AB 209
Page 1
Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
ABPCA Bill Id:AB 209 (
Author:Patterson) – As Introduced Ver:February 2, 2015
SUSPENSE
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Tax deductions: 529 college savings plans.
SUMMARY: Allows a deduction under the Personal Income Tax Law for contributions made to a qualified tuition program (QTP), as specified. Specifically, this bill:
1) Allows, for taxable years beginning on or after January 1, 2015, a deduction equal to the lesser of:
a) The amount contributed by a "qualified taxpayer" during the taxable year to a QTP under Internal Revenue Code (IRC) Section 529, as modified by state law; or,
b) $3,000 in the case of a taxpayer who is single or is a married individual filing a separate return, or $6,000 in the case of a taxpayer who is a married individual filing a joint return or an individual filing a head of household return.
2) Defines a "qualified taxpayer" as an individual who, on behalf of a beneficiary, contributes money to a QTP and meets all of the other applicable requirements under the Internal Revenue Code (IRC) Section 529, as modified by state law.
3) Provides that the deduction shall not be subject to the 2% floor that generally applies to miscellaneous itemized deductions.
4) Provides that the deduction shall be taken with respect to the taxable year in which the contribution is made.
5) Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
1) Allows individuals to deduct either a fixed amount, indexed for inflation, known as the standard deduction, or the amount of a taxpayer's itemized deductions, whichever is greater. Certain expenses, such as medical expenses, charitable contributions, interest, and taxes, are deductible as itemized deductions. The law also provides for "miscellaneous itemized deductions", which are those itemized deductions not specifically listed in IRC Section 67(b). As a general rule, miscellaneous itemized deductions are allowed only to the extent that the aggregate of such deductions exceeds 2% of adjusted gross income.
2) Provides tax-exempt status to QTPs. QTPs are programs established and maintained by a state (or by an eligible education institution) under which a person may purchase tuition credit or make cash contributions to meet the qualified higher education expenses of a designated beneficiary. Contributions to a QTP cannot exceed the amount necessary to provide for the beneficiary's qualified higher education expenses. Distributions to a beneficiary are excluded from income. However, contributions made to a QTP are not deductible.
EXISTING STATE LAW:
1) Conforms to IRC Section 529 as of the "specified date" of January 1, 2009, with certain state modifications, including a modification to the 10% tax on excess distributions to instead be an additional tax of 2.5% for state purposes.
2) Provides its own IRC Section 529 QTP, known as the Golden State Scholarshare Trust (ScholarShare). ScholarShare enables taxpayers to save for college by putting money in tax-advantaged investments. After-tax contributions allow earnings to grow tax-deferred, and disbursements, when used for tuition and other qualified expenses, are federal and state tax-free. Distributions in excess of qualified higher education expenses incurred for the beneficiary, the portion of the excess that is treated as earnings generally is subject to income tax and an additional 2.5% tax for state purposes.
3) Limits the total amount of contributions to a beneficiary to $371,000. Accounts that have reached the limit may continue to accrue earnings.
FISCAL EFFECT: The Franchise Tax Board (FTB) estimates general fund revenue loss of $310 million in fiscal year (FY) 2015-16, $200 million in FY 2016-17, and $210 million in 2017-18.
COMMENTS:
1) Author's Statement: The author has provided the following statement in support of this bill:
Many families do not meet the income threshold for financial aid yet do not make enough money to comfortably pay for higher-education expenses. Over 30 other states – including New York – have recognized this and allow tax deductions for those who are able to contribute to their children's 529 savings plans.
However, there is no tax relief for parents, grandparents or others who have been able to save a little extra money to put towards their student's college education. In an environment where working families are struggling to get ahead, granting a tax deduction for contributions will help these families plan ahead and make it easier to pay for college.
Over the past 20 years, in-state tuition at both The University of California and the California State University has more than tripled, according to a recent Public Policy Institute of California report. In the California State University system alone, tuition increased from $1,428 in 2001/02 to $5,472 effective fall of 2011. Parents need more tools to meet the increased demands.
Unfortunately, California is not one of the states that have opted to provide relief for working families and parents through a state tax deduction for ScholarShare contributions.
As the cost of higher education increases, it is important to provide parents with the financial tools and incentives necessary to help their children save for college. AB 209 will provide tax relief in the form of a tax deduction for contributions made to a ScholarShare account of up to $3,000 for individual tax filers and up to $6,000 for married individuals filing a joint return.
2) Arguments in Support: The Financial Services Institute argues that "[a]s educational expenses continue to rise, it becomes increasingly important that families engage in long-term planning and saving for their children's education. To help in this endeavor, "529" savings plans have been established in the [IRC]. This bill creates a modest tax break to help make such important savings more affordable. By creating this incentive, the State of California is clearly sending the message that education is a priority and that it values the importance of long-term planning for achieving educational goals."
