(1)Existing law establishes a governing board to establish and administer a unit known as the County Office Fiscal Crisis and Management Assistance Team. Among other duties, this unit provides fiscal management assistance, at the request of any school district, charter school, county office of education, or community college district.

This bill would authorize authorize, until January 1, 2023, this governing board to receive voluntary contributions made by individuals to school districts, charter schools, child care centers operated by local educational agencies, and community college districts. The bill would require these contributed moneys to be deposited in the Local Schools and Colleges Voluntary Contribution Fund, which the bill would establish in a county treasury, as specified, under the administration of the County Office Fiscal Crisis and Management Assistance Team. The bill would create 2 new subaccounts of the fund, the Baseline Schools and Colleges Subaccount and the Supplemental Schools and Colleges Subaccount, into which the moneys deposited in the Local Schools and Colleges Voluntary Contribution Fund would be deposited, as specified.

The bill would require the funds deposited in the Baseline Schools and Colleges Subaccount described above to be transferred to the State Treasury to reimburse the General Fund for that subaccounts share of meeting the constitutional minimum funding requirement for local educational agencies and community college districts.

The bill would require the funds deposited in the Supplemental Schools and Colleges Subaccount to be allocated, on the basis of average daily attendance, to local educational agencies and community college districts, as specified, thereby making an appropriation.

Because the bill would create new duties for a county treasury, it would constitute a state-mandated local program. Because the bill would require the deposit of a new source of moneys into a continuously appropriated fund, it would make an appropriation.

(2)The Personal Income Tax Law allows various credits against the tax imposed by that law.

This bill, for taxable years beginning on or after January 1, 2018, and before January 1, 2023, would allow a credit under the Personal Income Tax Law in an amount equal to 85% of the amount contributed by the taxpayer to the Local Schools and Colleges Voluntary Contribution Fund, as identified in the certification required by this bill to be issued by the County Office Fiscal Crisis and Management Assistance Team.

This bill would require the County Office Fiscal Crisis and Management Assistance Team to establish a procedure for any taxpayer to obtain from the office a certification for the credit allowed, as specified. The bill would require the County Office Fiscal Crisis and Management Assistance Team to provide the Franchise Tax Board with a copy of the certifications issued, as provided. This bill would limit the aggregate amount of credits allowable for the 201819 fiscal year and each fiscal year thereafter, through the 202223 fiscal year, plus any unallocated credit amount for the preceding fiscal year to $45,000,000,000.

This bill would, if the amount allowable as a credit under this bill exceeds the taxpayers tax liability for the taxable year, require the excess to be credited against other amounts due, if any, and the balance, if any, upon appropriation by the Legislature, to be paid from the ____ Fund and refunded to the taxpayer.

The Personal Income Tax Law provides for an alternative minimum tax and provides that, except for specified credits, no credit shall reduce the regular tax, as defined, below the tentative minimum tax.

This bill, for taxable years beginning on or after January 1, 2018, and before January 1, 2023, would allow the credit to reduce the regular tax below the tentative minimum tax.

(3)The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to the statutory provisions noted above.

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

This bill, under both laws for taxable years beginning on or after January 1, 2018, would allow a credit against tax under the Personal Income Tax Law in an amount equal to 85% of the amount contributed by the taxpayer for the taxable year to the California Excellence Fund, which this bill would create in the General Fund to accept monetary contributions for exclusively public purposes. The bill would require all amounts in this fund to be used for those public purposes upon appropriation by the Legislature. Fund.

This bill would take effect immediately as a tax levy.

Existing law, the Vocational Nursing Practice Act, establishes the Board of Vocational Nursing and Psychiatric Technicians for the regulation and licensure of vocational nurses and authorizes a licensed vocational nurse to perform certain medical procedures under the direction of a physician and surgeon.

This bill would authorize a licensed vocational nurse to perform certain feeding tube services in a home setting for a patient with a neurodegenerative condition.

Date of Hearing: August 15, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 227

Author:(De León) – As Amended Ver:July 5, 2018

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

SUMMARY:

This bill establishes the Local Schools and Colleges Voluntary Contributions Fund Tax Credit program. Specifically, this bill:

1. Allows, for tax years 2018 through 2022, a Personal Income Tax credit worth 85% of the amount a taxpayer contributes to the Local Schools and Voluntary Contributions Fund (Contribution Fund). The taxpayer receives a certification from the County Office Fiscal Crisis and Management Assistance Team (Assistance Team) based on a specified procedure that the taxpayer then uses to claim the credit.
2. Provides that if the credit amount exceeds the taxpayer's tax liability, the excess shall be credited against other amounts due, if any, and the balance paid, upon legislative appropriation, from an unspecified fund to the taxpayer.
3. Limits the aggregate credit amounts that may be allocated by the Assistance Team to $45 billion each fiscal year until 2022-23.
4. Prescribes how contributions to the Contribution Fund will be allocated as follows:
   1. Beginning in 2018-19, 85% of first $54.5 billion will be deposited into the Baseline Schools and Colleges Subaccount within the Contribution Fund, and each year thereafter the $54.5 billion amount will be adjusted by the same percentage as the adjustment to the appropriations limit made pursuant to Articled XIII B of the California Constitution.
   2. Beginning in 2018-19, amounts in excess of 85% of the first $54.5 billion will be deposited into the Supplemental Schools and Colleges Subaccount, to be allocated in a specified manner.
5. Makes the provisions of this bill operative only if Senate Constitutional Amendment (SCA) 23 of the 2017–18 Regular Session is submitted to, and approved by, the voters at the November 6, 2018, statewide general election, and in that event shall become operative on January 1, 2019.

FISCAL EFFECT:

1. Tens of billions of dollars deposited into the Contribution Fund each year, offset by allocated tax credits worth 85% of those revenues. SB 227 caps the amount of tax credits that may be allocated to $45 billion, and if that cap is reached then net new revenues would equal approximately $8 billion.
2. An unknown effect on Proposition 98 minimum funding guarantee. While SB 227 is operative only if SCA 23, which aims to protect Proposition 98 funding, is approved by voters, there are still interactions with the guarantee that could lead to possible reductions in school spending. (See Comment #5.)
3. Significant administrative costs in excess of $150,000 for the Franchise Tax Board (FTB) to administer the proposed tax credit, and unknown, but likely significant and reimbursable costs, to the Assistant Team to administer the certification process.

COMMENTS:

1. Federal tax reform. The Tax Cuts and Jobs Act of 2017 dramatically restructured the federal tax system for individuals and businesses. One change is a $10,000 cap on the deductibility of state and local tax (SALT) payments. While taxpayers can still itemize their charitable donations and their mortgage interest payments, the SALT cap greatly reduces the value of itemizing overall for many California households. For example, a taxpayer who pays $14,000 in SALT and only able to deduct $10,000, representing a significant increase in overall federal tax liability.
2. Purpose. According to the author, SB 227 will give taxpayers a measure of control over the tax dollars they invest in California. The author notes that under federal tax reform, an estimated three million Californians will lose out on thousands of dollars in itemized deductions, and this bill allows a taxpayer to donate to the Contribution Fund in exchange for a state tax credit and the federal charitable deduction.
3. How would this program work? As noted above, SB 227 allows a taxpayer to make a contribution to the state in exchange for a credit and a federal deduction. For example, a taxpayer donates $10,000 to the Contribution Fund and receives a state tax credit worth $8,500, and the state keeps $1,500. The taxpayer also deducts the donation from their federal taxes. If that taxpayer is in the 24% federal tax bracket, they receive a $2,400 reduction in federal taxes. In the end, the $10,000 donation gives the state an additional $1,500 and the taxpayer an additional $900.

The success of this proposed program rests on the premise that donations to the state are considered a charitable contribution. Thus far, the premise behind SB 227 has enjoyed broad support from academics, the courts, and the federal government. The Internal Revenue Service (IRS) issued a memo in 2010 that concluded that a payment of cash to a state agency constitutes a charitable contribution, and California’s own College Access Tax Credit uses the same logic to leverage federal deduction to incentivize donations to the Cal Grant program. However, IRS recently issued a notice informing taxpayers that it intends to propose new regulations addressing this issue, and it is not yet known what those regulations will entail.

1. Who benefits? SB 227 leverages the federal deduction or charitable giving to provide significant tax benefits to a California taxpayer who donates to the Contribution Fund. While this generates additional revenue to the state, it also provides a significant tax benefit to higher-income households in California who itemize their federal deductions and have the resources to make large donations.
2. Proposition 98 and SCA 23. SB 227 creates significant uncertainty around the Proposition 98 guarantee. To address some of these concerns, the author recently amended the bill to make its provisions operative only if voters approve SCA 23 (De León) in November 2018. SCA 23, which is pending in the Senate Education Committee, amends Proposition 98 to allow for contributions to the Baseline Schools and Colleges Subaccount to be included in the calculation of the minimum guarantee.

These recent amendments address some concerns around school funding, but there remain important questions about whether the proposed tax credit program will undermine future school funding. In some respects, this uncertainty is a product of the bill’s ambition – up to $45 billion in new tax credits allocated each year – and Proposition 98’s many variables and formulas. For example, when Test 3 (one of the formulas which may be used to calculate the guarantee, typically in times of economic downturn) is used, a maintenance factor is created to ensure that the minimum guarantee in future years receive the level of funding they would have received had no Test 3 year occurred. However, under SCA 23, the maintenance factor could be less than under current law, thereby costing schools an unknown amount of money in future years.

1. Related legislation. AB 2217 (Burke), of the 2017-18 Legislative Session, enacts the Bridget “Biddy” Mason Golden State Credit Program. This bill similarly aims to increase state revenues by encouraging taxpayers to donate funds in exchange for a tax credit and a federal deduction. The Golden State Program credit is worth 80% of the contribution. AB 2217 is pending in the Senate Governance and Finance Committee.

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

Date of Hearing: June 27, 2018

ASSEMBLY COMMITTEE ON EDUCATION

Patrick O'Donnell, Chair

SBPCA Bill Id:SB 227

Author:(De León) – As Amended Ver:June 4, 2018

[Note: This bill was doubled referred to the Revenue & Taxation Committee and was heard by that committee as it relates to issues under its jurisdiction.]

