BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
AB 362 (Ting) - Personal Income Tax: Exclusion: Health Insurance
Amended: May 21, 2013 Policy Vote: G&F 6-1
Urgency: No Mandate: No
Hearing Date: August 19, 2013
Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 362 would provide an income tax exclusion for
compensation received for employer-provided health insurance for
same-sex marriages.
Fiscal Impact: The Franchise Tax Board (FTB) indicates that the
bill would result in a General Fund revenue loss of $80,000 in
2013-14, $60,000 in 2014-15 and $70,000 in 2015-16. The bill
would not significantly impact the department's costs. However,
FTB's revenue estimate was prepared before the United States
Supreme Court passed rulings related to same-sex marriages in
June 2013. Those rulings would likely lower the revenue loss
from the bill (see Staff Comments).
Background: Federal and state tax laws exclude employer-provided
health insurance from gross income. Federal law provides the
exclusion 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 contrast in the recognition and treatment of same-sex
spouses produces 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
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be.
Both federal and state law include 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.
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.
Proposed Law: Until January 1, 2019, this bill 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.
Staff Comments: Recent United States Supreme Court decisions
related to California's Proposition 8 and the federal Defense of
Marriage Act (DOMA) indicate that the federal government could
potentially have to extend all the federal benefits of
opposite-sex marriages to same-sex marriages in those states
that permit them, including California. Thus, a California
employee in a same-sex marriage would no longer incur increased
federal income taxes related to health insurance premiums, and
thus would no longer need to be "grossed-up". This, in turn,
would lower the employee's state tax liability on the natural.
This sequence of events initiated by the Supreme Court's ruling
covers a large portion of this bill's intent. Thus, a large (but
currently unknown) portion of the bill's assigned revenue loss
would be eliminated. The actual revenue loss from the bill would
be lower by an unknown amount, which FTB will be able to
estimate once the specifics and the timing of Internal Revenue
Service guidance related to same-sex couples in the aftermath of
the Supreme Court's rulings are released.
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To the extent that the federal government would likely still not
offer beneficial tax treatment to either opposite-sex or
same-sex domestic partnerships, the bill's provisions regarding
domestic partnerships still apply.