BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 242 HEARING: 7/6/11
AUTHOR: Committee on Revenue & TaxationFISCAL: Yes
VERSION: 6/29/11 TAX LEVY: No
CONSULTANT: Grinnell
FEDERAL HEALTH CARE CONFORMITY BILL
Conforms state law to changes made by 2010 federal health
care reform.
Background and Proposed Law
I. Tax Conformity. Current state law provides modified
conformity of California's Revenue and Taxation Code to the
Internal Revenue Code and specified public laws.
Currently, California conforms to specified federal laws as
of the "specified date" of January 1, 2009 for federal laws
enacted after January 1, 2005 and before January 1, 2009
(SB 401, Wolk, 2010). Assembly Bill 242 conforms to the
following federal changes from the 2010 Patient Protection
and Affordable Care Act (PPACA), enacted by Congress:
Current federal law provides that Cafeteria plans and
certain qualified benefits are subject to nondiscrimination
requirements to prevent discrimination in favor of
highly-compensated individuals as to eligibility for
benefits and to actual contributions and benefits provided.
There are also rules to prevent the provision of
disproportionate benefits to key employees.
Assembly Bill 242 conforms to the federal change under the
PPACA to provide small employers a safe harbor from the
nondiscrimination requirements of a cafeteria plan. The
safe harbor would apply to taxable years beginning on or
after January 1, 2011.
Current federal law generally does not allow benefits
offered under the new "American Health Benefit Exchanges"
to be part of a cafeteria plan. However, there is an
exception for small businesses.
AB 242 conforms to the federal exception that allows
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benefits offered under a Small Business Health Options
Program to be part of a cafeteria plan beginning on or
after January 1, 2014.
Federal law generally provides that gross income includes
all income from whatever source derived. Exclusions from
income are provided, however, for certain health care
benefits. Additionally, under the general welfare
exclusion doctrine, certain payments made to individuals
are excluded from gross income. New federal law (IRC
Section 139D) allows an exclusion from gross income for the
value of specified Indian tribe health care benefits.
California currently exempts from income tax income
received by an Indian tribal member who lives in that
tribe's Indian country and such income is sourced in the
tribal member's Indian country. In general, California
conforms to the general welfare doctrine and the exclusion
of certain health care benefits from gross income. The
bill conforms to this provision.
Gross income generally includes the discharge of
indebtedness of the taxpayer. Under an exception to this
general rule, gross income does not include any amount from
the forgiveness of certain student loans, provided that the
forgiveness is contingent on the student's working for a
certain period of time in certain professions for any of a
broad class of employers. The new federal law (under IRC
Section 108) modifies the gross income exclusion for
amounts received under the National Health Service Corps
loan repayment program or certain state loan repayment
programs to include any amount received by an individual
under any state loan repayment or loan forgiveness program
that is intended to provide for the increased availability
of health care services in underserved or health
professional shortage areas (as determined by the state).
California in general conforms to IRC Section 108 and to
federal law relating to exemption of student loan
forgiveness. The measure conforms to this change.
Consistent with federal law, California provides an
exclusion from the gross income of an employee for
qualified adoption expenses paid or reimbursed by an
employer under an adoption assistance program. Beginning
on or after January 1, 2010 the maximum exclusion is
increased to $13,170 per eligible child. California does
not conform to the federal adoption credit; instead
California provides its own credit for adoption costs. The
AB 242 -- 6/29/11 -- Page 3
bill conforms to this provision.
II. BOE Omnibus. AB 242 enacts several technical changes
to the Civil Code and Sales and Use Tax Law sponsored by
the State Board of Equalization (BOE):
Currently, BOE must reimburse a manufacturer for an amount
equal to the sales tax included in restitution under
California's Lemon Law. Assembly Bill 242 amends the Civil
Code to allow the BOE to reimburse a manufacturer of a new
motor vehicle for the use tax refunded to a buyer or lessee
when the new motor vehicle is reacquired by the
manufacturer pursuant to California's "Lemon Law."
Retailers and lenders must file an electronic form with the
BOE designating which party is entitled to claim the bad
debt loss. The bill removes the requirement remove the
requirement in the case of accounts held by a lender that
have been found worthless and written off by the lender.
Only repair facilities licensed by the county in which it
is located is able to qualify the owner for the exception
to the rebuttable presumption that any vehicle, vessel, or
aircraft that is brought into California within 12 months
of purchase was acquired for use in California. The
measure makes a technical change to the statutes.
The sales tax is imposed on retailers for the privilege of
selling tangible personal property (TPP), absent a specific
exemption. The tax is based upon the retailer's gross
receipts from TPP sales in this state. Similarly, state
law imposes the use tax on persons for the storage, use, or
other consumption in this state of TPP purchased from any
retailer. The bill deletes obsolete reporting requirements
regarding the implementation of the racehorse breeding
stock and farm machinery exemptions and implementing
regulations under both the sales and the use tax.
