BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
36 (Perea)
Hearing Date: 3/17/2011 Amended: 2/18/2011
Consultant: McKenzie, Mark Policy Vote: G & F: 8-0
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BILL SUMMARY: AB 36 would make changes to state tax and
unemployment insurance laws to conform to specified provisions
enacted by federal healthcare reform legislation. Specifically,
this bill would conform to federal provisions that allow for an
exclusion or deduction from taxable income of costs to extend
health benefits to adult children under the age of 27, as
follows:
1) Excludes from gross income the value of
employer-provided health coverage under an accident or
health plan for an employee's adult child who is under the
age of 27 as of the end of the tax year. This exclusion
also applies to any reimbursements for medical expenses
provided under the under the accident or health plan and
reimbursements provided by an employer under flexible
spending arrangements.
2) Allows self-employed persons to deduct from taxable
income the cost of healthcare premiums for an adult child
who is under the age of 27 as of the end of the tax year.
3) Excludes from gross income the value of any health
benefits provided for the adult child of a member of a
tax-exempt non-profit voluntary employees' beneficiary
association (VEBA), if that child is under the age of 27 as
of the end of the tax year.
4) Exclude the value of employer-provided health benefits
for an adult child of an employee from the definition of
wages for purposes of employment taxes (Unemployment
Insurance, Employment Training Tax, and Disability
Insurance).
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Tax revenue reduction $4,800 $38,000 $35,000 General*
Employment tax revenue unknown, minor impact
Special**
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* $40 million in 2013-14, $44 million in 2014-15 and ongoing.
**Unemployment Insurance Fund and Disability Insurance Fund
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
In March of 2010, the U.S. Congress enacted, and President Obama
signed, comprehensive federal healthcare reform legislation: The
Patient Protection and Affordable Care Act (Public Law 111-148,
March 23, 2010), and The Health Care and Education
Reconciliation Act of 2010 (Public Law 111-152, March 30, 2010).
One provision of the healthcare acts requires group health
plans and health insurance issuers that offer coverage for
dependents to make coverage available for an unmarried adult
child up to age 26. Corresponding tax-related provisions
provide a general
Page 2, AB 36 (Perea/Blumenfield)
exclusion or deduction from taxable income for costs associated
with providing health benefits for an adult child who has not
turned 27 by the end of the tax year, as specified. Prior to
the enactment of the federal healthcare reform legislation, the
Internal Revenue Code (IRC 152) defined a dependent as a
qualifying child under the age of 19 or under the age of 24 if
the child is a full time student, for purposes of providing an
income exclusion or deduction for health benefits provided to
children.
For purposes of taxation of healthcare benefits, existing state
law conforms to federal law that was in effect as of January 1,
2009 (as specified in IRC 152). Thus, despite recently-enacted
legislation, SB 1088 (Price), Chapter 660 of 2010 that requires
group health plans and health insurance issuers to make
dependent coverage available for children up to age 26, state
tax law does not conform to federal law providing favorable tax
treatment for benefits provided to adult children up to age 27.
Staff notes that AB 1178 (Portantino), which was held on this
Committee's Suspense File last year, included the provisions of
this bill that would allow for an exclusion or deduction from
gross income for health benefits extended to adult children
under the age of 27.
Generally, when changes are made to federal tax laws, state
legislation is needed to conform to those federal changes. The
general purpose of conformity is to simplify the preparation of
California income tax returns and the administration of state
income tax laws. Conformity changes can also have significant
impacts on state revenues. In the case of AB 36, the Committee
must weigh the revenue impacts of conformity in a year with
substantial state budget deficits against the burdens on
taxpayers and employers, as well as increased tax compliance
costs, related to not conforming to these provisions of the
federal healthcare reform laws. The Franchise Tax Board (FTB)
reports a high volume of calls from employers seeking technical
assistance related to differences in withholding requirements
for purposes of federal and state taxes since California does
not currently conform to the federal tax laws on this subject.
The Franchise Tax Board (FTB) estimates a General Fund revenue
loss of $4.8 million in fiscal year 2010-11, $38 million in
2011-12, $35 million in 2012-13, $40 million in 2013-14, $44
million in 2014-15. This estimate represents tax revenue that
would not be collected due to the exclusions and deductions from
income that would occur with the passage of this bill.
California has historically conformed to federal exclusion and
deduction laws related to the healthcare benefits, and FTB has
never collected income tax on the value of health benefits
provided for eligible children. Staff notes that since FTB does
not have historical data related to the collection of taxes on
the value of dependent healthcare benefits, there could be a
significant margin of error in their estimate. AB 36 would
exclude the value of health benefits provided to adult children
retroactively to 2010. Because taxpayers are currently filing
their 2010 taxes, most would have to file an amended return to
take advantage of the exclusion for 2010. Any refunds
associated with amended returns would be made in the 2011-12
fiscal year, but would accrue back to 2010-11 for accounting
purposes.
The Employment Development Department indicates that extending
the exclusion of employer-provided health benefits provided for
children up to age 27 from wages for purposes of employment
taxes would result in an unknown, but minor loss of revenue for
the Unemployment Insurance Fund and the Disability Insurance
Fund.