BILL ANALYSIS SB 1827 Page 1 Date of Hearing: June 19, 2006 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Johan Klehs, Chair SB 1827 (Migden) - As Amended: June 14, 2006 Majority vote. Fiscal Committee. SENATE VOTE : 25-13 SUBJECT : Personal Income Tax: Domestic partners SUMMARY : Requires registered domestic partners to file joint or separate state tax returns, as specified. Specifically, this bill : 1)Contains legislative declarations and findings on the treatment of registered domestic partners with respect to state income taxes. 2)Requires registered domestic partners to either file (a) a joint state income tax return, or (b) a separate state income tax return by applying the standards applicable to spouses who file separately under federal income tax law. 3)Provides a rule to determine the application of limits based on adjusted gross income for domestic partners by combining the amounts reflected as adjusted gross income on the federal income tax return of each domestic partner. 4)Revises existing provisions of law to treat registered domestic partners as spouses for purposes of filing status as follows: a) If couples were registered as domestic partners as of the close of the taxable year, they may file separate returns if either partner was either an active member of the Armed Forces or any auxiliary branch thereof, or was a nonresident for the entire taxable year who had no income from a California source. b) Domestic partners may not file separate returns for any taxable year where a joint return has already been filed after the original filing period to file a return has SB 1827 Page 2 expired. c) No joint return can be made if the domestic partners have different taxable years, subject to exception. d) Extends to registered domestic partners the same rules with respect to filing status that are applicable in the event of the death of one or both spouses. 5)Applies the California community property rules to registered domestic partners in the same manner as married couples. EXISTING FEDERAL LAW specifies: 1)Five different filing status choices for federal tax purposes. The appropriate filing status to select is based on the following rules: a) An individual may choose the filing status "married filing jointly" if any of the following apply: i) An individual is married at the end of the taxable year, even if that individual did not live with their spouse at the end of the year; ii) An individual whose spouse died during the taxable year, and the individual did not remarry during that same taxable year; or iii) An individual was married at the end of the taxable year and the spouse died in the next taxable year but before the tax return is filed. b) An individual may choose the filing status "married filing separately" if the individual is married and chooses to file a separate tax return from the spouse. Each spouse reports on separate returns half of the couple's community income and the total amount of the spouse's separate income. Generally, an individual choosing this filing status will pay more tax. c) An individual may choose the filing status "head of household" if the individual is unmarried at the end of the tax year (or treated as unmarried) and provides a home for SB 1827 Page 3 certain individuals for more than half of the tax year. d) An individual shall choose the filing status "single" if the individual was any of the following: i) Never married; ii) Legally separated according to state law, under a decree of divorce or separate maintenance; or iii) Widowed before the beginning of the tax year and did not marry during the tax year. e) An individual may choose the filing status "qualifying widow(er) with dependent child" if all of the following apply: i) The spouse died in either of the prior two taxable years; ii) The widow(er) has a child or stepchild whom is claimed as a dependent; iii) The child lived with the widow(er) for all of the taxable year, except for temporary absences for special circumstances; iv) The widow(er) paid over half the cost of keeping up the home; and v) The widow(er) could have filed a joint return with the spouse in the year of death. 2)That registered domestic partners only have the filing status choices of "single" or "head of household." EXISTING LAW : 1)Requires an individual to use the same filing status as that used on the federal income tax return for the same taxable year; therefore, registered domestic partners only have the filing status choices of "single" or "head of household" for state purposes. 2)Provides that earned income will not be treated as community SB 1827 Page 4 property for state income tax purposes for registered domestic partners. 3)Specifies that registered domestic partnerships include same-sex partnerships and opposite-sex partnerships in which one or both partners are age 62 or older and receive Social Security benefits. 4)Provides that registered domestic partners shall have the same rights, protections, and benefits and shall be subject to the same responsibilities, obligations, and duties as imposed upon a spouse. FISCAL EFFECT : Franchise Tax Board (FTB) staff estimate a revenue loss of $8 million in fiscal year (FY) 2007-08, $9 million in FY 2008-09, and $10 million in FY 2009-10. Proposition 98 Fiscal Effect : Based upon the anticipated FY 2006-07 Budget, this bill will have no revenue impact on funding for K-14 schools in FY 2006-07. Committee staff estimate that the revenue loss to K-14 school funding will be $4.32 million in FY 2007-08, and between $3.2 million and $4.8 million in FY 2008-09. COMMENTS : 1)The author comments, "Under current law, married couples have more favorable tax treatment than domestic partners. Domestic partners share the same expenses as married couples and deserve the same tax treatment." 