State law allows a taxpayer to file a claim for
reimbursement of bank charges and third party check charges
incurred by the taxpayer as a result of an erroneous levy
or notice to withhold. The bill would also allow a
reimbursement as a result of an erroneous processing action
or collection action by the BOE.
The BOE and the State Controller's Office (SCO) collect
orders of restitution awarded to the BOE in criminal
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proceedings in the same manner as tax liabilities. AB 242
provides that orders of restitution are enforceable in the
same manner as if the order were a civil judgment. BOE's
orders of restitution may be collected either (a) by
referring the restitution order to the Franchise Tax Board
(FTB) for collection under the Court-Ordered Debt (COD)
program, or (b) as a civil money judgment. When the BOE
and the SCO collect an order of restitution as a civil
money judgment, both agencies must use the collection
remedies available to any creditor under the Code of Civil
Procedure which require obtaining a levy or a lien.
State Revenue Impact
Combining the losses from the income tax conformity
provisions of the bill with the BOE omnibus elements yields
revenue losses of $1,950,000 in 2010-11, $713,456 in
2011-12, gains of $706,435 in 2012-13, and 2013-14.
According to FTB, AB 242's income tax conformity provisions
have the following revenue effects:
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Except for the Order of Restitution provisions, this
measure would have a negligible impact on state and local
revenues. BOE anticipates additional restitution amounts
of $1,136,435 annually.
Comments
1. Purpose of the bill . According to the author, 'The
purpose of this bill is to conform California's income tax
laws to several tax-related provisions of the federal
health care acts enacted in March of 2010. AB 242 is not a
health care reform bill, but a tax-conformity bill that
would enable taxpayers to easily comply with
federally-mandated health care law. This bill is a "good
government" measure that is intended to reduce taxpayers'
compliance costs. It represents the Legislature's most
recent attempt to simplify the tax code for both taxpayers
and practitioners by narrowing the gap between the federal
and state tax laws. This bill also implements various
technical and non-controversial tax proposals sponsored by
the State Board of Equalization. These proposals are
AB 242 -- 6/29/11 -- Page 5
designed to streamline tax administration and to promote
clarity in the tax code."
2. Fitting in . California does not automatically conform
to changes in federal law, except under specified
circumstances. Instead, the Legislature must affirmatively
conform to federal changes. Conformity legislation is
introduced either as individual tax bills to conform to
specific federal changes or as one omnibus bill to conform
to the federal law as of a certain date with specified
exceptions. State tax law did not conform to changes made
in federal law after 2005 until last year, when the
Legislature enacted a bill conforming to changes through
January 1, 2009 (SB 401, Wolk). Conformity is difficult
despite its advantages and reduced tax compliance costs,
because the state may disagree with Congress's tax policy
changes, and conformity can also significantly impact state
revenues. AB 1423 only conforms to one specific federal
act, and the Committee will also hear
AB 242 (Perea) at its July 6th hearing, which conforms
state law to change made last year as part of health care
reform efforts.
3. Even the losers get lucky sometimes . In November,
2010, voters enacted Proposition 26, which changed the
rules for the Legislature when enacting bills that increase
the proceeds of state taxes. Before Proposition 26,
Legislative Counsel interpreted Section III of Article
XIIIA of the State Constitution to allow the Legislature to
enact a bill by majority vote if it lost revenue in the
first year and over the first three years, regardless of
whether it increased a tax on any one taxpayer.
Proposition 26 amended that part of the Constitution to
instead provide that whenever any taxpayer pays a higher
tax, then a 2/3 vote is required. As such, Legislative
Counsel today keys any tax conformity bill that contains
both increases and decreases a 2/3 vote. Last year's AB
1178 (Portantino) provided almost all of the changes
necessary for state law to conform to federal tax changes
made by federal health care reforms, and was keyed a
majority vote because its losses exceeded its gains.
However, AB 242 contains only tax conformity elements that
lose revenue to ensure its majority vote enactment.
4. Mishmash . When the Assembly passed AB 242, its
provisions solely related to income tax conformity. The
June 30th amendments added the BOE omnibus provisions
AB 242 -- 6/29/11 -- Page 6
formerly in ABs 1423 and 1424.
Assembly Actions
Assembly Revenue and Taxation 8-0
Assembly Appropriations 17-0
Assembly Floor 76-0
Support and Opposition (6/30/11)
Support : BIOCOM; California Taxpayers Association;
California Society of Enrolled Agents; AFSCME; California
Association of Health Underwriters.
Opposition : Unknown.