SENATE VOTE: 27-7

SUBJECT: Education finance: Local Schools and Colleges Voluntary Contribution Fund: personal income taxes: credits

SUMMARY: Establishes the Local Schools and Colleges Voluntary Contributions Fund Tax Credit program. Specifically, this bill:

1. Allows a tax credit, under the Personal Income Tax (PIT) Law, equal to the amount identified in the certification issued by the Fiscal Crisis and Management Assistance Team (FCMAT), as specified.
2. Allows the credit for taxable years beginning on or after January 1, 2018.
3. Allows this credit to reduce the regular tax below the tentative minimum tax.
4. Requires FCMAT to do all of the following:
   1. Establish a procedure for a taxpayer who makes a monetary contribution to the Local Schools and Colleges Voluntary Contributions Fund (Contribution Fund) created by this bill to obtain from FCMAT a certification for the credit. The certification shall be issued in an amount equal to 85% of the amount contributed by the taxpayer to the Contribution Fund. This procedure shall meet the following requirements:
      1. Beginning with fiscal year (FY) 2018-19, certifications shall be issued for contributions in the order that the monetary contributions are received. The amount identified in a certification issued for FY 2018-19 shall be allowed as a credit for taxable years beginning on or after January 1, 2018, but before January 1, 2019. The amount identified in a certification issued for every FY thereafter shall be allowed as a credit for taxable years beginning on or after January 1 of the previous FY, and before January 1 of the FY;
      2. FCMAT shall cease issuing certifications attributable to a FY once the credit threshold amount described below is reached for the FY. If the credit threshold amount is reached for a FY before the FY ends, FCMAT shall begin issuing certifications for the following FY; and,
      3. FCMAT shall certify the contribution amount eligible for credit and the FY to which the certification is attributable within 45 days following receipt of the contribution.
   2. Provide to the Franchise Tax Board (FTB) a copy of each credit certificate issued for the calendar year by January 31 of the calendar year immediately following the calendar year in which the credit certificate is issued.
5. Requires FCMAT to adopt any regulations necessary or appropriate to implement this credit program. The Administrative Procedure Act shall not apply to any regulation adopted by FCMAT pursuant to this authority.
6. Provides that if the credit amount exceeds the taxpayer's tax liability, the excess shall be credited against other amounts due, if any, and the balance paid, upon legislative appropriation, from an unspecified fund to the taxpayer.
7. Specifies that no deduction shall be allowed for amounts taken into account in calculating the credit.
8. Caps the aggregate amount of credits that may be allocated for a FY by FCMAT at $45 billion for FY 2018-19 and each FY thereafter, plus any unallocated credit amount, if any, for the preceding FY.
9. Authorizes the FTB to prescribe any regulations necessary or appropriate to carry out this program. The Administrative Procedure Act shall not apply to any such rule, guideline, or procedure prescribed by the FTB.
10. Specifies that Revenue and Taxation Code (R&TC) Section 41 shall not apply to this credit.
11. Provides that if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts shall be made.
12. Authorizes the governing board specified in Education Code Section 42127.8(b) (Governing Board) to receive voluntary contributions made by individuals to:
    1. School districts;
    2. Charter schools;
    3. Child care centers operated by local educational agencies; and,
    4. Community college districts.
13. Requires the Governing Board to deposit these contributions in the Contribution Fund, which this bill establishes in the county treasury of the county in which FCMAT has its principal office under the administration of FCMAT.
14. Requires the moneys deposited into the Contribution Fund to be allocated into two subaccounts as follows:
    1. Beginning with FY 2018-19, 85% of the first $54.5 billion deposited into the Contribution Fund in that FY shall be deposited into the Baseline Schools and Colleges Subaccount, which this bill establishes within the Contribution Fund. For FY 2019-20, and each FY thereafter, the $54.5 billion amount shall be adjusted by the same percentage as the adjustment of the appropriations limit made pursuant to Article XIII B of the California Constitution.
       1. Requires the Governing Board to do both of the following:
          1. On or before January 15 of each FY, transfer to the State Treasury all of the moneys that were deposited in the Baseline Schools and Colleges Subaccount from July 1 to December 31, inclusive, of that FY to reimburse the General Fund for the Baseline Schools and Colleges Subaccount's share of meeting the requirements of Section 8 of Article XVI of the California Constitution; and,
          2. On or before July 15 of each FY, transfer to the State Treasury all of the moneys that were deposited in the Baseline Schools and Colleges Subaccount from January 1 to June 30, inclusive, of the prior FY to reimburse the General Fund for the Baseline Schools and Colleges Subaccount's share of meeting the requirements of Section 8 of Article XVI of the California Constitution.
    2. Beginning with FY 2018-19, the contributions to the Contribution Fund in excess of 85% of the first $54.5 billion (or the adjusted amount), shall be deposited into the Supplemental Schools and Colleges Subaccount, which this bill establishes within the Contribution Fund.
       1. Requires the Governing Board to do all of the following:
          1. On or before January 15 of each FY, allocate 89% of the moneys deposited in the Supplemental Schools and Colleges Subaccount from July 1 to December 31, inclusive, of that FY to school districts, county offices of education, and charter schools on the basis of an equal amount per unit of regular average daily attendance, as those numbers are reported at the time of the second principal apportionment for the prior FY;
          2. On or before January 15 of each FY, allocate 11% of the moneys deposited in the Supplemental Schools and Colleges Subaccount from July 1 to December 31, inclusive, of that FY to community college districts on the basis of an equal amount per enrolled full-time equivalent student, as those numbers of students are reported at the time of the second principal apportionment for the prior FY;
          3. On or before July 15 of each FY, allocate 89% of the moneys deposited in the Supplemental Schools and Colleges Subaccount from January 1 to June 30, inclusive, of the prior FY to school districts, county offices of education, and charter schools on the basis of an equal amount per unit of regular average daily attendance, as those numbers are reported at the time of the second principal apportionment for the prior FY; and,
          4. On or before July 15 of each FY, allocate 11% of the moneys deposited in the Supplemental Schools and Colleges Subaccount from January 1 to June 30, inclusive, of the prior FY to community college districts on the basis of an equal amount per enrolled full-time equivalent student, as those numbers of students are reported at the time of the second principal apportionment for the prior FY.

EXISTING LAW:

1. Establishes a minimum funding guarantee for public schools and community colleges (Proposition 98), which is based on proceeds of taxes to the state General Fund.
2. Creates a Governing Board to establish and administer a unit known as FCMAT. Among other things, this unit provides fiscal management assistance, at the request of any school district, charter school, county office of education, or community college district.
3. Allows various tax credits under the PIT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
4. Provides for an alternative minimum tax and specifies that, except for certain credits, no credit shall reduce the regular tax, as defined, below the tentative minimum tax.
5. Allows a College Access Tax Credit in an amount equal to 50% of the amount contributed by a taxpayer to the College Access Tax Credit Fund, as allocated and certified by the California Educational Facilities Authority (Authority). The maximum aggregate amount of the College Access Tax Credit that may be allocated and certified by the Authority is $500 million. Taxpayers are precluded from taking a deduction for amounts included in the calculation of the College Access Tax Credit. Any unused credits may be carried forward for up to six years. Finally, the College Access Tax Credit may reduce tax below the tentative minimum tax under both the PIT Law and the Corporation Tax Law.
6. Requires any bill authorizing a new credit to contain all of the following:
   1. Specific goals, purposes, and objectives that the tax credit will achieve;
   2. Detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives stated in the bill; and,
   3. Data collection requirements to enable the Legislature to determine whether the tax credit is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the credit is in effect, for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data. (R&TC Section 41.)

FISCAL EFFECT: State-mandated local program. In addition, the FTB notes that "because taxpayers only receive an 85 percent credit for their contribution to the Fund, there would be a net gain to the State of 15 cents for every dollar contributed."

COMMENTS:

Background: Federal tax overhaul. On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 (the "Act"), which dramatically restructured the federal tax system for both individuals and businesses. For individuals, the Act adjusts tax rates, increases the standard deduction, and eliminates personal exemptions. The Act also imposes a new $10,000 cap on the deductibility of state and local tax (SALT) payments. Critics of this provision note that eliminating the full deductibility of SALT payments "rolls back a basic tenet of federal tax law that has been part of the modern federal income tax since it was created in 1913, more than a century ago."^[1] Critics of the new $10,000 cap on SALT deductions also note that this provision will negatively impact millions of California households currently claiming more than $10,000 in SALT deductions on their federal tax returns. The Act's $10,000 cap on SALT deductions raises the after-tax price of state- and local government-provided public goods and services for millions of Californians. This, in turn, could make it more difficult for state and local governments to raise future revenues. At the same time, the nearly $1.5 trillion projected increase in the federal deficit caused by the Act will likely lead to reductions in federal funding for education and healthcare, along with other spending priorities. With the federal government poised to disinvest from the public sector, states such as California will be tasked with making up the difference at the very moment the new federal Act undermines state fiscal capacity.^[2]

What would this bill do? The author has chosen to address this challenging national landscape by establishing the Local Schools and Colleges Voluntary Contributions Fund Tax Credit program. This program would allow, for taxable years beginning on or after January 1, 2018, a PIT credit equal to the amount certified by the Fiscal Crisis Management and Assistance Team (FCMAT). Certifications, in turn, would be issued in an amount equal to 85% of the amount contributed by the taxpayer to a newly established Contribution Fund. This bill caps the aggregate amount of credits that may be allocated for a FY by FCMAT at $45 billion, plus any unallocated credit amount for the preceding FY.

What is FCMAT? FCMAT is funded through the Kern County Superintendent of Schools and it provides guidance to local educational agencies in the areas of business and financial management practices. Funding is appropriated each year in the Budget Act in support of FCMAT's activities and responsibilities, and the California Department of Education is then responsible for apportioning the funding to the Kern County Superintendent of Schools. By funding FCMAT through the Kern County Superintendent of Schools, the funds count towards meeting the state's minimum public school and community college funding requirements under Proposition 98.

What's in it for the taxpayer? This bill is designed to encourage taxpayers to make voluntary contributions to fund public education. If a taxpayer were to donate $10,000 to the Contribution Fund, she would receive a state PIT credit equal to $8,500. However, it is also envisioned that this donation would be fully deductible as a charitable contribution for federal purposes. Assuming a marginal federal tax rate of 24%, the taxpayer would see a $2,400 reduction in his/her federal tax bill. When added to her $8,500 state credit, the taxpayer would actually receive a benefit of $10,900 for her $10,000 contribution.

