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2012 Income Tax Credit ReviewJoint Legislative Income TaxCredit Review Committee
December 6, 2012
JLBC
2JLBC
Joint Legislative Income Tax Credit Review Committee- Annually Reviews Credits As Determined in Statute
63
Solar Hot Water Heater Plumbing Stub-Outs & Electric Vehicle Recharge Outlets
51Public School Extracurricular Activity Fee
39Private School Tuition Organization
29Military Family Relief Fund Donation
19Commercial Solar Energy Device
9Family Income
PageOpen Session*
* 3 Credits Will Be Reviewed in Executive Session
3JLBC
Role of the Committee
Determine original purpose of tax credit
Establish standards for evaluating and measuring success or failure
Recommend changes
4JLBCJLBC
EvaluationEvaluationStandardsStandards
History Rationale
DollarImpact
EconomicDevelopment
Complexity
NewInvestments
New Jobs
Statute Provides Possible Standards
5JLBC
Confidential Taxpayer Information
Laws 2010, Chapter 225 authorizes DOR to disclose confidential “statistical information” only to the Committee and JLBC Staff
DOR considers credit information confidential if:• credits were claimed by 3 or fewer taxpayers, or
• a single taxpayer used more than 90% of total credits
Three of the credits on the 2012 review schedule include confidential statistical information
6JLBC
Issues Affecting Evaluation
Timeliness of data
Lack of performance measures
Certain costs and benefits can be difficult to quantify
7JLBC
Evaluation of Arizona Tax Credit Reviews
The Pew Center on the States rates Arizona among 13 states that are “leading the way” in the evaluation of tax incentives
Arizona ranked highly for its systematic process of reviewing all income tax credits
The Pew Center, however, questioned the quality of the reviews due to a lack of both economic impacts and clear conclusions
9JLBC
Family Income Tax Credit
11JLBC
Family Income Tax Credit – Summary
Cost – $5.8 million in tax year 2011
– 516,800 claims at an average of $11 per claim
Purpose – reduce the tax burden on low-income households
Complexity – simple to use
– worksheet for credit calculation is included in tax return instruction pamphlet
– no separate administration and approval process is required
Performance Measures – none in statute
12JLBC
Family Income Tax Credit – Description of Credit
Credit is $40 for each household member for whom a personal or dependent exemption is allowed
Total credit cannot exceed $120 for singles and married couples filing separate returns
Total credit cannot exceed $240 for married couples filing joint returns and single persons filing as head of household
Credit is nonrefundable and unused amounts cannot be carried forward
13JLBC
Family Income Tax Credit – Credit Available to Taxpayers Below Prescribed Income Limits
* Income Limit Depends on Number of Dependents
$20,000 - $26,575Head of Household *
$20,000 - $31,000Married Filing Joint Return *
$10,000Married Filing Separate Return
$10,000Single
Income LimitFiling Status
14JLBC
Family Income Tax Credit – Amount of Credit Used Is Much Less Than Available Credit
Total credit available depends on filing status and number of dependents claimed
Since credit is nonrefundable and carry forwards are disallowed, actual amount used is limited by taxpayer’s liability
Since low-income households generally incur low tax liabilities, they tend to use far less of the credit than their maximum allowable amount
15JLBC
Family Income Tax Credit – Total Available Credit versus Actual Credit Used
20.6 20.5 20.5
27.7 28.4 28.9
33.436.1 35.1 35.6 36.7 36.7
42.7 42.144.7 44.6 44.3
5.85.65.35.86.86.97.77.77.47.47.45.2 5.1 4.6
7.9 7.8 7.4
$0
$10
$20
$30
$40
$50
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Mill
ions
of D
olla
rs
Credit Available Credit Used
16JLBC
$7.9 $7.8$7.5
$6.8
$5.8$5.3
$5.6$5.8
$5.2
$7.4
$6.9
$7.7$7.7
$5.1$4.6
