BILL ANALYSIS                                                                                                                                                                                                    




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  AB 362                      HEARING:  8/14/13
          AUTHOR:  Ting                         FISCAL:  Yes
          VERSION:  5/21/13                     TAX LEVY:  Yes
          CONSULTANT:  Miller                   

                     INCOME TAX EXCLUSION: HEALTH INSURANCE
          

          Provides income tax exclusion for compensation received for  
          employer provided health insurance for same sex marriages. 


                           Background and Existing Law  

          Federal and state tax laws exclude employer-provided health  
          insurance from gross income.  Federal law provides the  
          inclusion for the employee, his or her dependents and the  
          employee's opposite sex spouse.  State law provides the  
          benefit for a domestic partner which may include a same sex  
          spouse.  This difference in the recognition and treatment  
          of same sex spouses lead to different tax consequences  
          under state and federal law:

                 Federal law provides that employer provided health  
               insurance premiums must be included in gross income  
               and therefore taxed at the federal level.  Under state  
               law, these premiums are not included.


                 Federal and state law allow taxpayers to claim a  
               personal exemption for each of the taxpayer's  
               dependents but federal law does recognize the  
               dependents of same sex marriages.  Generally, the more  
               dependents a taxpayer may claim, the lower that  
               taxpayer's federal tax liability will be.


          Both federal and state law includes any compensation to  
          discharge any tax liability in gross income.  For example,  
          if an employer provides an "offset" to an employee to pay  
          the taxes on health insurance premiums of his or her same  
          sex spouse, that amount would be included in gross income  
          and therefore taxed.  





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          Many employers "gross up" an employee's compensation, or  
          increase the amount the employer provides to offset  
          additional federal income taxes incurred on such  
          compensation.  At least 71 companies across various  
          industries provide "gross up" compensation.




             History and Timeline of Same-Sex Marriage in California:

           Feb. 12, 2004: San Francisco Mayor Gavin Newsom instructs  
          city officials to issue marriage licenses to same-sex  
          couples. Over four weeks, nearly 4,000 same-sex couples  
          received marriage licenses.

          March 11, 2004: The California Supreme Court unanimously  
          orders San Francisco to stop marrying same-sex couples and  
          announces that it will rule on the legality of the city's  
          actions within the next few months.

          August 12, 2004: The California Supreme Court rules  
          unanimously that San Francisco's mayor overstepped his  
          authority by issuing same-sex marriage licenses. In a 5-2  
          vote, the court declares the 4,000 marriages of gay and  
          lesbian couples that had been sanctioned by the city void.

          May 15, 2008: The California Supreme Court rules that the  
          State's Constitution protects a fundamental "right to  
          marry" that extends equally to same-sex couples. Thousands  
          of same-sex couples begin to wed in California.

          November 4, 2008: California voters pass Proposition 8  
          defining a marriage between a man and a woman.

          May 26, 2009: The California Supreme Court upholds  
          Proposition 82s ban on marriage equality, but also rules  
          that same-sex couples who wed before the election will  
          continue to be married under state law.

          Aug. 4, 2010: U.S. District Chief Judge Vaughn R. Walker, a  
          federal judge in San Francisco, rules that Proposition 8 is  
          unconstitutional.

          February 7, 2012: A federal appeals court affirms Walker's  





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          decision striking down California's ban on marriage for  
          same- sex couples, clearing the way for the U.S. Supreme  
          Court to rule on the freedom to marry.

          December 7, 2012: The U.S. Supreme Court agrees to hear the  
          case.

          June 26, 2013:  In Hollingsworth v. Perry, the U.S. Supreme  
          Court upholds the trial court decision striking down Prop 8  
          because the proponents did not have standing to challenge  
          the lower court ruling.



             History and Timeline of Defense of Marriage Act (DOMA):

           September 21, 1996: President Clinton signs the Defense of  
          Marriage Act into law.

          November 9. 2010: The ACLU and Edie Windsor file suit in  
          the U.S. District Court for the Southern District of New  
          York.

          February 23, 2011: The Obama Administration announces it  
          would no longer defend Section 3 of DOMA because it found  
          the law to be unconstitutional.