Federal deductibility. This bill's approach admittedly depends upon the premise that federal tax authorities will recognize the donating taxpayer's contribution as a charitable contribution eligible for deduction under IRC Section 170. This premise enjoys robust support. Courts have consistently held that a donor's receipt of tax benefits in exchange for a charitable contribution "cannot be used as a basis for disallowing the deduction for that charitable contribution." (See Allen v. Commissioner, 92 T.C. 1, 7 (1989); Skirpak v. Commissioner, 84 T.C. 285, 319 (1985); see also McLennan v. Commissioner, 994 F.2d 839 (Fed. Cir. 1993) (holding that the receipt of tax benefits for charitable contributions does not undermine the "donative intent" required for a charitable contribution deduction under IRC Section 170).) These decisions are reflected in IRS Chief Counsel Advice 201105010, which concludes that a payment of cash to a state agency or charitable organization constitutes a charitable contribution under IRC Section 170 notwithstanding the fact that the payment entitles the donor to a transferable state tax credit.

It should be noted, however, that the IRS recently issued a notice informing taxpayers that it intends to propose regulations addressing the federal income tax treatment of certain payments made by taxpayers for which taxpayers receive a credit against their state and local taxes. Specifically, the notice states:

In response to this new [SALT] limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay. The aim of these proposals is to allow taxpayers to characterize such transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.

This bill would reduce the Proposition 98 minimum guarantee. The California Constitution establishes a minimum funding guarantee for public elementary and secondary schools and community colleges (K-14 education). The constitution establishes three methods, or "tests," for determining the minimum funding level. Test 1 requires K-14 allocations, as a percent of total General Fund revenue subject to the appropriations limit, to be no less than the percentage allocation from the General Fund to K-14 education in 1986-87 (the year before the adoption of Proposition 98), which is about 40%.

Test 2 requires the total allocation to K-14 education from the General Fund and local ad valorem property tax revenues to be no less than allocations from those sources in the prior year as adjusted for changes in K-12 average daily attendance (ADA) and a cost-of-living adjustment (COLA). For Test 2, the COLA is defined as the percent change in per capita personal income (PCPI).

Generally, the constitution requires K-14 funding to be the greater of Test 1 or Test 2. However, concerns that the increased funding required under Test 2 could exceed General Fund revenue growth in a slow or bad economy led to the approval of Proposition 111 in 1990. Proposition 111 added Test 3, which is identical to Test 2 except the COLA is defined as the percent growth in General Fund revenue instead of PCPI.

The calculation required by all three tests is based on General Fund revenues. The constitution specifies "proceeds of taxes" for Tests 2 and 3, but only "revenues" for Test 1. However, statute defines Test 1 revenues also to mean proceeds of taxes. Under existing law, therefore, this bill would reduce the minimum guarantee by reducing proceeds of taxes to the General Fund. Depending on the amount of contributions to the Local Schools and Colleges Voluntary Contribution Fund, and the subsequent transfers from the Baseline Schools and Colleges Subaccount, the minimum funding guarantee could be significantly reduced and far lower than what is necessary to maintain existing K-14 programs. If so, it is unlikely that actual funding would be reduced to the minimum. However, it could be less than what would be required under existing law.

Proposition 98 funds would be used to administer a tax credit program. This bill imposes several duties on FCMAT, which is funded through the Kern County Office of Education, which is a local education agency. Accordingly, any funds allocated to the Kern COE from the General Fund, whether a direct appropriation or a reimbursement for mandated costs, would count toward meeting the state's Proposition 98 minimum funding requirement. Therefore, Proposition 98 funds, which are intended to support public schools and community colleges, would be used to administer the tax credit program.

Arguments in support. According to the author:

Under the new Trump Tax cuts, an estimated three million California taxpayers will lose out on thousands of dollars of valuable deductions each year on their federal taxes. Senate Bill 227 gives California taxpayers the ability to direct a charitable contribution to improve vital state programs and services such as k-12 education, higher education, and state parks. This proposal is based in part on the College Access Tax Credit, which allows Californians to make charitable contributions to the Cal Grant program. And it builds on successful models already in place in 17 states across the nation. SB 227 gives taxpayers a measure of control over the tax dollars they invest in California and it also blunts the negative impact of the Republican tax plan on our state.

Arguments in opposition. This bill is opposed by the California Teachers Association, which notes the following:

SB 227 proposes a system of tax credits that will run on a tax year basis going forward and proposes that contributions to the newly established fund will flow to schools twice annually. Precisely when taxpayers will make contributions and in what quantity is unknown, and the amount of each twice-annual disbursement is not certain.

The Proposition 98 guarantee, however, is calculated on a fiscal year basis as part of the state budget. SB 227 is silent as to how moneys contributed to the Fund and disbursed twice annually will be reconciled with Proposition 98's fiscal year. Nor is there any consideration for how to handle partial year tax credits, or any true-up mechanism to correct errors in calculations or estimates. This creates significant uncertainty for school funding.

Related legislation. SCA 223 (De Leon), which is currently pending in the Senate, amends the California Constitution to add transfers from the Baseline Schools and Colleges Subaccount or successor fund to the General Fund revenues for purposes of calculating the Proposition 98 minimum funding guarantee.

Amendment needed. During the hearing on this bill in the Revenue & Taxation Committee, the author agreed to amend the bill to add a five year sunset to its provisions. Due to time constraints, the author committed to amending the bill in this committee. Accordingly, staff recommends that the bill be amended to add a five year sunset.

REGISTERED SUPPORT / OPPOSITION:

Support

None received

Opposition

California Teachers Association

Analysis Prepared by: Rick Pratt / ED. / (916) 319-2087

1. "Preliminary Report on the Federal Tax Cuts and Jobs Act", New York State Department of Taxation and Finance, January 2018. ↑

2. The Act not only represents a potential threat to taxpayers and state and local governments; nonprofit charities will also likely feel the brunt. With fewer taxpayers itemizing their deductions because of the expanded standard deduction, millions of households in California and across the country will also see their tax incentive for charitable giving eliminated. ↑

Date of Hearing: June 25, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

SBPCA Bill Id:SB 227

Author:(De León) – As Amended Ver:June 4, 2018

Majority vote. Fiscal committee.

SENATE VOTE: 27-7

SUBJECT: Education finance: Local Schools and Colleges Voluntary Contribution Fund: personal income taxes: credits

SUMMARY: Establishes the Local Schools and Colleges Voluntary Contributions Fund Tax Credit program. Specifically, this bill:

1. Allows a tax credit, under the Personal Income Tax (PIT) Law, equal to the amount identified in the certification issued by the County Office Fiscal Crisis and Management Assistance Team (Assistance Team), as specified.
2. Allows the credit for taxable years beginning on or after January 1, 2018.
3. Allows this credit to reduce the regular tax below the tentative minimum tax.
4. Requires the Assistance Team to do all of the following:
   1. Establish a procedure for a taxpayer who makes a monetary contribution to the Local Schools and Colleges Voluntary Contributions Fund (Contribution Fund) created by this bill to obtain from the Assistance Team a certification for the credit. The certification shall be issued in an amount equal to 85% of the amount contributed by the taxpayer to the Contribution Fund. This procedure shall meet the following requirements:
      1. Beginning with fiscal year (FY) 2018-19, certifications shall be issued for contributions in the order that the monetary contributions are received. The amount identified in a certification issued for FY 2018-19 shall be allowed as a credit for taxable years beginning on or after January 1, 2018, but before January 1, 2019. The amount identified in a certification issued for every FY thereafter shall be allowed as a credit for taxable years beginning on or after January 1 of the previous FY, and before January 1 of the FY;
      2. The Assistance Team shall cease issuing certifications attributable to a FY once the credit threshold amount described below is reached for the FY. If the credit threshold amount is reached for a FY before the FY ends, the Assistance Team shall begin issuing certifications for the following FY; and,
      3. The Assistance Team shall certify the contribution amount eligible for credit and the FY to which the certification is attributable within 45 days following receipt of the contribution.
   2. Provide to the Franchise Tax Board (FTB) a copy of each credit certificate issued for the calendar year by January 31 of the calendar year immediately following the calendar year in which the credit certificate is issued.
5. Requires the Assistance Team to adopt any regulations necessary or appropriate to implement this credit program. The Administrative Procedure Act shall not apply to any regulation adopted by the Assistance Team pursuant to this authority.
6. Provides that if the credit amount exceeds the taxpayer's tax liability, the excess shall be credited against other amounts due, if any, and the balance paid, upon legislative appropriation, from an unspecified fund to the taxpayer.
7. Specifies that no deduction shall be allowed for amounts taken into account in calculating the credit.
8. Caps the aggregate amount of credits that may be allocated for a FY by the Assistance Team at $45 billion for FY 2018-19 and each FY thereafter, plus any unallocated credit amount, if any, for the preceding FY.
9. Authorizes the FTB to prescribe any regulations necessary or appropriate to carry out this program. The Administrative Procedure Act shall not apply to any such rule, guideline, or procedure prescribed by the FTB.
10. Specifies that Revenue and Taxation Code (R&TC) Section 41 shall not apply to this credit.
11. Provides that if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts shall be made.
12. Authorizes the governing board specified in Education Code Section 42127.8(b) (Governing Board) to receive voluntary contributions made by individuals to:
    1. School districts;
    2. Charter schools;
    3. Child care centers operated by local educational agencies; and,
    4. Community college districts.
13. Requires the Governing Board to deposit these contributions in the Contribution Fund, which this bill establishes in the county treasury of the county in which the Assistance Team has its principal office under the administration of the Assistance Team.
14. Requires the moneys deposited into the Contribution Fund to be allocated into two subaccounts as follows:
    1. Beginning with FY 2018-19, 85% of the first $54.5 billion deposited into the Contribution Fund in that FY shall be deposited into the Baseline Schools and Colleges Subaccount, which this bill establishes within the Contribution Fund. For FY 2019-20, and each FY thereafter, the $54.5 billion amount shall be adjusted by the same percentage as the adjustment of the appropriations limit made pursuant to Article XIII B of the California Constitution.
       1. Requires the Governing Board to do both of the following:
          1. On or before January 15 of each FY, transfer to the State Treasury all of the moneys that were deposited in the Baseline Schools and Colleges Subaccount from July 1 to December 31, inclusive, of that FY to reimburse the General Fund for the Baseline Schools and Colleges Subaccount's share of meeting the requirements of Section 8 of Article XVI of the California Constitution; and,
          2. On or before July 15 of each FY, transfer to the State Treasury all of the moneys that were deposited in the Baseline Schools and Colleges Subaccount from January 1 to June 30, inclusive, of the prior FY to reimburse the General Fund for the Baseline Schools and Colleges Subaccount's share of meeting the requirements of Section 8 of Article XVI of the California Constitution.
    2. Beginning with FY 2018-19, the contributions to the Contribution Fund in excess of 85% of the first $54.5 billion (or the adjusted amount), shall be deposited into the Supplemental Schools and Colleges Subaccount, which this bill establishes within the Contribution Fund.
       1. Requires the Governing Board to do all of the following:
          1. On or before January 15 of each FY, allocate 89% of the moneys deposited in the Supplemental Schools and Colleges Subaccount from July 1 to December 31, inclusive, of that FY to school districts, county offices of education, and charter schools on the basis of an equal amount per unit of regular average daily attendance, as those numbers are reported at the time of the second principal apportionment for the prior FY;
          2. On or before January 15 of each FY, allocate 11% of the moneys deposited in the Supplemental Schools and Colleges Subaccount from July 1 to December 31, inclusive, of that FY to community college districts on the basis of an equal amount per enrolled full-time equivalent student, as those numbers of students are reported at the time of the second principal apportionment for the prior FY;
          3. On or before July 15 of each FY, allocate 89% of the moneys deposited in the Supplemental Schools and Colleges Subaccount from January 1 to June 30, inclusive, of the prior FY to school districts, county offices of education, and charter schools on the basis of an equal amount per unit of regular average daily attendance, as those numbers are reported at the time of the second principal apportionment for the prior FY; and,
          4. On or before July 15 of each FY, allocate 11% of the moneys deposited in the Supplemental Schools and Colleges Subaccount from January 1 to June 30, inclusive, of the prior FY to community college districts on the basis of an equal amount per enrolled full-time equivalent student, as those numbers of students are reported at the time of the second principal apportionment for the prior FY.

