BILL ANALYSIS Ó
AB 1796
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Date of Hearing: April 28, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1796 (Linder) - As Amended: April 10, 2014
Majority vote. Fiscal committee.
SUBJECT : Franchise Tax board: refunds: direct deposit:
taxpayer form instructions
SUMMARY : Requires the Franchise Tax Board (FTB) to revise the
personal income tax (PIT) returns to include information about
the ability of a taxpayer to directly deposit a portion of the
refund into the Golden State Scholarshare College Savings Trust
(ScholarShare). Specifically, this bill :
1)Requires the FTB to revise instructions, for returns required
to be filed, to include information about the ability of a
taxpayer to directly deposit a portion of the refund into a
ScholarShare fund.
2)Requires the ScholarShare Investment Board to provide the FTB
with a description of the Scholarshare program on or before a
specified date provided by the FTB. The length of the
description is limited to five lines.
3)Requires the FTB to revise taxpayer form instructions in the
most cost-effective manner.
4)Defines "Golden State Scholarshare College Savings Trust" by
reference to Education Code Section 69980(e).
EXISTING FEDERAL LAW provides tax-exempt status to qualified
tuition programs. Qualified tuition programs are programs
established and maintained by a state (or by an eligible
education institution) under which a person may purchase tuition
credit or make cash contributions to meet the qualified higher
education expenses of a designated beneficiary. Contributions
to a qualified tuition program cannot exceed the amount
necessary to provide for the beneficiary's qualified higher
education expenses. Distributions to a beneficiary are excluded
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from income.
EXISTING STATE LAW:
1)Conforms to IRC Section 529 as of the "specified date" of
January 1, 2009, with certain state modifications, including a
modification to the 10% tax on excess distributions to instead
be an additional tax of 2.5% for state purposes.
2)Provides its own IRC Section 529 qualified tuition program,
known as ScholarShare. ScholarShare enables taxpayers to save
for college by putting money in tax-advantaged investments.
After-tax contributions allow earnings to grow tax-deferred,
and disbursements, when used for tuition and other qualified
expenses, are federal and state tax-free. Distributions in
excess of qualified higher education expenses incurred for the
beneficiary, the portion of the excess that is treated as
earnings, is subject to income tax and an additional 2.5% tax
for state purposes.
3)Allows a taxpayer to deposit refunds directly into checking
and/or savings accounts, including 529 qualified tuition
savings accounts.
4)Limits the total amount of contributions to a beneficiary to
$371,000. Accounts that have reached the limit may continue
to accrue earnings.
FISCAL EFFECT : This bill would not impact the state's income
tax revenue.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
AB 1796 will add section 19304 to the Revenue and Taxation
Code, allowing the [FTB] to include information about the
ability of a taxpayer to directly deposit a portion of the
refund into Golden State College Savings Trust.
Creating a savings account for college is helpful for
families of all income levels and incentivizes students to
fulfill their goals of higher education by increasing
access to college.
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2)Committee Staff Comments:
a) This bill's purpose . Existing law allows individual
taxpayers to designate a qualified tuition program for the
deposit of their PIT refund. To do so, taxpayers need only
provide their account and routing numbers. The author,
however, notes that this option is not widely known. Thus,
this bill would direct the FTB to revise taxpayer form
instructions so that taxpayers may become aware of their
ability to deposit a portion of their refund into the
ScholarShare program. The author argues that by creating a
college savings account, this bill will increase access to
higher education.
Committee staff appreciates the goal of increasing college
savings opportunities. It should be noted, however, that
this bill would not enable individuals to establish a 529
college savings account. By making an explicit reference
to such accounts, however, this bill could remind PIT
filers with existing accounts of their ability to deposit
refund moneys into the account. An explicit reference to
the ScholarShare program could also conceivably incentivize
filers to explore the program as a potential vehicle for
college savings. In addition, by highlighting 529 plans,
this bill implicitly suggests that these savings vehicles
are preferable to other vehicles (such as Roth IRA plans)
that theoretically could also be explicitly noted on the
returns.
b) Favoring Higher Income Earners . As noted earlier,
informing families of the ScholarShare program is a
laudable goal. However, qualified tuition program tend to
favor higher income earners. The U.S. tax system generally
provides for a progressive system of taxation, ensuring
that tax rates increase as income increases. According to
Susan Dynarksi, assistant professor at Harvard University's
Kennedy School of Government, education savings plans
counteract the tax system's progressivity. (Higher-Income
Families Benefit from New Education Savings Incentives,
Urban-Brookings Tax Policy Center, No. 9, Feb., 2005.)
Higher income families benefit the most from educational
savings accounts because higher marginal tax rates receive
larger benefits from tax free growth under a 529 plan, and
the benefits that are received more than offset potential
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penalties if the funds are not used for educational
expenses.
According to a report by the Government Accountability
Office (GAO), less than 3% of families have 529 plans and
those who do tend to be wealthier. (Higher Education: A
Small Percentage of Families Save in 529 Plans, GAO, Dec.
2012.) Families with 529 plans have a median income of
$142,000 per year and a median financial asset value of
about $413,500. It was also said that families with 529
plans tend to have higher levels of education, which may
increase the likelihood of their children attending
college.
The report outlined several reasons why low-income families
participate far less in 529 plans, such as confusion as to
how the plan works and differences among the various 529
plans. However, 68% of those surveyed stated a lack of
money as the major reason for not participating. It is
difficult to encourage families to save for college when
they have little or no disposable income. In the end, lack
of participation in qualified tuition plans may have more
to do with a lack of disposable income and less to do with
awareness.
c) Related Legislation . AB 1956 (Bonilla) provides a
credit in the amount of 20% of the contributions made to a
qualified tuition program, not to exceed $500 per return.
AB 1956 has not been heard yet by this Committee.
d) Prior Legislation . AB 675 (Gilmore), introduced in the
2009-10 Legislative Session, would have allowed a deduction
from a qualified taxpayer to a qualified tuition program.
AB 675 was held in this Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
AB 1796
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Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098