          March 4, 2011: The Bipartisan Legal Advocacy Group chooses  
          to intervene in the case and defend Section 3 of DOMA since  
          the Department of Justice would no longer defend the law.

          June 6, 2012: U.S. District Court Judge Barbara Jones rules  
          Section 3 of DOMA unconstitutional.

          June 14, 2012: The Bipartisan Legal Advisory Group appeals  
          Judge Jones' ruling, continuing to defend DOMA in court.

          July 16, 2012: Edith Windsor asks the U.S. Supreme Court to  
          hear her case.

          October 18, 2012: The United States Court of Appeals for  
          the Second Circuit in New York upholds Judge Jones' ruling,  
          deciding that Section 3 of DOMA is unconstitutional.

          December 7, 2012: The U.S. Supreme Court announces that it  
          will review Windsor v. United States.





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          June 26, 2013:  In Windsor v. United State, the U.S.  
          Supreme Court strikes down Section 3 of DOMA as  
          unconstitutional under the Due Process Clause of the Fifth  
          Amendment.



                                   Proposed Law  

          Until January 1, 2019, Assembly Bill 362 excludes from  
          gross income any amounts received by an employee from an  
          employer to compensate for additional federal income taxes  
          that are incurred by the employee on employer-provided  
          health-care benefits because, for federal income tax  
          purposes, the same-sex spouse or domestic partner of the  
          employee is not considered the spouse of the employee. The  
          exclusion from gross income would also apply to any amount  
          of the employer-provided health-care compensation paid to  
          an employee that represents the "grossed-up" amount that an  
          employer includes to offset additional federal income taxes  
          incurred on such compensation.


                               State Revenue Impact
           According to the FTB, AB 362 results in a revenue loss of  
          $80,000 in 2013-14; $60,000 in 2014-15 and $70,000 in  
          2015-16.


                                     Comments 

          1.   Purpose of the bill  .  Due to the Defense of Marriage  
          Act (DOMA), same-sex coupled households have not been able  
          to deduct their partner's/family's employer sponsored  
          health care coverage on their federal taxes.  A growing  
          number of employers, such as Facebook, Google, Kempton  
          Hotels, and the City of San Francisco have recognized this  
          injustice and have provided their employee's in same-sex  
          unions reimbursement for this federal tax. Unfairly, the  
          State of California taxes this reimbursement as income at  
          the state level.  Although the United States Supreme Court  
          made recent decisions to strike down Proposition 8 and the  
          Defense of Marriage Act (DOMA), the Franchise Tax Board has  
          yet to receive guidance from the Internal Revenue Service  
          in this matter.  However, it is clear that the  





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          reimbursements provided to employees in the 2013 taxable  
          year are still subject to state taxes.  Additionally,  
          employers are still figuring out their human resources  
          policies and same-sex couples - particularly those who  
          married in the window of 2008 - are still determining how  
          their legal marital status relates to the DOMA decision.   
          In the meantime, California can take steps to provide  
          equity to these households by ensuring that California's  
          same-sex couples receive the full reimbursement provided to  
          them from their employers by exempting employer  
          reimbursements from state taxation.  AB 362 will ensure  
          that reimbursements provided to employees during this major  
          transition will be exempt from state income taxation.   
          Anticipating fairness at the Federal level should not delay  
          us from implementing fairness in our state.

          2.   State and federal law  .  No state has ever crafted an  
          income exclusion based upon a taxpayer's federal tax  
          liability.  Were this bill to enter into law, it would be  
          the first of its kind to affect federal taxes by amending  
          the state tax law.  




                                 Assembly Actions  

          Assembly Revenue & Taxation             7-2
          Assembly Appropriations                      12-5
          Assembly Floor                          56-19


                         Support and Opposition  (8/8/13)

           Support  :  Equality California (Sponsor); Alice B. Toklas  
          Democratic Club; Facebook; Los Angeles Gay & Lesbian  
          Center; Harvey Milk Democratic Club; California Nurses  
          Association; City of Los Angeles; Orange County LGBTQ  
          Center; Microsoft; San Francisco Mayor Edwin M. Lee; San  
          Francisco Chamber of Commerce; City of Sacramento; Health  
          Access; City of West Hollywood; California Association of  
          Health Underwriters; AFSCME.


           Opposition  :  Unknown.   






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