EXISTING LAW:

1. Creates a Governing Board to establish and administer a unit known as the Assistance Team. Among other things, this unit provides fiscal management assistance, at the request of any school district, charter school, county office of education, or community college district.
2. Allows various tax credits under the PIT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
3. Provides for an alternative minimum tax and specifies that, except for certain credits, no credit shall reduce the regular tax, as defined, below the tentative minimum tax.
4. Allows a College Access Tax Credit in an amount equal to 50% of the amount contributed by a taxpayer to the College Access Tax Credit Fund, as allocated and certified by the California Educational Facilities Authority (Authority). The maximum aggregate amount of the College Access Tax Credit that may be allocated and certified by the Authority is $500 million. Taxpayers are precluded from taking a deduction for amounts included in the calculation of the College Access Tax Credit. Any unused credits may be carried forward for up to six years. Finally, the College Access Tax Credit may reduce tax below the tentative minimum tax under both the PIT Law and the Corporation Tax Law.
5. Requires any bill authorizing a new credit to contain all of the following:
   1. Specific goals, purposes, and objectives that the tax credit will achieve;
   2. Detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives stated in the bill; and,
   3. Data collection requirements to enable the Legislature to determine whether the tax credit is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the credit is in effect, for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data. (R&TC Section 41.)

FISCAL EFFECT: Unknown. However, the FTB notes that "because taxpayers only receive an 85 percent credit for their contribution to the Fund, there would be a net gain to the State of 15 cents for every dollar contributed."

COMMENTS:

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

Under the new Trump Tax cuts, an estimated three million California taxpayers will lose out on thousands of dollars of valuable deductions each year on their federal taxes. Senate Bill 227 gives California taxpayers the ability to direct a charitable contribution to improve vital state programs and services such as k-12 education, higher education, and state parks. This proposal is based in part on the College Access Tax Credit, which allows Californians to make charitable contributions to the Cal Grant program. And it builds on successful models already in place in 17 states across the nation. SB 227 gives taxpayers a measure of control over the tax dollars they invest in California and it also blunts the negative impact of the Republican tax plan on our state.

1. This bill is opposed by the California Teachers Association, which notes the following:

SB 227 proposes a system of tax credits that will run on a tax year basis going forward and proposes that contributions to the newly established fund will flow to schools twice annually. Precisely when taxpayers will make contributions and in what quantity is unknown, and the amount of each twice-annual disbursement is not certain.

The Proposition 98 guarantee, however, is calculated on a fiscal year basis as part of the state budget. SB 227 is silent as to how moneys contributed to the Fund and disbursed twice annually will be reconciled with Proposition 98's fiscal year. Nor is there any consideration for how to handle partial year tax credits, or any true-up mechanism to correct errors in calculations or estimates. This creates significant uncertainty for school funding.

1. The FTB has identified the following implementation concerns in this bill:
   1. "A taxpayer that makes multiple contributions during a fiscal year would receive a certificate for each contribution. For ease of administration, the author may wish to consider requiring credit certificates to be issued on an annual basis and include identifying information for the taxpayer such as a social security number."
   2. "This bill would allow a credit for contributions made to an allocated fund that is tied to a fiscal year that will bridge two taxable and calendar years. Generally, deductions and credits are allowed for the taxable year when the expense is incurred or payment is made. To avoid confusion for the department and taxpayers, it is recommended to amend the bill to specify that the credit be allowed for the calendar year when the contribution is made, regardless of what fiscal year the credit is allocated from and that the corresponding certification be issued by January 31 of the following calendar year."
   3. "The bill would require any excess credit to be refunded to the taxpayer from an unspecified fund. For the FTB to be able to administer the refunds, the appropriate fund should be included in the language."
   4. "This bill would require regular annual appropriations by the Legislature to pay for the refundable portion of this credit. Refunds in excess of the appropriation would be denied. This concern could be alleviated by providing a continuous appropriation."
2. Committee Staff Comments:
   1. Federal tax overhaul: On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 (the "Act"), which dramatically restructured the federal tax system for both individuals and businesses. For individuals, the Act adjusts tax rates, increases the standard deduction, and eliminates personal exemptions. The Act also imposes a new $10,000 cap on the deductibility of state and local tax (SALT) payments. Critics of this provision note that eliminating the full deductibility of SALT payments "rolls back a basic tenet of federal tax law that has been part of the modern federal income tax since it was created in 1913, more than a century ago."^[1] Critics of the new $10,000 cap on SALT deductions also note that this provision will negatively impact millions of California households currently claiming more than $10,000 in SALT deductions on their federal tax returns. In this case, as in so many others, an example might be helpful:
      

A single filer annually pays $8,000 in state income taxes and $6,000 in local property taxes, for a total of $14,000 in SALT payments. This individual also pays $9,000 per year in mortgage interest on his/her home loan, and annually contributes $2,000 to nonprofit charities. Under prior federal law, this individual would have been able to take $25,000 in itemized deductions on his/her federal tax return. Under the Act, however, the picture changes significantly. Specifically, this individual would only be able to deduct $10,000 in SALT payments. When this amount is combined with the $9,000 in mortgage interest payments and the $2,000 in charitable contributions, this taxpayer would now have a total of $21,000 in itemized deductions. As such, this individual would have $4,000 less to deduct on his federal return, representing a potentially significant increase in his federal tax bill (e.g., $960 assuming a marginal tax rate of 24%).^[2]

As such, critics argue that the Act's $10,000 cap on SALT deductions raises the after-tax price of state- and local government-provided public goods and services for millions of Californians. This, in turn, could make it more difficult for state and local governments to raise future revenues. At the same time, the nearly $1.5 trillion projected increase in the federal deficit caused by the Act will likely lead to reductions in federal funding for education and healthcare, along with other spending priorities. With the federal government poised to disinvest from the public sector, states such as California will be tasked with making up the difference at the very moment the new federal Act undermines state fiscal capacity.^[3]

• 1. What would this bill do? The author has chosen to address this challenging national landscape by establishing the Local Schools and Colleges Voluntary Contributions Fund Tax Credit program. This program would allow, for taxable years beginning on or after January 1, 2018, a PIT credit equal to the amount certified by the Assistance Team. Certifications, in turn, would be issued in an amount equal to 85% of the amount contributed by the taxpayer to a newly established Contribution Fund. This bill caps the aggregate amount of credits that may be allocated for a FY by the Assistance Team at $45 billion, plus any unallocated credit amount for the preceding FY.
     
  2. What is the Assistance Team? The FTB notes that the Kern County Superintendent of Schools is the county office of education selected to administer the Assistance Team and its operations. The Assistance Team provides guidance to local educational agencies in the areas of business and financial management practices. Funding is appropriated each year in the Budget Act in support of the Assistance Team's activities and responsibilities, and the California Department of Education is then responsible for apportioning the funding to the Kern County Superintendent of Schools.
  3. What's in it for the taxpayer? This bill is designed to encourage taxpayers to make voluntary contributions to fund public education. If a taxpayer were to donate $10,000 to the Contribution Fund, she would receive a state PIT credit equal to $8,500. However, it is also envisioned that this donation would be fully deductible as a charitable contribution for federal purposes. Assuming a marginal federal tax rate of 24%, the taxpayer would see a $2,400 reduction in his/her federal tax bill. When added to her $8,500 state credit, the taxpayer would actually receive a benefit of $10,900 for her $10,000 contribution.
  4. Federal deductibility: This bill's approach admittedly depends upon the premise that federal tax authorities will recognize the donating taxpayer's contribution as a charitable contribution eligible for deduction under IRC Section 170. This premise enjoys robust support. Courts have consistently held that a donor's receipt of tax benefits in exchange for a charitable contribution "cannot be used as a basis for disallowing the deduction for that charitable contribution." (See Allen v. Commissioner, 92 T.C. 1, 7 (1989); Skirpak v. Commissioner, 84 T.C. 285, 319 (1985); see also McLennan v. Commissioner, 994 F.2d 839 (Fed. Cir. 1993) (holding that the receipt of tax benefits for charitable contributions does not undermine the "donative intent" required for a charitable contribution deduction under IRC Section 170).) These decisions are reflected in IRS Chief Counsel Advice 201105010, which concludes that a payment of cash to a state agency or charitable organization constitutes a charitable contribution under IRC Section 170 notwithstanding the fact that the payment entitles the donor to a transferable state tax credit.

It should be noted, however, that the IRS recently issued a notice informing taxpayers that it intends to propose regulations addressing the federal income tax treatment of certain payments made by taxpayers for which taxpayers receive a credit against their state and local taxes. Specifically, the notice states:

In response to this new [SALT] limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay. The aim of these proposals is to allow taxpayers to characterize such transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.