$7.4 $7.4
341 341 345
449
519501
516 517 517
428417
439425
313 328335
402
$0
$2
$4
$6
$8
$10
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Cred
it U
sed
($ M
illio
ns)
0
100
200
300
400
500
600
Num
ber
of C
laim
ants
(Tho
usan
ds)
Credits Used # of Claimants
Family Income Tax Credit Credit– Amount of Credits Used & Number of Claimants
17JLBC
Family Income Tax Credit – Benefits to the Arizona Economy
Credit has the effect of raising the disposable income of low-income households
Economic theory predicts that a higher disposable income will increase consumer spending, which in turn will spur economic activity
However, since the total amount of the credit claimed is small (less than $6 mil.), the impact on the Arizona economy is likely minimal
18JLBC
Family Income Tax Credit – Potential Performance Measures
There are no performance measures for this credit
19JLBC
Commercial Solar Device Energy Tax Credit
21JLBC
Commercial Solar Energy Device Tax Credit– Summary
Cost – $129,500 in 2010 for the corporate credit and $51,400 in 2011 for the individual credit
Purpose – to promote development of Arizona’s solar energy industry
Complexity – simple to use and administer
Performance Measures – none in statute
22JLBC
Commercial Solar Energy Device Tax Credit– Description of the Credit
Individual and corporate tax credits for 10% of the cost of a solar energy device up to a maximum of $25,000 per building or $50,000 per business
Solar devices include photovoltaic (PV) electricity generators, water heaters, and energy storage systems
Credit is available through 2018 and is capped at $1 million per year
Credit is non-refundable, but unused amounts can be carried forward for up to 5 years
23JLBC
$129,500
$87,100$74,900
7
12
10
$0
$50,000
$100,000
$150,000
2008 2009 *2010
Cred
it U
sed
0
2
4
6
8
10
12
14
Num
ber
of C
laim
ants
Credits Used # of Claimants
Credit data for 2006 and 2007 has not been released by DOR.
Commercial Solar Energy Device Tax Credit– Amount of Corporate Credits Used & Number of Claimants
* Preliminary Numbers
24JLBC
$51,400
$258,000
$18,100$54,600
$279,900$325,100
5
1715
5346
81
$0
$100,000
$200,000
$300,000
$400,000
2006 2007 2008 2009 2010 *2011
Cred
it U
sed
0
20
40
60
80
100
Num
ber
of C
laim
ants
Credits Used # of Claimants
Commercial Solar Energy Device Tax Credit– Amount of Individual Credits Used & Number of Claimants
* Preliminary Numbers
25JLBC
Commercial Solar Energy Device Tax Credit– Recent Trends
PV units are becoming less expensive and more efficient
Arizona instituted a Renewable Energy Standard (15% by 2025)
Federal residential and commercial solar energy credits of 30% are available through end of CY 2016
Utility rebates, state credits, and federal credits collectively reduce PV system costs by 50%
26JLBC
Commercial Solar Energy Device Tax Credit – Benefits to the Arizona Economy
In 2010, credits were applied against $7.5 million of investments in solar energy devices
There is no data on the number of new jobs created from purchases related to this credit
However, studies show Arizona’s total solar related employment has increased recently
27JLBC
Commercial Solar Energy Device Tax Credit – Potential Performance Measures
Total megawatt hours of electricity generated from solar energy devices
Total megawatt hours of electricity conserved from non-renewable energy sources
Number of persons employed in businesses that manufacture, install, or service residential energy solar devices
29JLBC
Military Family Relief Fund Tax Credit
31JLBC
Military Family Relief Fund Tax Credit– Summary
Cost – $996,700 in tax year 2011.– 3,007 claims averaging $331 a claim
Purpose – to encourage contributions used to relieve financial hardship of families of military service members
Complexity – moderately complex to administer due to popularity of the credit
Performance Measures – none in statute
