BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 362
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          ASSEMBLY THIRD READING
          AB 362 (Ting)
          As Amended  May 21, 2013
          Majority vote.  Tax levy 

           REVENUE & TAXATION  7-2         APPROPRIATIONS      12-5        
           
           ----------------------------------------------------------------- 
          |Ayes:|Bocanegra, Gordon,        |Ayes:|Gatto, Bocanegra,         |
          |     |Mullin, Nestande, Pan, V. |     |Bradford,                 |
          |     |Manuel Pérez, Ting        |     |Ian Calderon, Campos,     |
          |     |                          |     |Eggman, Gomez, Hall,      |
          |     |                          |     |Ammiano, Pan, Quirk,      |
          |     |                          |     |Weber                     |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Dahle, Harkey             |Nays:|Harkey, Bigelow,          |
          |     |                          |     |Donnelly, Linder, Wagner  |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           SUMMARY  :  Excludes from state gross income compensation received  
          from an employer for the additional federal income tax liability  
          incurred by the employee because federal income tax law does not  
          consider the employee's same-sex spouse or domestic partner to  
          be the employee's spouse, including any compensation for the  
          additional federal income tax liability incurred with respect to  
          those amounts.  Specifically,  this bill  :  

          1)Excludes from state gross income compensation received from an  
            employer for the additional federal income tax liability  
            incurred by the employee because federal income tax law does  
            not consider the employee's same-sex spouse or domestic  
            partner to be the employee's spouse for purposes of the  
            federal exclusion of employer-provided health coverage.
                                    
          2)Excludes from state gross income any compensation for the  
            additional federal income tax liability incurred with respect  
            to the original compensation amount.   
                                  
          3)Takes immediate effect as a tax levy.

          4)Sunsets these provisions on January 1, 2019. 
                                                       
           EXISTING FEDERAL LAW :








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          1)Excludes from federal gross income health insurance provided  
            by an employer to an employee, an employee's dependents, and  
            an employee's opposite-sex spouse.  


          2)Includes in an employee's federal gross income health  
            insurance provided by an employer to a domestic partner, a  
            same-sex spouse, or the domestic partner's or same-sex  
            spouse's dependents.  


          3)Includes in federal gross income any amount paid by another on  
            behalf of a taxpayer to discharge a liability of the taxpayer,  
            including a tax liability.  


           EXISTING STATE LAW  :


          1)Excludes from state gross income health insurance provided by  
            an employer to an employee, an employee's dependents, an  
            employee's spouse, or an employee's domestic partner,  
            regardless of whether the employee's spouse or domestic  
            partner is the same or opposite sex of the employee.  


          2)Includes in state gross income any amount paid by another on  
            behalf of a taxpayer to discharge a liability of the taxpayer,  
            including a tax liability. 


           FISCAL EFFECT  :  The Franchise Tax Board (FTB) has provided the  
          following revenue estimate:


             --------------------------------------------------------------- 
            |                                                               |
            |    For Taxable Years Beginning on or after January 1, 2013    |
            |                                                               |
            |             Assumed Enactment after June 30, 2013             |
            |                                                               |
            |                                                               |
            |                                                               |








                                                                  AB 362
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            |                                                               |
             --------------------------------------------------------------- 
            |-------------+----------------+----------------+----------------|
            |Fiscal Year  |    2013-14     |    2014-15     |    2015-16     |
            |-------------+----------------+----------------+----------------|
            |Amount       |    -$80,000    |    -$60,000    |-$70,000        |
            |             |                |                |                |
             ---------------------------------------------------------------- 

           COMMENTS  :   

          1)The author has provided the following statement in support of  
            this bill:

               At the heart of this issue is a question of fairness  
               for same-sex couples.  The federal policy to tax the  
               health care benefits of same-sex couples and same-sex  
               headed families is discriminatory, and the last thing  
               the state of California should do is make it harder to  
               remedy the injustice by taxing the reimbursement of  
               these costs.  This legislation will expand on, and  
               strengthen, California's rich history of  
               non-discrimination.

          2)Proponents state:

               Unfortunately, because the federal Defense of Marriage  
               Act (DOMA) prohibits recognition of same-sex  
               partnerships, the government treats health insurance  
               benefits provided through a same-sex spouse's or  
               domestic partner's employer as income and taxes them.   
               The federal government does not tax these benefits as  
               income for different-sex couples.  When a California  
               employer provides reimbursement to its employees for  
               this federal tax, often referred to as a "gross-up,"  
               California taxes this reimbursement as additional  
               income.

          3)Assembly Revenue and Taxation Committee staff comments:

              a)   A paradox - this bill is both cutting edge and  
               potentially moot  :  As far as the Assembly Revenue and  
               Taxation Committee is aware, no state has ever crafted an  
               income exclusion based upon a taxpayer's federal tax  








                                                                  AB 362
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               liability.  Were this bill to become law, it would  
               represent a novel and historic development in tax law.



             However, even though this bill breaks new ground, this bill  
               is still potentially moot, depending upon the actions of  
               the United States Supreme Court.
               The United States Supreme Court recently heard oral  
               arguments in United States v. Windsor and Hollingsworth v.  
               Perry.  United States v. Windsor concerns the  
               constitutionality of the Defense of Marriage Act.  If the  
               United States Supreme Court finds provisions of the Defense  
               of Marriage Act unconstitutional, the federal government  
               would potentially have to extend all the federal benefits  
               of opposite-sex marriages to same-sex marriages in those  
               states in which same-sex marriages are allowed.  Moreover,  
               if the United States Supreme Court does not reverse the 9th  
               Circuit's ruling or the District Court's ruling in  
               Hollingsworth v. Perry, California would once more allow  
               same-sex marriages.


               If both of these cases reached these outcomes, this bill  
               would affect little change in the law.  An employee in a  
               same-sex marriage would no longer incur increased federal  
               income taxes and, as such, there would be no additional  
               federal income tax liability to offset.   


               There is only one change proposed by this bill that would  
               survive such rulings by the United States Supreme Court.   
               It concerns domestic partners.  No matter the United States  
               Supreme Court's actions, the federal government would  
               likely still not accord beneficial tax treatment to either  
               opposite-sex or same-sex domestic partnerships.  An  
               employer could still choose to "gross up" an employee's  
               wages to offset the increased federal income tax liability  
               of the employee.  This bill would continue to exclude such  
               offsets from the employee's California gross income,  
               provided the domestic partner was a same-sex domestic  
               partner.  










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               In such a situation, same-sex domestic partners could marry  
               and avoid increased federal income taxes in the first  
               place.  Although some couples might not wish to marry for  
               any number of reasons, it is unclear California should  
               forego state tax revenue when such couples could reduce  
               their federal tax liabilities on their own and choose not  
               to.  Encouraging tax neutrality between marriage and  
               domestic partnerships would be the only justification to  
               continue to provide an exclusion even when taxpayers do not  
               need one.  If such tax neutrality between marriage and  
               domestic partnerships is the goal however, it is not clear  
               why this bill does not provide an exclusion for  
               opposite-sex domestic partners as well.
           

          Analysis Prepared by  :    M. David Ruff / REV. & TAX. / (916)  
          319-2098 


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