• 1. Policy concerns:
     1. In its current form, this bill lacks a sunset date for the proposed PIT credit. While the FTB estimates a positive revenue impact for the state, this Committee nevertheless has a longstanding policy of including a five-year sunset date for most new tax credit programs to ensure ample opportunity for future legislative review. The Committee may wish to consider adding a five-year sunset date.
     2. The FTB has expressed concern that creating another refundable tax credit could increase the trend in refund fraud and identity theft. Specifically, the FTB notes that both the Internal Revenue Service and the FTB have experienced fraud and improper claims with refundable credits. These concerns are heightened; if a refund is determined to be fraudulent, the refund commonly cannot be recovered.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

California Teachers Association

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

1. "Preliminary Report on the Federal Tax Cuts and Jobs Act", New York State Department of Taxation and Finance, January 2018. ↑

2. For the sake of simplicity, this example does not factor in the net effect of lowered marginal tax rates or other changes to federal tax law. ↑

3. The Act not only represents a potential threat to taxpayers and state and local governments; nonprofit charities will also likely feel the brunt. With fewer taxpayers itemizing their deductions because of the expanded standard deduction, millions of households in California and across the country will also see their tax incentive for charitable giving eliminated. ↑

 THIRD READING  

Bill No: SB 227

Author: , Lara (D), and McGuire (D)

Amended: 1/25/18

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 5-1, 1/10/18

AYES: McGuire, Beall, Hernandez, Hertzberg, Lara

NOES: Moorlach

NO VOTE RECORDED: Nguyen

SENATE APPROPRIATIONS COMMITTEE: 5-0, 1/18/18

AYES: Lara, Beall, Bradford, Hill, Wiener

NO VOTE RECORDED: Bates, Nielsen

SUBJECT: Personal income taxes: credits: California Excellence Fund

SOURCE: Author

DIGEST:

This bill enacts the California Excellence Fund Tax Credit, which allows a credit against the Personal Income Tax equal to 85% of a contribution to the California Excellence Fund.

Senate Floor Amendments of 1/25/18 (1) allow the bills’ credit to reduce regular tax below tentative minimum tax; (2) reduce credit percentage from 100% of the contribution to 85%; (3) change the date for the State Treasurer to provide copies of each credit certification from March 1 to January 1; (4) allow amounts contributed to also qualify for the charitable contribution deduction against state taxes; (5) allow the Franchise Tax Board to prescribe regulations necessary to implement the bill, which are exempt from the Administrative Procedures Act; (6) strike the bill’s corporation tax credit provisions; (7) make the bill’s enactment contingent on SB 581 (De León); and (8) make technical and clarifying changes.

ANALYSIS:

Existing law:

1. 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.
2. Allows credits against state tax for specified donations, which when combined with the federal charitable deduction can afford tax benefits almost equal to the amount of the contribution. Among these:
   1. The Natural Heritage Preservation Tax Credit, which compensates landowners who donate land to the state for preservation purposes (SB 1647, O’Connell, Chapter 113, Statutes of 2000), and extended it until 2020 (SB 355, Beall, Chapter 620, Statues of 2014). To qualify for the credit, landowners must apply to the Wildlife Conservation Board (WCB) for approval to donate a parcel of property, and for certification that the property meets certain requirements. If the WCB approves the contribution, the landowner may claim a tax credit equal to 55% of the property’s fair market value and carryover the credit for eight years.
   2. The College Access Tax Credit, which helps to fund the Cal Grant B High School Entitlement Program (SB 798, De Leon, Chapter 367, Statutes of 2014), and extended it last year through the 2022 taxable year (AB 490, Quirk-Silva, Chapter 527, Statutes of 2017). The California Educational Facilities Authority (CEFA), housed in the Office of the State Treasurer, administers the tax credit. Taxpayers make cash contributions to CEFA, who then issues the taxpayer a credit certificate with a credit of 50% of the value of the contribution, which the taxpayer keeps after claiming the credit on his or her return. CEFA then deposits contribution proceeds into the College Access Tax Credit Fund. Fund proceeds first offset the foregone General Fund revenue resulting from the credit, and then are appropriated by the Legislature to the Franchise Tax Board (FTB), CEFA, the State Controller, and the Student Aid Commission to reimburse any administrative costs. Any funds remaining are then continuously appropriated to the California Student Aid Commission to supplement other moneys funding Cal Grants. CEFA can allocate up to a total of $500 million in credits each year on a first-come, first-served, basis.
3. Does not, generally, allow taxpayers to use tax credits to reduce its tax liability under the tentative minimum tax; a part of the alternative minimum tax. However, the Legislature has allowed several credits to do so, such as the Research and Development Tax Credit, and the Motion Picture Production Credit.

This bill:

1. Enacts the California Excellence Fund Tax Credit against the Personal Income Tax equal to 85% of the amount of the contribution to the California Excellence Fund.
2. Requires the contributed funds be used for those public purposes when appropriated by the Legislature.
3. Directs the State Treasurer to establish a procedure for any taxpayer making a monetary contribution to the Fund to obtain a certification for the credit.
4. Provides that the procedure must require the State Treasurer to certify the contribution amount within 45 days following the receipt of the contribution.
5. States that the State Treasurer must provide to FTB a copy of each credit certificate issued for the calendar year by January 31st of the following calendar year.
6. Requires the State Treasurer to adopt any regulations necessary and appropriate to implement the measure, which are exempt from the Administrative Procedures Act.
7. Allows taxpayers to carry forward the credit for up to six subsequent taxable years until exhausted.
8. Provides that taxpayers may claim charitable contribution deductions against state personal income taxes for amounts they give to the Excellence Fund, but precludes them from claiming these amounts for the purposes of any other deduction.
9. Allows the Franchise Tax Board to prescribe any regulations necessary and appropriate to implement, the bill which are exempt from the Administrative Procedures Act.
10. States that Section 41 of the Revenue and Taxation Code, which requires any introduced bill enacting a tax credit to contain specified provisions, does not apply to the credit.
11. Allows the California Excellence Fund Tax Credit to reduce regular tax below tentative minimum tax.

Background

The Internal Revenue Code allows a deduction from income for any charitable contribution made within the taxable year. California conforms to this deduction. A charitable contribution includes a contribution to public agencies, not just charitable organizations, but only if the contribution or gift is made for exclusively public purposes.

Federal law limits the deduction when the donor receives consideration in exchange for the contribution, as the contribution can lose part of its charitable nature. If the benefits expected to be received by a donor are greater than those to the general public, then the transferor has received a quid pro quo sufficient to deny the deduction. Treasury regulations clarify that no part of a payment that a taxpayer makes in consideration for goods or services qualifies for the deduction unless the taxpayer intends to make, or makes, a payment that exceeds the fair market value of the consideration. For example, a taxpayer donating $100 to the Public Broadcasting Service can claim a $100 deduction, but only an $80 deduction if he or she received a $20 tote bag as a result of the donation.

Treasury regulations don’t specifically address whether a reduction in state tax liability constitutes a good or service, instead defining “goods and services” to mean “cash, property, services, benefits, and privileges.” In response to questions from taxpayers regarding whether cash payments to state agencies can be considered charitable contributions, an Internal Revenue Service (IRS) Chief Counsel Advice Memoranda from February, 2011 (CCA 201105010), states that the payment of cash to a state agency “is treated for federal tax purposes as a reduction or potential reduction in tax liability,’’ and not as consideration, based on its legal analysis of the relevant case law, most notably McLennan v. United States, 23 Cl. Ct. 99 (1991). CCA 201105010 additionally states that “the tax benefit of a federal or state charitable contribution deduction is not regarded as a return benefit that negates charitable intent, reducing or eliminating the deduction itself,” and that the IRS has no reason to distinguish between a state tax deduction and a credit based on the amount of the benefit, even transferable tax credits. While the memo appears to allow contributions made to public agencies that also generate state tax benefits to qualify for the federal charitable deduction without any reduction for consideration received, it does contain a caveat, namely that “there may be unusual circumstances in which it would be appropriate to recharacterize a payment of cash or property that was, in form, a charitable contribution as, in substance, a satisfaction of tax liability.” Additionally, the IRS website states that chief counsel advice memos “have no precedential value and cannot be relied on by taxpayers. Nonetheless, they may be useful for background or insight into a position the IRS might take on an undecided or novel issue for which no other agency guidance is available.”

In 2013, Phillip Blackman of Penn State School of Law and Kirk Stark of the UCLA School of Law outlined a roadmap for states to create state tax credits for cash contributions to a state entity, , which the Legislature relied upon when enacting SB 798. In addition to California, many other states have similar tax credit programs, including credits equal to 100% of donations made to private nonprofit scholarship-granting organizations that issue scholarships to K-12 students to attend private schools, or public schools outside of the district, approved by the scholarship organizations, according to the National Conference of State Legislatures. SB 227 expands on SB 798’s model to potentially offer California taxpayers a way to reduce an increase in their federal tax liability resulting from the limitation on the deduction for state and local taxes enacted as part of a recent federal tax reform measure.

However, critics argue that SB 227’s approach may not work, and that IRS may deny any federal deductions claimed by taxpayers making contributions to the California Excellence Fund. Jared Walczak of the Tax Foundation states “that charitable contributions have a charitable aspect is a significant challenge for this approach” as the donor gets two benefits in exchange for the contribution: government services, and lower tax liability, which runs afoul of IRS publication 526’s exclusion from deduction for contributions for which the donor benefits. Walczak argues that contributions under SB 227 may not qualify as meeting the “solely for public purposes” standard, as the contribution serves no public purpose, has no net effect on state revenue, and is intended to leave the giver in better shape financially.

Comments

According to the author, “SB 227 mitigates the damage to the pocket books of California taxpayers caused by GOP tax reform by allowing them to contribute to the California Excellence Fund. Donations to the California Excellence Fund will allow taxpayers to help bolster funding for critical California programs, including higher education, healthcare, and public safety. The bill will utilize the current IRS charitable donation deduction to make sure California taxpayers are not burdened with a tax increase as a result of the recently enacted GOP tax reform measure. The measure punishes California taxpayers so that wealthy individuals and corporations can benefit. SB 227 builds upon several other tax credits in 21 other states, including my own 2014 bill SB 798 (de León). SB 798 established a tax credit for taxpayers that made donations to the Cal Grant program. SB 227 is a scaled up version of SB 798 that will minimize harm caused by the GOP tax measure to California taxpayers and give them an opportunity to help strengthen California.”

