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  








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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.