2)FTB staff note that automated systems are used to compare taxpayer return information to files received from other state and federal agencies, including the Internal Revenue Service (IRS). These automated systems search through IRS records by Social Security Number and name and compares information on the taxpayer's federal income tax return to the information on the California income tax return. Current law generally requires the filing status of the taxpayer for the state tax return to be the same filing status as on the federal return; the information systems have the ability to verify joint returns based on the primary taxpayer's information. Domestic partners are required to file separate federal income tax returns and this bill would allow domestic partners to file a joint state income tax return; the department anticipates a SB 1827 Page 5 significant delay in the ability of the automated systems to compare taxpayer information. The systems would be required to process the federal information more than once as the systems search for the primary taxpayer and the secondary taxpayer individually because each taxpayer would have a separate return at the federal level. The systems would need additional programming and testing prior to being operational. 3)In the case where a "head of household" filer and a "single" filer combine tax returns to file jointly there could be an increase in tax. This is due to the fact that we provide incentives for head of households meant to mitigate the tax burden associated with a single taxpayer with multiple dependents. This bill would negate that incentive. It is important to note that there is no marriage penalty in California for joint returns. 4)The Secretary of State estimates that the total number of registered domestic partners in California will be 40,950 by December 2007. 5)FTB staff estimate that of all tax returns associated with this bill, 59% would see a reduction in taxes; 29% would experience no change in taxes; and 12% would experience an increase in taxes. 6)Committee staff note that a different filing status for domestic partners on their state and federal returns could lead to confusion related to the federal deduction of state tax and the inclusion in income of a refund previously received for this deduction. There might not be a direct match between state and federal reported income, leading to an increase in federal inquiries or audits. 7)According to supporters of this bill, there have been unfair financial burdens on domestic partners and their families, especially those they bear under the state's tax laws. After the passage of the comprehensive domestic partnership law enacted in 2003, registered domestic partners have assumed mutual financial responsibility of each other on the same terms as spouses. Yet, the state's laws deny them equal treatment with respect to state income taxes denying the convenience and financial benefits that sometimes come with filing a joint return. This bill, according to the supporters, will make a significant difference in the lives of SB 1827 Page 6 thousands of same-sex couples in the state and will be a statement of respectful inclusion for all. 8)Opponents assert that the tax benefit that is conferred to domestic partners under this bill is the last marital benefit still reserved for married couples. They comment that the benefits of marriage have been largely transferred to same-sex relationships without the consent of California voters, despite the passage of Proposition 22, which defined marriage as between one man and one woman. Opponents also comment that this bill could create confusion with federal law - leading to additional taxpayer expense. 9)AB 205 (Goldberg), Chapter 421, Statutes of 2003, as introduced on January 28, 2003, allowed domestic partners to file personal income tax returns as either (a) married filing joint, or (b) married filing separate. In addition, the bill, as chaptered, made changes to various California laws regarding domestic partners, including the creation of community property rights. It also added language that required the same filing status on a state income tax return as used on the federal income tax return and provided that earned income is not community property for state income tax purposes. The provisions of joint filing were removed from the bill. AB 25 (Migden), Chapter 893, Statutes of 2001, allowed several existing taxpayer benefits for medical expenses and health insurance benefits to include a taxpayer's domestic partner and a domestic partner's dependents. 10)For tax periods ending on or after May 16, 2004, Massachusetts recognizes the right of same-sex couples to be married. As a consequence, same-sex spouses that marry shall file Massachusetts income tax returns as married filing joint or married filing separate. Massachusetts is not a community property state. REGISTERED SUPPORT / OPPOSITION : Support Attorney General Bill Lockyer Equality California (sponsor) Gay and Lesbian Alliance of the Central Coast Lambda Letters Project L.A. Gay & Lesbian Center SB 1827 Page 7 San Francisco AIDS Foundation San Francisco LGBT Community Center State Controller Steve Westly State Treasurer Phil Angelides Stonewall Democratic Club of Greater Sacramento Opposition California Catholic Conference Concerned Women for America Analysis Prepared by : Sabrina Landreth / REV. & TAX. / (916) 319-2098