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee:

• Both FTB and the State Treasurer’s Office have yet to determine the administrative costs from implementing their respective portions of the bill. Annual costs are thus unknown, but potentially significant to the General Fund.
• FTB notes that the impact of the bill on the timing of receipt of state tax revenues would be driven by taxpayer response, which cannot be modeled.

SUPPORT: (Verified 1/26/18)

California Association of Nonprofits

OPPOSITION: (Verified 1/26/18)

None received

Prepared by:

1/29/18 17:28:33

**** END ****

 THIRD READING  

Bill No: SB 227

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 5-1, 1/10/18

AYES: McGuire, Beall, Hernandez, Hertzberg, Lara

NOES: Moorlach

NO VOTE RECORDED: Nguyen

SENATE APPROPRIATIONS COMMITTEE: 5-0, 1/18/18

AYES: Lara, Beall, Bradford, Hill, Wiener

NO VOTE RECORDED: Bates, Nielsen

SUBJECT:

SOURCE: Author

DIGEST:

This bill enacts the California Excellence Fund Tax Credit, which allows a Personal Income and Corporation Tax credit equal to the amount of a contribution to the California Excellence Fund.

ANALYSIS:

Existing law:

1. 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.
2. Allows credits against state tax for specified donations, which when combined with the federal charitable deduction can afford tax benefits almost equal to the amount of the contribution. Among these:
   1. The Natural Heritage Preservation Tax Credit, which compensates landowners who donate land to the state for preservation purposes (SB 1647, O’Connell, Chapter 113, Statutes of 2000), and extended it until 2020 (SB 355, Beall, Chapter 620, Statues of 2014). To qualify for the credit, landowners must apply to the Wildlife Conservation Board (WCB) for approval to donate a parcel of property, and for certification that the property meets certain requirements. If the WCB approves the contribution, the landowner may claim a tax credit equal to 55% of the property’s fair market value and carryover the credit for eight years.
   2. The College Access Tax Credit, which helps to fund the Cal Grant B High School Entitlement Program (SB 798, De Leon, Chapter 367, Statutes of 2014), and extended it last year through the 2022 taxable year (AB 490, Quirk-Silva, Chapter 527, Statutes of 2017). The California Educational Facilities Authority (CEFA), housed in the Office of the State Treasurer, administers the tax credit. Taxpayers make cash contributions to CEFA, who then issues the taxpayer a credit certificate with a credit of 50% of the value of the contribution, which the taxpayer keeps after claiming the credit on his or her return. CEFA then deposits contribution proceeds into the College Access Tax Credit Fund. Fund proceeds first offset the foregone General Fund revenue resulting from the credit, and then are appropriated by the Legislature to the Franchise Tax Board (FTB), CEFA, the State Controller, and the Student Aid Commission to reimburse any administrative costs. Any funds remaining are then continuously appropriated to the California Student Aid Commission to supplement other moneys funding Cal Grants. CEFA can allocate up to a total of $500 million in credits each year on a first-come, first-served, basis.

This bill:

1. Enacts the California Excellence Fund Tax Credit against the Personal Income and Corporation Tax equal to the amount of a contribution to the California Excellence Fund, which the measure creates in the General Fund to accept monetary contributions exclusively for public purposes.
2. Requires the contributed funds be used for those public purposes when appropriated by the Legislature.
3. Directs the State Treasurer to establish a procedure for the public to make monetary contributions to the Fund, and obtain a certification for the credit.
4. Provides that the procedure must require the State Treasurer to certify the contribution amount within 45 days following the receipt of the contribution.
5. States that the State Treasurer must provide to FTB a copy of each credit certificate issued for the calendar year by March 1st of the following calendar year.
6. Requires the State Treasurer to adopt any regulations necessary and appropriate to implement the measure, which are exempt from the Administrative Procedures Act.
7. Allows taxpayers to carry forward the credit for up to six subsequent taxable years until exhausted, but precludes them from claiming as a deduction any amounts taken into account when calculating the credit.
8. States that Section 41 of the Revenue and Taxation Code, which requires any introduced bill enacting a tax credit to contain specified provisions, does not apply to the credit.

Background

The Internal Revenue Code allows a deduction from income for any charitable contribution made within the taxable year. California conforms to this deduction. A charitable contribution includes a contribution to public agencies, not just charitable organizations, but only if the contribution or gift is made for exclusively public purposes.

Federal law limits the deduction when the donor receives consideration in exchange for the contribution, as the contribution can lose part of its charitable nature. If the benefits expected to be received by a donor are greater than those to the general public, then the transferor has received a quid pro quo sufficient to deny the deduction. Treasury regulations clarify that no part of a payment that a taxpayer makes in consideration for goods or services qualifies for the deduction unless the taxpayer intends to make, or makes, a payment that exceeds the fair market value of the consideration. For example, a taxpayer donating $100 to the Public Broadcasting Service can claim a $100 deduction, but only an $80 deduction if he or she received a $20 tote bag as a result of the donation.

Treasury regulations don’t specifically address whether a reduction in state tax liability constitutes a good or service, instead defining “goods and services” to mean “cash, property, services, benefits, and privileges.” In response to questions from taxpayers regarding whether cash payments to state agencies can be considered charitable contributions, an Internal Revenue Service (IRS) Chief Counsel Advice Memoranda from February, 2011 (CCA 201105010), states that the payment of cash to a state agency “is treated for federal tax purposes as a reduction or potential reduction in tax liability,’’ and not as consideration, based on its legal analysis of the relevant case law, most notably McLennan v. United States, 23 Cl. Ct. 99 (1991). CCA 201105010 additionally states that “the tax benefit of a federal or state charitable contribution deduction is not regarded as a return benefit that negates charitable intent, reducing or eliminating the deduction itself,” and that the IRS has no reason to distinguish between a state tax deduction and a credit based on the amount of the benefit, even transferable tax credits. While the memo appears to allow contributions made to public agencies that also generate state tax benefits to qualify for the federal charitable deduction without any reduction for consideration received, it does contain a caveat, namely that “there may be unusual circumstances in which it would be appropriate to recharacterize a payment of cash or property that was, in form, a charitable contribution as, in substance, a satisfaction of tax liability.” Additionally, the IRS website states that chief counsel advice memos “have no precedential value and cannot be relied on by taxpayers. Nonetheless, they may be useful for background or insight into a position the IRS might take on an undecided or novel issue for which no other agency guidance is available.”

In 2013, Phillip Blackman of Penn State School of Law and Kirk Stark of the UCLA School of Law outlined a roadmap for states to capture federal moneys by creating a state tax credit for cash contributions to a state entity, with very little cost to the state based on CCA 201105010, which the Legislature relied upon when enacting SB 798. In addition to California, many other states have similar tax credit programs, including credits equal to 100% of donations made to private nonprofit scholarship-granting organizations that issue scholarships to K-12 students to attend private schools, or public schools outside of the district, approved by the scholarship organizations, according to the National Conference of State Legislatures. SB 227 expands on SB 798’s model to potentially offer California taxpayers a way to reduce an increase in their federal tax liability resulting from the limitation on the deduction for state and local taxes enacted as part of a recent federal tax reform measure.

However, critics argue that SB 227’s approach may not work, and that IRS may deny any federal deductions claimed by taxpayers making contributions to the California Excellence Fund. Jared Walczak of the Tax Foundation states “that charitable contributions have a charitable aspect is a significant challenge for this approach” as the donor gets two benefits in exchange for the contribution: government services, and lower tax liability, which runs afoul of IRS publication 526’s exclusion from deduction for contributions for which the donor benefits. Walczak argues that contributions under SB 227 may not qualify as meeting the “solely for public purposes” standard, as the contribution serves no public purpose, has no net effect on state revenue, and is intended to leave the giver in better shape financially.

Comments

According to the author, “SB 227 mitigates the damage to the pocket books of California taxpayers caused by GOP tax reform by allowing them to contribute to the California Excellence Fund. Donations to the California Excellence Fund will allow taxpayers to help bolster funding for critical California programs, including higher education, healthcare, and public safety. The bill will utilize the current IRS charitable donation deduction to make sure California taxpayers are not burdened with a tax increase as a result of the recently enacted GOP tax reform measure. The measure punishes California taxpayers so that wealthy individuals and corporations can benefit. SB 227 builds upon several other tax credits in 21 other states, including my own 2014 bill SB 798 (de León). SB 798 established a tax credit for taxpayers that made donations to the Cal Grant program. SB 227 is a scaled up version of SB 798 that will minimize harm caused by the GOP tax measure to California taxpayers and give them an opportunity to help strengthen California.”

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee:

• Both FTB and the State Treasurer’s Office have yet to determine the administrative costs from implementing their respective portions of the bill. Annual costs are thus unknown, but potentially significant to the General Fund.
• FTB notes that the impact of the bill on the timing of receipt of state tax revenues would be driven by taxpayer response, which cannot be modeled.

SUPPORT: (Verified 1/18/18)

None received

OPPOSITION: (Verified 1/18/18)

None received

Prepared by:

1/24/18 15:51:09

**** END ****

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 227 (De León) - Income taxes: credits: California Excellence Fund

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

Bill Summary:

SB 227 would enact the California Excellence Fund Tax Credit, allowing a Personal Income or Corporation Tax credit equal to the amount of a contribution to the California Excellence Fund.

Fiscal Impact:

• Both the Franchise Tax Board (FTB) and the State Treasurer’s Office (STO) have yet to determine the administrative costs from implementing their respective portions of the bill (described below). Annual costs are thus unknown, but potentially significant (General Fund).
• FTB notes that the impact of the bill on the timing of receipt of state tax revenues would be driven by taxpayer response, which cannot be modeled (See Staff Comments).

Background:

Federal law permits a deduction from income for any charitable contribution made within a given taxable year, and California conforms to this deduction. A charitable contribution includes a contribution to public agencies, not solely charitable organizations, but only if the contribution or gift is made exclusively for public purposes. Under federal law, the deduction is limited when the donor receives consideration in exchange for the contribution.