32JLBC
Military Family Relief Fund Tax Credit– Description of Credit
Individual tax credit for cash donations to the Military Family Relief Fund
Maximum credit allowed:• $200 for single individual or head of household• $400 for married couple filing joint return
Credit is available through 2018 and is capped at $1 million per year
Credit is non-refundable and unused amounts cannot be carried forward
33JLBC
$996,700$995,800$998,300$982,600
3,007
3,0703,052
3,185
$500,000
$750,000
$1,000,000
2008 2009 2010 *2011
Cred
it U
sed
2,900
3,000
3,100
3,200
Num
ber
of C
laim
ants
Credits Used # of Claimants
Military Family Relief Fund Tax Credit– Amount of Credits Used & Number of Claimants
* Preliminary Numbers
34JLBC
Military Family Relief Fund Tax Credit– Grant Making
$20,000 grant cap
Each of the following requirements must be met to be eligible for a grant:
• Resident families of deployed military personnel or veterans
• Military service in a combat zone since September 11, 2001
• Experiencing financial hardship
35JLBC
Military Family Relief Fund Tax Credit – Benefits to the Arizona Economy
With a $1 million annual cap, the credit’s economic impact is small
Temporarily raises income of families of service members
• In FY 2012, the committee made $562,100 in grants
• 2010 legislation eased program eligibility requirements
36JLBC
Military Family Relief Fund Tax Credit – Level of Grants Below Donation Level
562999TY ’11/FY ’12
2331,000TY ’10/FY ’11
1271,005TY ’09/FY ’10
$12$993TY ’08/FY ’09
Grants(Fiscal Year; in $1,000)
Donations(Tax Year; in $1,000)
Year
37JLBC
Military Family Relief Fund Tax Credit – Potential Performance Measures
Number and dollar amount of donations
Number and dollar amount of grants
39JLBC
Private School Tuition Organization Credit
41JLBC
Private School Tuition Organization Credit – Summary
Cost – $43.2 million in tax year 2010
– 62,941 claims (average = $686)
Purpose – assist parents with the cost of private school tuition
Complexity – simple to use
– administration now “significantly more complex for STOs” due to 2nd individual STO credit created by Laws 2012, Chapter 4
Performance Measures – none in statute
42JLBC
Private School Tuition Organization Credit– Description of Credit
Individual income tax credit for contributions to a school tuition organization (STO)
– Charitable organization exempt from federal taxes
– awards 90% of tax credit revenue for scholarships & grants
Maximum credit allowed (CY 2012):
– $503 for single individual or head of household
– $1,006 for married couple filing joint return
– adjusted annually for inflation
5-year carry-forward
53 STOs received contributions in CY 2012
43JLBC
Private School Tuition Organization Credit– Related STO Credits
Three other STO tax credits exist (none under review this year):
Corporate “low income” STO credit
– scholarships for “low income” students
Corporate “displaced/disabled” STO credit
– scholarships for students with disabilities or from foster care
system
Individual “switcher” STO credit (new for CY 2012)
– scholarships for students who switch to private schools
– donor must first take maximum “original” STO credit
44JLBC
$43.2
$51.0
$29.4$26.5
$1.8
$42.2
$50.9
$55.3$54.3
$13.8
$17.7
$24.9
$31.8
38.232.0
4.2
62.9
73.469.2 73.678.476.1
46.752.2
58.163.8
$0
$10
$20
$30
$40
$50
$60
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Con
trib
utio
ns R
epor
ted
($ M
illio
ns)
0
20
40
60
80
100
120
140
160
Num
ber
of C
ontr
ibut
ions
(tho
usan
ds)
Contributions Reported ($ Millions)# of Contributions (thousands)
Private School Tuition Organization Credit – In 2010, Average Contribution Was $686
45JLBC
Private School Tuition Organization Credit– Impact on State K-12 Cost
Revenue loss is offset to the extent that credit allows students to attend private school who otherwise would have attended public school
