BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1827
                                                                  Page  1

          Date of Hearing:  June 26, 2006

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                 Johan Klehs, Chair

                    SB 1827 (Migden) - As Amended:  June 14, 2006

                                      VOTE ONLY

          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  








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               taxable year where a joint return has already been filed  
               after the original filing period to file a return has  
               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  








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               household" if the individual is unmarried at the end of the  
               tax year (or treated as unmarried) and provides a home for  
               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.








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          2)Provides that earned income will not be treated as community  
            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  








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            returns and this bill would allow domestic partners to file a  
            joint state income tax return; the department anticipates a  
            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  








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            filing a joint return.  This bill, according to the  
            supporters, will make a significant difference in the lives of  
            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








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          Lambda Letters Project
          L.A. Gay & Lesbian Center
          San Francisco AIDS Foundation
          San Francisco LGBT Community Center
          State Bar of California, Taxation Section
          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