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 30, 2013 Consultant: Robert Ingenito 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 AB 362 (Ting) Page 1 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. AB 362 (Ting) Page 2 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.