State K-12 Costs:
– Operating - $5,300 per ADM
– Capital – New construction and building renewal savings
46JLBC
Private School Tuition Organization Credit– Impact on State K-12 Costs
No net GF cost if at least 8,150 students otherwise would be attending public schools (8,150 X $5,300 = $43.2 million)
Total STO scholarship recipients estimated at 23,800, but actual number of “switchers” is unknown
Private school enrollment had grown over past decade prior to Great Recession (NCES survey)
– 44,060 in 2000
– 51,590 in 2008
– 44,559 in 2010
47JLBC
$1,791
$1,645
$1,213$1,166
$811
$1,370
$1,889$1,914
$1,788
$684
$899$913
$1,325
3.2
15.1
0.1
26.427.6
22.524.7
28.327.2
18.019.6 20.1 21.1
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
$2,200
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Ave
rage
Sch
olar
ship
/Gra
nt
0
5
10
15
20
25
30
35
40
45
50
# of
Sch
olar
ship
s/G
rant
s (th
ousa
nds)
Average Scholarship/Grant# of Scholarships/Grants (thousands)
Private School Tuition Organization Credit – Over 26,400 awards distributed in 2010 (Average = $1,791)
48JLBC
Private School Tuition Organization Credit– Average Scholarship Funding and Tuition
Estimated 53% of private school population receives STO scholarship/grant
– some students receive more than one award
STO scholarships cover an estimated 22% of private school tuition costs
– Average tuition cost of $8,549 (NCES survey 2008)
– $1,914 ÷ $8,549 (‘08 scholarship average) = 22.4%
49JLBC
Private School Tuition Organization Credit – Potential Performance Measures
Percent of STO revenues retained for administrative costs
Percent of private school tuition paid for with award funding
51JLBC
Public School Extracurricular Activity Fee Credit
53JLBC
Public School Extracurricular Activity Fee Credit – Summary
Cost – $48.4 million in tax year 2011.
– 250,210 claims averaging $194 per claim
Purpose – assist parents with the cost of
extracurricular activities
Complexity – simple to use
– recent law changes have increased school district reporting requirements, adding data collection duties to DOR
Performance Measures – none in statute
54JLBC
Public School Extracurricular Activity Fee Credit– Description of Credit
Individual income tax credit for contributions to a K-12 public school for extracurricular activities or character education programs
Maximum credit allowed:
– $200 for single individual or head of household
– $400 for married couple filing joint return
5-year carry-forward
55JLBC
Public School Extracurricular Activity Fee Credit– Activities Eligible for Credit
Extracurricular activities are school sponsored activities that require a fee to participate:
– Excludes senior trips and recreational, amusement, and tourist activities
Character education instruction must include:
– At least 6 character traits
– Application of the traits
– Presentations by those who demonstrate the traits
56JLBC
$48.4
$43.7$43.2
$27.8
$22.4
$9.0
$35.4
$42.7$45.2$44.1
$14.8$17.5
$20.0
$31.0
149
11074
250 250239215 219
234214
167144
201214
$0
$10
$20
$30
$40
$50
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Con
trib
utio
ns R
epor
ted
($ M
illio
ns)
50
100
150
200
250
300
350
400
450
500
Num
ber
of C
ontr
ibut
ions
(tho
usan
ds)
Contributions Reported ($ Millions)# of Contributions (thousands)
Public School Extracurricular Activity Fee Credit – In 2011, Average Contribution Was $194
57JLBC
$1.0Catalina Foothills$2.2Paradise Valley Unified
$1.0Tempe Union$2.2Chandler Unified
$1.3Prescott Unified$2.3Gilbert Unified
$1.4Deer Valley Unified$2.5Scottsdale Unified
$1.5Peoria Unified$3.0Tucson Unified
$2.0Kyrene Elementary$5.9Mesa Unified
Contributions
($ in millions)District
Contributions
($ in millions)District
Public School Extracurricular Activity Fee Credit – 12 Districts Received 54% of Contributions in ’11
(represents 34% of Statewide Enrollment)
58JLBC
