarification would result in many fewer taxpayers being eligible to claim the deduction, and therefore significantly lower impact to GF revenue.
   
   

8. Prior Legislation:
   
   

1. AB 2326 (Dickinson), of the 2013-14 Legislative Session, would have allowed a deduction for qualified costs paid or incurred adopting a pet from a qualified animal rescue organization. AB 2326 was held on the Assembly Committee on Appropriations' Suspense File.

2. AB 233 (Smyth), of the 2009-10 Legislative Session, would have allowed a deduction for qualified costs paid or incurred by a taxpayer for the adoption of a pet from a qualified animal rescue organization. AB 233 was held on the Assembly Committee on Appropriations' Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

Humane Society of the United States

Opposition

American Federation of State, County, and Municipal Employees

California Tax Reform Association

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098