In response to questions from taxpayers regarding whether cash payments to state agencies can be considered charitable contributions, an Internal Revenue Service (IRS) Chief Counsel Advice Memoranda from February, 2011 (CCA 201105010), states that the payment of cash to a state agency “is treated for federal tax purposes as a reduction or potential reduction in tax liability,’’ and not as consideration, based on its legal analysis of the relevant case law. CCA 201105010 additionally states that “the tax benefit of a federal or state charitable contribution deduction is not regarded as a return benefit that negates charitable intent, reducing or eliminating the deduction itself,” and that the IRS has no reason to distinguish between a state tax deduction and a credit based on the amount of the benefit, even transferable tax credits. While the memo appears to allow contributions made to public agencies that also generate state tax benefits to qualify for the federal charitable deduction without any reduction for consideration received, it does contain a caveat, namely that “there may be unusual circumstances in which it would be appropriate to recharacterize a payment of cash or property that was, in form, a charitable contribution as, in substance, a satisfaction of tax liability.” Additionally, the IRS internet site states that chief counsel advice memos “have no precedential value and cannot be relied on by taxpayers. Nonetheless, they may be useful for background or insight into a position the IRS might take on an undecided or novel issue for which no other agency guidance is available.”

Additionally, federal law allows a deduction for certain taxes paid to state and local governments. This deduction was part of the federal income tax system when it was created 100 years ago. However, the deduction can be limited by the federal Alternative Minimum Tax. Available data indicate that in 2015, more than five million Californians deducted more than $80 billion in state and local taxes from their federal returns.

Federal tax law changed significantly in December, 2017 with the passage of HR1. Amongst its numerous provisions, the law capped the deduction from income for state and local taxes paid by individuals at $10,000 per taxable year, not indexed for inflation. HR 1 did not affect the deduction for state and local taxes paid when carrying out a trade or business.

Current state tax law includes various tax credits designed (1) to provide incentives for taxpayers that incur certain expenses, such as child adoption, or (2) to influence behavior, including business practices and decisions, such as research and development credits and motion picture production credits. The Legislature typically enacts such tax incentives to encourage taxpayers to behave in a manner that would generally not happen on the natural. The Department of Finance is required to annually publish a list of tax expenditures, currently totaling $57 billion in 2016-17.

Similar to other states, California law allows credits against state tax for specified donations to state government, that when combined with the federal charitable deduction can result in tax benefits nearly equal to the amount of the contribution. One example is the College Access Tax Credit, originally enacted in 2014, and subsequently extended through 2022. This credit was enacted help to fund the Cal Grant B High School Entitlement Program, and it is administered by The California Educational Facilities Authority (CEFA), housed within STO. Taxpayers make contributions to CEFA, who then issues the taxpayer a credit certificate with a credit of 50 percent of the value of the contribution, which the taxpayer keeps after claiming the credit on his or her return. CEFA then deposits contribution proceeds into the College Access Tax Credit Fund. Fund proceeds first offset the foregone General Fund revenue resulting from the credit, and then are appropriated by the Legislature to FTB, CEFA, the State Controller, and the Student Aid Commission to reimburse any administrative costs. The remaining funds are then continuously appropriated to the California Student Aid Commission to supplement other moneys funding Cal Grants. CEFA can allocate up to a total of $500 million in credits each year on a first-come, first-served, basis.

Proposed Law:

This bill would enact the California Excellence Fund Tax Credit against both the Personal Income and Corporation Tax equal to the amount of a contribution to the California Excellence Fund (Fund), created by the measure within the General Fund to accept monetary contributions exclusively for public purposes. It would require the contributed funds be used for those public purposes when appropriated by the Legislature.

The bill would direct STO to establish a procedure for the public to make monetary contributions to the Fund. The procedure must require STO to certify the contribution amount within 45 days following the receipt of the contribution. STO must provide to FTB a copy of each credit certificate issued for the calendar year by March 1st of the following calendar year. STO would be required to adopt any regulations necessary and appropriate to implement the measure, as specified.

Taxpayers may carry the credit forward for up to six subsequent taxable years until exhausted, but cannot claim as a deduction any amounts taken into account when calculating the credit. The measure states that Section 41 of the Revenue and Taxation Code, which requires any introduced bill enacting a tax credit to contain specified provisions, does not apply to the credit.

Related Legislation:

• AB 490 (Quirk-Silva, Chapter 490, Statutes of 2017) extended the College Access Tax Credit to taxable years beginning on or after January 1, 2018, and before January 1, 2023.
• SB 81 (Committee on Budget and Fiscal Review, Chapter 22, Statutes of 2015) extended the College Access Tax Credit to taxable years beginning on or after January 1, 2017, and before January 1, 2018.
• SB 798 (De Leon, Chapter 367, Statutes of 2014) created the College Access Tax Credit, an income tax credit for cash contributions made to an education special fund with an aggregate credit cap of $500 million per calendar year.

Staff Comments: By creating a state tax credit equal to 100 percent of a taxpayer’s contribution to the California Excellence Fund that would also qualify for the federal charitable deduction, this bill would mitigate the impact of HR 1’s limitation on the deductibility of state and federal taxes, thereby shielding some residents from an increase in federal tax liability. However, Congress could change federal law, or the IRS could issue further guidance on the issue altering or reversing CCA 201105010. In either case, taxpayers receiving a 100 percent tax credit from the state would be no worse off at the state level – the taxpayer still received a tax credit equal to the contributed amount. However, it’s unclear whether federal accuracy-related penalties would apply should the IRS deny any SB 227 federal charitable contributions.

Assuming no federal response to this bill, the mechanics of the bill would work as follows: a taxpayer would make a contribution to the California Excellence Fund, and STO would issue a credit certificate in the full amount of the contribution. The taxpayer would then claim a credit in that amount on the California tax return in the year the contribution was made; as noted earlier, the credit is not refundable but could be carried over to future taxable years. The taxpayer then would claim an equivalent charitable contribution deduction on the federal return in the same year. Taxpayers could contribute amounts that would offset their entire state tax liability, which they could then claim as charitable deductions on their federal returns up to the percentage limit based on their income.

FTB notes that, respect to the impact on state revenues, the bill could result in four specific behavioral changes, each of which would have a unique impact. First, some taxpayers may respond by making contributions to the Fund that exceed their tax liability before credits. Since the credit is nonrefundable, any excess contribution not used in the year would result in an acceleration of receipts to the State from the time of the contribution until the taxpayer is ultimately able to apply the credit. FTB anticipates this impact to be minor.

Second, some taxpayers could continue to make regular estimated payments and payroll withholding, in addition to making contributions to the Fund. Consequently, they could receive refunds of their estimated payments and withholding overpayments after filing their tax return. To the extent that contributions to the Fund are made in the second half of the calendar year, and refunds are issued in the first half of the following calendar year, a minimum General Fund impact would result, as all the activity would occur within the same fiscal year. If, however, contributions are made in the first half of the calendar year, or if refunds are not issued until the second half of the subsequent year (as is commonly the case for taxpayers who file for extensions beyond April 15^th), an acceleration of receipts to the General Fund would result.

Third, some taxpayers could reduce withholding and estimated payments in the first half of the calendar year (fiscal year 1), and then subsequently make a large contribution to the California Excellence Fund near the end of the calendar year (fiscal year 2). Under this scenario, receipts would be shifted from fiscal year 1 to fiscal year 2.

Finally, for S-corporations, the bill would lead to a revenue loss as a result of contributions. S-corporations may take one-third of their credits at the entity level and pass 100 percent of their credits through to their shareholders. Thus, a $3,000 contribution to the California Excellence Fund by an S-corporation would result in a $1,000 credit available for use on the S-corporation’s return and a $3,000 credit passed through to the shareholders for use on their personal oncome tax returns. This results in a net loss of $1,000 to the state (a $3,000 contribution to the Fund less $4,000 in credit).

FTB indicates that it cannot predict the magnitude of any of these behavioral responses. However, it notes that “if the majority of itemizing taxpayers shift the majority of their payments from the first half of the year to the end of the year, the revenue transfer across fiscal years would be in the low tens of billions of dollars. We expect the actual revenue transfer to be significantly less than that by an unknown amount.”

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Income taxes: credits: California Excellence Fund

Enacts the California Excellence Fund Tax Credit, which allows a Personal Income or Corporation Tax credit equal to the amount of a contribution to the California Excellence Fund.

Background

Federal Charitable Deduction. The Internal Revenue Code allows a deduction from income for any charitable contribution made within the taxable year. California conforms to this deduction. A charitable contribution includes a contribution to public agencies, not just charitable organizations, but only if the contribution or gift is made for exclusively public purposes.

Federal law limits the deduction when the donor receives consideration in exchange for the contribution, as the contribution can lose part of its charitable nature. If the benefits expected to be received by a donor are greater than those to the general public, then the transferor has received a quid pro quo sufficient to deny the deduction. Treasury regulations clarify that no part of a payment that a taxpayer makes in consideration for goods or services qualifies for the deduction unless the taxpayer intends to make, or makes, a payment that exceeds the fair market value of the consideration. For example, a taxpayer donating $100 to the Public Broadcasting Service can claim a $100 deduction, but only an $80 deduction if he or she received a $20 tote bag as a result of the donation.

Treasury regulations don’t specifically address whether a reduction in state tax liability constitutes a good or service, instead defining “goods and services” to mean “cash, property, services, benefits, and privileges.” In response to questions from taxpayers regarding whether cash payments to state agencies can be considered charitable contributions, an Internal Revenue Service (IRS) Chief Counsel Advice Memoranda from February, 2011 (CCA 201105010), states that the payment of cash to a state agency “is treated for federal tax purposes as a reduction or potential reduction in tax liability,’’ and not as consideration, based on its legal analysis of the relevant case law, most notably McLennan v. United States, 23 Cl. Ct. 99 (1991). CCA 201105010 additionally states that “the tax benefit of a federal or state charitable contribution deduction is not regarded as a return benefit that negates charitable intent, reducing or eliminating the deduction itself,” and that the IRS has no reason to distinguish between a state tax deduction and a credit based on the amount of the benefit, even transferable tax credits. While the memo appears to allow contributions made to public agencies that also generate state tax benefits to qualify for the federal charitable deduction without any reduction for consideration received, it does contain a caveat, namely that “there may be unusual circumstances in which it would be appropriate to recharacterize a payment of cash or property that was, in form, a charitable contribution as, in substance, a satisfaction of tax liability.” Additionally, the IRS website states that chief counsel advice memos “have no precedential value and cannot be relied on by taxpayers. Nonetheless, they may be useful for background or insight into a position the IRS might take on an undecided or novel issue for which no other agency guidance is available.”

State Tax Credits. 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 totaling around $57 billion per year.

