BILL ANALYSIS Ó 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. AB 362 -- 5/21/13 -- Page 2 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 AB 362 -- 5/21/13 -- Page 3 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. AB 362 -- 5/21/13 -- Page 4 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 AB 362 -- 5/21/13 -- Page 5 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. AB 362 -- 5/21/13 -- Page 6