Public School Extracurricular Activity Fee Credit– Charters Receive Higher Average Contribution Per Pupil
Average contribution per pupil:
– School Districts - $45
– Charter Schools - $52
Highest average contribution per pupil:
– Prescott Unified - $261
– Tempe Preparatory Academy (charter) - $390
Some districts and charters reported receiving no contributions
59JLBC
Public School Extracurricular Activity Fee Credit– Family Income Levels Impact Contributions
Higher income districts received more contributions per student:
– Particularly true for larger districts
– Only a minimal impact on smaller districts
Other factors in determining contribution levels cold include:
– School administration (advertising, accessibility)
– Community involvement
60JLBC
Public School Extracurricular Activity Fee Credit– Laws 2011, Chapter 195 Increased Reporting Requirements
Schools must now report spending “categorized by specific extracurricular activity”
Most reported FY11 spending was for Athletics and Field Trips:
– Athletics or Sports ($12.2 M / 27%)
– Field Trips ($9.5 M / 21%)
– Other Clubs ($5.8 M / 13%)
– All Other (16 subcategories)($18.1 M / 39%)
Increases school and DOR administrative duties
61JLBC
Public School Extracurricular Activity Fee Credit– Laws 2011, Chapter 195 Permits Limited Spending on
“Short Term Capital Items”
Schools may use up to 50% of unencumbered contributions received prior to FY11 to buy “short-term capital items”
Must report spending annually to JLBC
Most FY11 spending ($1.6 M total) was for technology, furniture and equipment:
– Technology ($753K / 47%)
– Furniture & Equipment ($462K / 29%)
– Instructional Aids ($212K / 13%)
– Textbooks($144K / 9%)
– Library Resources ($43K / 2%)
62JLBC
Public School Extracurricular Activity Fee Credit – Potential Performance Measures
Student participation in extracurricular activities and character education programs
Funding by type of activity
63JLBC
Solar Hot Water Heater Plumbing Stub Outsand Electric Vehicle Recharge Outlets
Tax Credit
65JLBC
Solar Hot Water Heater Plumbing Stub Outs and Electric Vehicle Recharge Outlets Tax Credit– Summary
Cost – $1,600 in tax year 2009– 16 claims averaging $98 a claim
Purpose – none in statute
Complexity – simple to use and administer
Performance Measures – none in statute
66JLBC
Solar Hot Water Heater Plumbing Stub Outs and Electric Vehicle Recharge Outlets Tax Credit– Description of the Credit
Corporate and individual income tax credits for:• Stub outs, or plumbing fixtures, designed to
accommodate solar water heater installations• Electric vehicle recharge outlets
Corporate credit not claimed since 2000
Credit of up to $75 for the installation of qualifying devices
Non-refundable with 5-year carry-forward
67JLBC
$9.7
$1.6 $0.0 $0.0
$5.7
$11.6
$7.8
$3.3
$0.0$0.5 $0.9$0.0
35
15
2
17
22
6
11
18
0
16
0 0
$0
$2
$4
$6
$8
$10
$12
$14
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *2011
Cred
it U
sed
($ T
hous
ands
)
0
5
10
15
20
25
30
35
40
Num
ber
of C
laim
ants
Credits Used # of Claimants
Solar Hot Water Heater Plumbing Stub Outs and Electric Vehicle Recharge Outlets Tax Credit– Amount of Credits Used & Number of Claimants
* Preliminary Numbers
68JLBC
Solar Hot Water Heater Plumbing Stub Outs and Electric Vehicle Recharge Outlets Tax Credit– Recent Trends
Solar water heater units are becoming less popular as photovoltaic units become less expensive and more efficient
Demand for new electric vehicle models remains well below demand for non plug-in hybrid vehicles
Other forms of renewable energy increasingly compete for investment (wind, biomass, biofuels)
69JLBC
Solar Hot Water Heater Plumbing Stub Outs and Electric Vehicle Recharge Outlets Tax Credit– Economic Benefits & Performance Measures
No economic development at this level of credit usage
Cost of administering performance measures exceeds the tax expenditure