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.
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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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