Date of Hearing: January 23, 2020

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 535

Author:(Brough) – As Amended Ver:January 15, 2020

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

SUMMARY:

This bill creates an income tax credit worth 50% of the costs of first-year professional license fees for licenses issued by the Department of Real Estate, the Board of Registered Nursing, Board of Behavioral Sciences, Contractors’ State License Board and the Board of Psychology. This credit is available for tax years 2021 through 2025 and cannot be used with any deduction that can be claimed for the costs associated with a professional license fee. This bill also requires the Legislative Analyst’s Office (LAO) to review the effectiveness of the proposed credit.

FISCAL EFFECT:

1. Annual GF revenue loss in the range of $4 million to $6 million in 2020-21 and $10 million to $12 million each year thereafter.
2. Likely minor costs for LAO to complete the annual review of the credit.

COMMENTS:

1. Background. A professional license is a type of license needed to lawfully practice a certain type of occupation. Generally, a professional license fee can be claimed as a deduction if it is “ordinary and necessary” for the work of the taxpayer, meaning it is directly related to the taxpayer’s occupation. For example, the pilot license fee is only deductible if the taxpayer works as a pilot.
2. Purpose. According to the author, this bill “will increase the amount of licensed mental health and housing professionals in California.” The author contends that licensing fees for new professionals can be a barrier to entry.
3. Deduction vs credit? This bill provides a credit worth half of a professional license fee and disallows a taxpayer from claiming both the credit and the deduction. Generally, the credit will be far more generous to a taxpayer because the value of the deduction depends on the taxpayer’s marginal state tax rate, which peaks at 13.3%. For example, a high-income taxpayer at the 13.3% state income tax bracket would receive $13.30 from deducting a $100 license fee. In contrast, the same taxpayer would receive $50 from the proposed credit. The costs associated with this bill reflect the difference between the new costs of the credit offset by the savings associated with disallowing the deduction.
4. Report costs. Section 41 of the Revenue and Taxation Code calls for tax expenditure legislation to include the legislative intent of the proposed tax expenditure and a process by which to evaluate its effectiveness. Generically, a bill that complies with Section 41 includes a report or formal evaluation utilizing specified data sources.

Costs associated with Section 41 reporting may be significant if the requested data is not easily obtainable or if the scope of the requested research is overly ambitious.  Moreover, the evaluating entity, such as the LAO or FTB, may need additional resources if it is required to conduct many Section 41 evaluations in the same year, even if each individual report is absorbable within existing resources.

This bill requires LAO to review the effectiveness of the proposed tax credit and its economic impact once a year beginning on January 1, 2022. This is a complicated and time-consuming analysis, and LAO may need to request additional resources if tasked with other Section 41 reporting requirements.

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

Date of Hearing: January 13, 2020

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 535 (

Author:Brough) – As Amended Ver:April 8, 2019

FOR VOTE ONLY

SUBJECT: Personal income taxes: credit: professional license fees

SUMMARY: Allows a tax credit under the Personal Income Tax (PIT) Law equal to the costs paid or incurred by a taxpayer for an initial "qualified professional licensee" fee. Specifically, this bill:

1. Provides the credit for taxable years beginning on or after January 1, 2020, and before January 1, 2025.
2. Defines a "qualified professional license" as any "license" issued by the:
   1. Department of Real Estate;
   2. Board of Registered Nursing;
   3. Board of Behavioral Sciences;
   4. Contractors' State License Board; or,
   5. Board of Psychology.
3. Defines a "license" by reference to Business and Professions Code Section 23.7.
4. Provides that this credit shall be in lieu of any other deduction that the taxpayer may otherwise claim under the PIT Law with respect to the costs paid or incurred by a taxpayer for an initial professional license fee.
5. Allows any tax credit carryover to be applied in the following taxable year and succeeding five taxable years, if necessary, until the credit has been exhausted.
6. Sunsets the credit provisions on December 1, 2025.
7. Provides that, for purposes of complying with Revenue and Taxation Code (R&TC) Section 41, the Legislature finds and declares all of the following:
   1. The specific goals, purposes, and objectives that this credit will achieve are:
      1. Reducing the burden of entering into a licensed profession;
      2. Increasing the number of mental healthcare professionals in California; and,
      3. Supporting California's effort to build affordable housing by increasing jobs in the housing market.
   2. Detailed performance indicators for the Legislature to use in determining whether this credit meets the goals, purposes, and objectives listed above are:
      1. The number of people being allowed the credit; and,
      2. The number of licenses provided by the Department of Real Estate, Board of Registered Nursing, Board of Behavioral Sciences, Contractors' State License Board, and the Board of Psychology.
   3. To review this tax credit's effectiveness requires the Legislative Analyst's Office (LAO) to collaborate with the Franchise Tax Board (FTB) and requires the review to include an analysis of this tax credit's demand and the economic impact.
   4. To assist the Legislature in determining whether this tax credit meets the specific goals, purposes, and objectives listed above, allows the LAO to request information from the FTB and requires the FTB to provide any data so requested.