3) Arguments in Opposition: The California Tax Reform Association states that this bill "provides a break for those who already can save for college and most likely can afford college. The 529 program appears to benefit those who are least in need of help in covering college costs." Opponents further state that the "$300 million cost estimated by the FTB represents a major loss to the general fund. To the extent this program is directed at higher education costs, that $300 million could be used in a number of ways – lowering tuition, improving CalGrants, and generally improving higher education access. Instead, this bill would help those least in need and not help those most in need, since it requires a level of savings that low-income people cannot provide."
4) Conformity Issues: As noted above, California conforms to IRC Section 529, with slight modifications. In general, state conformity with federal law promotes greater simplicity and eases administration of complex tax laws. The Federal Government does not provide a deduction for contributions to a 529 plan. By allowing a deduction for contributions made to QTPs, this bill would bring California out of conformity with federal law.
5) Favoring Higher Income Earners: According to a report by the Government Accountability Office (GAO), less than 3% of families have 529 or Coverdell plans and those who do tend to be wealthier. (Higher Education: A Small Percentage of Families Save in 529 Plans, GAO, Dec. 2012.) Specifically, families with 529 and Coverdell plans had a median income of $142,000 per year and a median financial asset value of about $413,500. It was also said that families with 529 plans tend to have higher levels of education, which may increase the likelihood that their children will attend college.
The report outlined several reasons why low-income families participate far less in 529 plans, such as a lack of awareness, confusion as to how the plan works, and differences among the various 529 plans. However, 68% of those surveyed stated a lack of money as the major reason for not participating. In the end, it is difficult to encourage families to save for college when they have little or no disposable income.
6) High Cost of a Formal Education: State support for higher education has been dramatically reduced because of budget crises over the last 10 years. According to a study by the Public Policy Institute of California, in 2010-11, California spent $1.6 billion less in higher education than it did 10 years earlier, adjusted for inflation. (Hans Johnson, Defunding Higher Education: What are the Effects on College Enrollment, Public Policy Institute of California, May 2012.) The provisions of this bill are meant to counteract the skyrocketing costs of an education by providing a credit for contributions made to qualified tuition programs. Instead of forgoing General Fund revenues that predominantly favor higher income earners, these funds may be better utilized if directly appropriated to the state's University of California, California State University, and Community College system.
7) Further Incentivizing Behavior that Already Occurred: Generally, tax credits and deductions are provided to encourage socially beneficial behavior that likely would not occur absent a financial incentive. Existing law already encourages families to save for college by allowing earnings on after tax contributions to 529 plans to grow tax-deferred. Additionally, disbursements from 529 plans are federal and state tax-free when used for tuition and other qualified expenses. Because existing law already provides incentives to save for a child's college education, it is unclear as to why an additional incentive, such as the deduction provided for under this bill, is needed. Furthermore, because this bill applies to taxable years beginning on or after January 1, 2015, this bill would allow a deduction for behavior that had already taken place before this bill's enactment. The Committee may wish to consider the policy implications of providing such an incentive.
8) How is a tax expenditure different from a direct expenditure? As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. For this reason, the author may wish to include a five-year sunset date for this deduction, to provide the opportunity for future legislative review.
9) FTB concerns: FTB has raised the following implementation concerns:
This bill would allow a qualified taxpayer to make a contribution to a Section 529 plan, and generate a deduction even if the funds are immediately withdrawn. Additionally, the deduction would be allowed even if the withdrawal was nonqualifying. If this is contrary to the author's intent, the author may wish to amend the bill to provide a recapture or disallowance provision.
This bill is silent on whether amounts transferred or rolled over from another state's Section 529 Plan would qualify for the deduction and how the department could verify that a contribution was made to a qualified tuition program. The lack of guidance could cause disputes between taxpayers and the department and require the department to open up an audit in order to verify the amount of contributions made by taxpayers.
10) Related Legislation:
a) AB 17 (Bonilla) would provide a credit in the amount of 20% of the contributions made to a QTP, not to exceed $500 per return. AB 17 will be heard by this Committee today.
11) Prior Legislation:
a) AB 1956 (Bonilla), of the 2013-14 Legislative Session, would have provided a credit in the amount of 20% of the contributions made to a QTP, not to exceed $500 per return. AB 1956 was held in the Assembly Appropriations Committee.
b) AB 675 (Gilmore), of the 2009-10 Legislative Session, would have allowed a deduction for contributions made to a QTP. AB 675 was held in this Committee.
c) AB 819 (Runner), of the 2007-08 Legislative Session, would have allowed an above-the-line deduction for contributions made by a qualified taxpayer to a QTP. AB 819 was held in this Committee.
d) SB 643 (Florez), of the 2007-08 Legislative Session, would have allowed a deduction for contributions made to a QTP. SB 643 was held in the Senate Committee on Revenue and Taxation
REGISTERED SUPPORT / OPPOSITION:
Support
Associate Students, Inc.
California Communities United Institute
Clovis Unified School District
Securities Industry and Financial Markets Association
25 individuals
Opposition
American Federation of State, County and Municipal Employees
California Tax Reform Association
Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098