Similar to other states, California law allows credits against state tax for specified donations to state government, that when combined with the federal charitable deduction can afford tax benefits almost equal to the amount of the contribution, specifically the Natural Heritage Preservation Credit, and the College Access Tax Credit:

• The Legislature enacted the Natural Heritage Preservation Tax Credit to compensate landowners who donate land to the state for preservation purposes (SB 1647, O’Connell, 2000), and extended it until 2020 (SB 355, Beall, 2014). To qualify for the credit, landowners must apply to the Wildlife Conservation Board (WCB) for approval to donate a parcel of property, and for certification that the property meets certain requirements. If the WCB approves the contribution, the landowner may claim a tax credit equal to 55% of the property’s fair market value and carryover the credit for eight years.
• In 2014, the Legislature enacted a new tax credit to induce taxpayers into contributing to the College Access Tax Credit Fund, which helps to fund the Cal Grant B High School Entitlement Program (SB 798, De Leon, 2014), and extended it last year through the 2022 taxable year (AB 490, Quirk-Silva). The California Educational Facilities Authority (CEFA), housed in the Office of the State Treasurer, administers the tax credit. Taxpayers make cash contributions to CEFA, who then issues the taxpayer a credit certificate with a credit of 50% of the value of the contribution, which the taxpayer keeps after claiming the credit on his or her return. CEFA then deposits contribution proceeds into the College Access Tax Credit Fund. Fund proceeds first offset the foregone General Fund revenue resulting from the credit, and then are appropriated by the Legislature to the Franchise Tax Board (FTB), CEFA, the State Controller, and the Student Aid Commission to reimburse any administrative costs. Any funds remaining are then continuously appropriated to the California Student Aid Commission to supplement other moneys funding Cal Grants. CEFA can allocate up to a total of $500 million in credits each year on a first-come, first-served, basis.

HR 1. On December 22^nd, 2017, President Trump signed HR 1, which enacted fundamental changes to the federal income tax. Among them, HR 1:

• Increased the standard deduction from inflation-indexed amounts of $6,350 (single)/$12,700 (joint) in 2017 to $12,000 (single)/$24,000 (joint), adjusted annually for inflation, but using the chained consumer price index (CPI) for all urban consumers instead of the traditional CPI.
• Limited the deduction from income for state and local taxes paid by individuals to $10,000 per taxable year, not indexed for inflation. HR 1 did not affect the deduction for state and local taxes paid when carrying out a trade or business.
• Raised the general percentage limit for charitable contributions, which disallows deductions for charitable contributions above a specified percentage of the taxpayer’s modified adjusted gross income, from 50% to 60%, among other changes.

Seeking to ameliorate the effect of HR 1’s limitation on the deductibility of state and federal taxes, the author wants to enact a state tax credit equal to 100% of a taxpayer’s contribution to the California Excellence Fund that would also qualify for the federal charitable deduction.

Proposed Law

Senate Bill (SB) 227 enacts the California Excellence Fund Tax Credit against the Personal Income and Corporation Tax equal to the amount of a contribution to the California Excellence Fund, which the measure creates in the General Fund to accept monetary contributions exclusively for public purposes. The measure requires the contributed funds be used for those public purposes when appropriated by the Legislature.

The measure directs the Treasurer to establish a procedure for the public to make monetary contributions to the Fund, and obtain a certification for the credit. The procedure must require the Treasurer to certify the contribution amount within 45 days following the receipt of the contribution. The Treasurer must provide to FTB a copy of each credit certificate issued for the calendar year by March 1^st of the following calendar year. The bill requires the Treasurer to adopt any regulations necessary and appropriate to implement the measure, which are exempt from the Administrative Procedures Act.

Taxpayers may carry forward the credit for up to six subsequent taxable years until exhausted, but cannot claim as a deduction any amounts taken into account when calculating the credit. The measure states that Section 41 of the Revenue and Taxation Code, which requires any introduced bill enacting a tax credit to contain specified provisions, does not apply to the credit.

State Revenue Impact

According to FTB, “FTB noted four potential revenue impacts that would result from taxpayer behavioral changes. Unfortunately, we have no way to predict the magnitude of any of these behavioral responses. If the majority of itemizing taxpayers shift the majority of their payments from the first half of the year to the end of the year, the revenue transfer across fiscal years would be in the low tens of billions of dollars. We expect the actual revenue transfer to be significantly less than that by an unknown amount.”

Comments

1. Purpose of the bill. According to the author, “SB 227 mitigates the damage to the pocket books of California taxpayers caused by GOP tax reform by allowing them to contribute to the California Excellence Fund. Donations to the California Excellence Fund will allow taxpayers to help bolster funding for critical California programs, including higher education, healthcare, and public safety. The bill will utilize the current IRS charitable donation deduction to make sure California taxpayers are not burdened with a tax increase as a result of the recently enacted GOP tax reform measure. The measure punishes California taxpayers so that wealthy individuals and corporations can benefit. SB 227 builds upon several other tax credits in 21 other states, including my own 2014 bill SB 798 (de León). SB 798 established a tax credit for taxpayers that made donations to the Cal Grant program. SB 227 is a scaled up version of SB 798 that will minimize harm caused by the GOP tax measure to California taxpayers and give them an opportunity to help strengthen California.”

2. Sure, but will it work? In 2013, Phillip Blackman of Penn State School of Law and Kirk Stark of the UCLA School of Law outlined a roadmap for states to capture federal moneys by creating a state tax credit for cash contributions to a state entity, with very little cost to the state.^[1] SB 227 expands the model described by Blackman and Stark to potentially offer California taxpayers a way to reduce an increase in their federal tax liability resulting from HR 1’s limitation on the deduction for state and local taxes. In addition to California, many other states have similar tax credit programs, including credits equal to 100% of donations made to private nonprofit scholarship-granting organizations that issue scholarships to K-12 students to attend private schools, or public schools outside of the district, approved by the scholarship organizations, according to the National Conference on State Legislatures.

However, critics argue that SB 227’s approach may not work, and that IRS may deny any federal deductions claimed by taxpayers making contributions. Jared Walczak of the Tax Foundation states “that charitable contributions have a charitable aspect is a significant challenge for this approach” as the donor gets two benefits in exchange for the contribution: government services, and lower tax liability, which runs afoul of IRS publication 526’s exclusion from deduction for contributions for which the donor benefits.^[2] Walczak argues that contributions under SB 227 may not qualify as meeting the “solely for public purposes” standard, as the contribution serves no public purpose, has no net effect on state revenue, and is intended to leave the giver in better shape financially.

Congress could clarify the issue by changing federal law, or IRS could issue further guidance on the issue altering or reversing CCA 201105010. In either case, taxpayers receiving a 100% tax credit from the state will be no worse off at the state level – the taxpayer still received a tax credit equal to the contributed amount. However, it’s unclear whether federal accuracy-related penalties would apply if IRS denies any SB 227 federal charitable contributions given CCA 201105010. The Committee may wish to consider whether SB 227’s approach will work.

3. How does this work? Under SB 227, Jane can contribute $10,000 to the California Excellence Fund, and the Treasurer issues her a $10,000 credit certificate. Jane may then claim a $10,000 credit on her California tax return in the year she makes the contribution, which she could carry over to future taxable years. Jane then claims a $10,000 charitable contribution deduction on her federal return in the same year. Jane could contribute amounts sufficient to offset her entire state tax liability, which she could then claim as charitable deductions on her federal return up to the percentage limit based on her income. Jane could contribute amounts that exceed her state tax liability, and generate a credit that she could carry forward and apply in future taxable years; however, she could not obtain a refund that exceeds her tax liability for that year because SB 227 does not provide for a refundable credit.

4. Generous Incentive. This bill would enact the most generous tax credits ever allowed in California, which when combined with the federal charitable deduction, would afford the donating taxpayer benefits that exceed the amount contributed. Using the example above, Jane’s state tax liability can be entirely offset when she applies the credit for her $10,000 contribution, and she gets to deduct $10,000 in income as a charitable contribution. Assuming Jane is in the highest income tax bracket of 37%, and the contribution does not exceed the credit percentage for the year she makes the donation, she receives $13,700 in total federal and state tax benefits as a result of her contribution. While the measure precludes taxpayers from claiming a state charitable deduction for any amount used to calculate the California Excellence Fund Tax Credit, thereby negating any double benefit, the Committee may wish to consider whether SB 227’s credit percentage is appropriate.

5. HR 1 and California. Part of the federal income tax since its inception, the deduction for state and local income taxes paid permits taxpayers who itemize deductions on their federal income tax to deduct certain taxes paid to state and local governments for federal tax purposes. Taxpayers may deduct their property taxes plus either their state income or sales taxes, but not both. However, the deduction can be limited by the federal Alternative Minimum Tax. In 2015, more than five million Californians deducted more than $80 billion in state and local taxes from their federal returns, according to the IRS. Proponents of the deduction argue that it prevents both the federal government and the state from taxing the same income twice, while critics assert that it primarily benefits higher-income individuals. HR 1 capped the deductions at $10,000 per year, and provided a significantly higher standard deduction, which will reduce the number of filers who itemize. The Tax Policy Center states that residents of high-tax states, such as New York, California, and New Jersey, generally would face the biggest tax increases.

6. Redirecting? SB 227 could result in taxpayers redirecting charitable contributions from charities to the Fund, as contributions to other charities would only qualify for the state and federal deduction, and not the 100% state tax credit. The Committee may wish to consider whether SB 227 will impact general charitable giving.

7. Open ends. SB 227 may benefit from further detail in some areas, including:

• Allow the credit to reduce tax liability below tentative minimum tax to ensure taxpayers can apply the full credit amount in the taxable year of the contribution.
• Add a potential sunset date.
• To accommodate multiple contributions in one taxable year, replace “for” with “during” before “taxable year,” (P.2, L.6., and P.3, L.22) and allow the Treasurer to grant one certificate per taxpayer per year instead of requiring one within 45 days of each contribution.

8. Gut and amend. Previously, SB 227 related to the Vocational Nursing Practices Act. The author removed those provisions on January 3, 2018, and inserted the current ones.

Support and Opposition

(1/8/18)

Support: Unknown.

Opposition: Unknown.

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1. “Capturing Federal Dollars with State Charitable Tax Credits,” 139 Tax Notes 53, 2013 ↑

2. “State Strategies to Preserve SALT Deductions for High-Income Taxpayers: Will They Work?” Tax Foundation, January 5, 2018. ↑