EXISTING LAW:

1. Allows various tax credits under the PIT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
   
2. 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: The FTB estimates this bill would reduce General Fund revenues by $12 million in fiscal year (FY) 2019-20, $23 million in FY 2020-21, and $26 million in FY 2021-22.

COMMENTS:

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

Licensing fees in California for new professionals, starting a career or making a career change, requires these individuals to go into debt before they can even get a job. For a lower-income licensed occupation in California, applicants, on average, pay $300 in licensing fees, spend 549 days in education and training, and must pass one exam. Occupational licensing is important for consumer protection; however, initial licensing fees are a barrier to entry for these professionals. California is currently in the middle of two crises, a housing shortage and a severe lack of mental health professionals. This bill will increase the amount of licensed mental health and housing professionals in California by providing a tax credit for initial licensing fees.

1. This bill is supported by the California Association for Health Services at Home (CAHSAH), which notes that this bill provides a reprieve for registered nurses and social workers who have incurred considerable educational expenses for obtaining their professional license. CAHSAH supports any financial assistance the State can provide to help these clinicians get started in their professional career.
2. The FTB notes the following policy and implementation considerations:
   1. "This bill fails to limit the amount of the credit that may be taken. Credits that could potentially be quite costly are sometimes limited either on a per-project or per-taxpayer basis. This bill would provide a 100 percent credit which would be unprecedented."
   2. "The term 'initial qualified professional license fee' is undefined in the bill. Absent a definition, the term could be broadly interpreted and may lead to disputes between the department and taxpayers."
   3. "Typically, credits involving areas for which the department lacks expertise are certified by another agency or agencies that possess the relevant expertise. The certification language would specify the responsibilities of both the certifying agency and the taxpayer. It is recommended that this bill be amended to include certification by the appropriate agency responsible for each license."
   4. "This bill would require FTB to provide data to the LAO for use in the review of the credit effectiveness, upon request, which could contain confidential taxpayer information. However, the bill fails to allow the disclosure of such information or prohibit the LAO from further disclosure of confidential taxpayer information. An exception from the general disclosure provisions should be added to specifically allow the FTB to comply with the bill's provision on disclosure of tax information and apply the appropriate disclosure restrictions to the LAO."
3. Committee Staff Comments:
   1. What does this bill do? This bill creates a nonrefundable tax credit equal to the costs paid or incurred by a taxpayer for their initial "qualified professional licensee" fee that is paid to the Department of Real Estate, Board of Registered Nursing, Board of Behavioral Sciences, Contractors' State License Board, or the Board of Psychology. Typically, these fees are several hundred dollars.
   2. Suggested amendments: Committee staff recommends that the tax credit amount be reduced from 100% to 50% and that the sunset provisions be adjusted to provide the credit for taxable years beginning on or after January 1, 2021, and before January 1, 2026, with a December 1, 2026 sunset date. The author concurs with these suggestions.
   3. Unequal benefits: Tax credits reduce state income tax liability dollar for dollar. Many low- or moderate-income taxpayers who have little state income tax liability under California's progressive income tax structure may not receive the full, or any, benefit from tax credits. As such, those taxpayers most in need of financial assistance as they start their career may receive no benefit from this bill. The funds this bill proposes to expend through a new tax expenditure might be better focused through a direct grant to newly qualified professional licensees or through the waiver of their initial professional licensee fee paid to the various Boards or State Departments to ensure equitable access to this General Fund expenditure.
   4. What is a "Tax Expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures," since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each of them (in the form of forgone revenues). This bill would enact a new tax expenditure program in the form a tax credit for a specified group of individuals issued professional licenses.
   5. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. This Committee has recently adopted a new policy, requiring that all new tax expenditure proposals comply with the requirements of R&TC Section 41. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote. According to the new policy, an "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean 10 years. This bill, as currently drafted, complies with all of the Committee's tax expenditure policy requirements.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association for Health Services at Home

Opposition

None on file

Analysis Prepared by: Rose Marie Kinnee / REV. & TAX. / (916) 319-2098

Date of Hearing: January 6, 2020

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 535 (

Author:Brough) – As Amended Ver:April 8, 2019

FOR TESTIMONY ONLY

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: credit: professional license fees

SUMMARY: Allows a tax credit under the Personal Income Tax (PIT) Law equal to the costs paid or incurred by a taxpayer for an initial "qualified professional licensee" fee. Specifically, this bill:

1. Provides the credit for taxable years beginning on or after January 1, 2020, and before January 1, 2025.
2. Defines a "qualified professional license" as any "license" issued by the:
   1. Department of Real Estate;
   2. Board of Registered Nursing;
   3. Board of Behavioral Sciences;
   4. Contractors' State License Board; or,
   5. Board of Psychology.
3. Defines a "license" by reference to Business and Professions Code Section 23.7.
4. Provides that this credit shall be in lieu of any other deduction that the taxpayer may otherwise claim under the PIT Law with respect to the costs paid or incurred by a taxpayer for an initial professional license fee.
5. Allows any tax credit carryover to be applied in the following taxable year and succeeding five taxable years, if necessary, until the credit has been exhausted.
6. Sunsets the credit provisions on December 1, 2025.
7. Provides that, for purposes of complying with Revenue and Taxation Code (R&TC) Section 41, the Legislature finds and declares all of the following:
   1. The specific goals, purposes, and objectives that this credit will achieve are:
      1. Reducing the burden of entering into a licensed profession;
      2. Increasing the number of mental healthcare professionals in California; and,
      3. Supporting California's effort to build affordable housing by increasing jobs in the housing market.
   2. Detailed performance indicators for the Legislature to use in determining whether this credit meets the goals, purposes, and objectives listed above are:
      1. The number of people being allowed the credit; and,
      2. The number of licenses provided by the Department of Real Estate, Board of Registered Nursing, Board of Behavioral Sciences, Contractors' State License Board, and the Board of Psychology.
   3. To review this tax credit's effectiveness requires the Legislative Analyst's Office (LAO) to collaborate with the Franchise Tax Board (FTB) and requires the review to include an analysis of this tax credit's demand and the economic impact.
   4. To assist the Legislature in determining whether this tax credit meets the specific goals, purposes, and objectives listed above, allows the LAO to request information from the FTB and requires the FTB to provide any data so requested.

EXISTING LAW:

1. Allows various tax credits under the PIT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
   
2. 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: The FTB estimates this bill would reduce General Fund revenues by $12 million in fiscal year (FY) 2019-20, $23 million in FY 2020-21, and $26 million in FY 2021-22.

COMMENTS:

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

Licensing fees in California for new professionals, starting a career or making a career change, requires these individuals to go into debt before they can even get a job. For a lower-income licensed occupation in California, applicants, on average, pay $300 in licensing fees, spend 549 days in education and training, and must pass one exam. Occupational licensing is important for consumer protection; however, initial licensing fees are a barrier to entry for these professionals. California is currently in the middle of two crises, a housing shortage and a severe lack of mental health professionals. This bill will increase the amount of licensed mental health and housing professionals in California by providing a tax credit for initial licensing fees.

1. This bill is supported by the California Association for Health Services at Home (CAHSAH), which notes that this bill provides a reprieve for registered nurses and social workers who have incurred considerable educational expenses for obtaining their professional license. CAHSAH supports any financial assistance the State can provide to help these clinicians get started in their professional career.
2. The FTB notes the following policy and implementation considerations:
   1. "This bill fails to limit the amount of the credit that may be taken. Credits that could potentially be quite costly are sometimes limited either on a per-project or per-taxpayer basis. This bill would provide a 100 percent credit which would be unprecedented."
   2. "The term 'initial qualified professional license fee' is undefined in the bill. Absent a definition, the term could be broadly interpreted and may lead to disputes between the department and taxpayers."
   3. "Typically, credits involving areas for which the department lacks expertise are certified by another agency or agencies that possess the relevant expertise. The certification language would specify the responsibilities of both the certifying agency and the taxpayer. It is recommended that this bill be amended to include certification by the appropriate agency responsible for each license."
   4. "This bill would require FTB to provide data to the LAO for use in the review of the credit effectiveness, upon request, which could contain confidential taxpayer information. However, the bill fails to allow the disclosure of such information or prohibit the LAO from further disclosure of confidential taxpayer information. An exception from the general disclosure provisions should be added to specifically allow the FTB to comply with the bill's provision on disclosure of tax information and apply the appropriate disclosure restrictions to the LAO."
3. Committee Staff Comments:
   1. What does this bill do? This bill creates a nonrefundable tax credit equal to the costs paid or incurred by a taxpayer for their initial "qualified professional licensee" fee that is paid to the Department of Real Estate, Board of Registered Nursing, Board of Behavioral Sciences, Contractors' State License Board, or the Board of Psychology. Typically, these fees are several hundred dollars.
   2. Unequal benefits: Tax credits reduce state income tax liability dollar for dollar. Many low- or moderate-income taxpayers who have little state income tax liability under California's progressive income tax structure may not receive the full, or any, benefit from tax credits. As such, those taxpayers most in need of financial assistance as they start their career may receive no benefit from this bill. The funds this bill proposes to expend through a new tax expenditure might be better focused through a direct grant to newly qualified professional licensees or through the waiver of their initial professional licensee fee paid to the various Boards or State Departments to ensure equitable access to this General Fund expenditure.
   3. What is a "Tax Expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures," since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each of them (in the form of forgone revenues). This bill would enact a new tax expenditure program in the form a tax credit for a specified group of individuals issued professional licenses.
   4. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. This Committee has recently adopted a new policy, requiring that all new tax expenditure proposals comply with the requirements of R&TC Section 41. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote. According to the new policy, an "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean 10 years. This bill, as currently drafted, complies with all of the Committee's tax expenditure policy requirements.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association for Health Services at Home

Opposition

None on file

Analysis Prepared by: Rose Marie Kinnee / REV. & TAX. / (916) 319-2098