BILL ANALYSIS Ó
AB 1956
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Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1956 (Bonilla) - As Amended: April 1, 2014
SUSPENSE
Tax levy. Majority vote. Fiscal committee.
SUBJECT : Personal income tax: credit: qualified tuition
program
SUMMARY : Provides a credit in the amount of 20% of the
contributions made to a qualified tuition program, not to exceed
$500 per return. Specifically, this bill :
1)Provides, beginning on or after January 1, 2015, a refundable
credit, as specified, against the "net tax" to a qualified
taxpayer who contributes money to a qualified tuition program.
2)Provides that the amount of the credit shall be the lesser of
the following:
a) 20% of the monetary contributions made by a qualified
taxpayer to a qualified tuition program that the qualified
taxpayer owns during a taxable year; or,
b) $500.
3)Provides that the portion of the credit that is in excess of
tax liability shall, upon an appropriation by the Legislature,
be paid to the qualified taxpayer.
4)Defines a "qualified tuition program" in the same manner as a
qualified tuition program under Internal Revenue Code (IRC)
Section 529.
5)Defines a "qualified taxpayer" as an individual who, on behalf
of a beneficiary, contributes money to a qualified tuition
program for which the individual is the account owner and has
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an adjusted gross income of either:
a) $100,000 or less if the qualified taxpayer files as
single, married filing separately, or domestic registered
partner filing separately; or,
b) $200,000 or less if the qualified taxpayer files as head
of household, surviving spouse, married filing jointly, or
domestic partner filing jointly.
6)Allows, in the case of married taxpayers or domestic partners
who file separate returns, the credit to be taken by either
spouse or registered domestic partner, or divided equally
between the spouses or registered domestic partners.
7)Defines a "nonqualified withdrawal" as any payment or
distribution from a qualified tuition program that is subject
to an additional tax as provided for by IRC Section 529.
8)Provides that when a qualified taxpayer receives a
nonqualified withdrawal, in addition to any other tax, an
additional tax shall be imposed in an amount that is the
lesser of 10% of the nonqualified withdrawal or the total
amount of credits received for the taxable year and for all
prior taxable years that a qualified taxpayer was allowed a
credit pursuant to this bill.
9)Provides that the Franchise Tax Board may proscribe rules,
guidelines, or procedures necessary or appropriate to carry
out the purposes of this section.
10)Takes effect immediately as a tax levy.
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
from income. However, contributions made to a qualified tuition
program are not deductible.
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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 the Golden State Scholarshare Trust (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 generally is subject
to income tax and an additional 2.5% tax for state purposes.
3)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 : Unknown
COMMENTS :
1)The author states, "[c]hildren with college savings accounts
are seven-times more likely to attend college. AB 1956 will
increase the number of families saving for college and also
increase the amount of money they set aside for higher
education. California is one of only seven states with
personal income taxes that does not offer any type of tax
incentives for saving with a 529 plan. Californians have
nearly $100 billion in student debt. It is estimated that
this bill will decrease student debt by more than $700 million
within 20 years. AB 1956 will stimulate economic activity by
providing college graduates with more disposable income to
make major purchases such as buying a home or automobile."
2)Proponents state, "[s]tudent debt continues to rise, with 52%
of graduates incurring an average debt of nearly $26,000.
This mounting student debt places a damper on the state's
economic activity because current debt holders have less
disposable income to purchase a home, car, and other
beneficial economic improvements. Starting early saving with
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a 529 account and saving regularly can significantly help ease
college debt burdens." Proponents also state, "[i]t is
projected that the bill's provisions will decrease student
debt in California by more than $600 million over 20 years.
Lower debt payments will enable college graduate to use their
increased disposable income for major purchases that increase
tax revenues, such as buying a home."
3)Opponents of this bill state that "[r]efundable tax credits
also create great opportunities for fraud. An August 2013
report by the U.S. Treasury's inspector general for tax
administration estimated that 21 percent to 25 percent of
federal earned income tax credit payments were improperly
issued during 2012, amounting to approximately $11 billion in
improper payments. Also, California's two popular, formerly
refundable credits - the renters' credit and the child and
dependent care expenses credit - had very high fraud rates,
prompting the Legislature to repeal their refundability."
4)Committee Staff Comments:
a) Conformity issues . As noted above, California conforms
to IRC Section 529, with slight modifications. In general,
state conformity with federal law promotes greater
simplicity and eases administration of complex tax laws.
The Federal Government does not provide a credit for
contributions to a 529 plan. By providing a refundable
credit for contributions made to qualified tuitions
programs, this bill would bring California out of
conformity with federal law.
b) Favoring Higher Income Earners . According to a report
by the Government Accountability Office (GAO), less than 3%
of families have 529 or Coverdell plans and those who do
tend to be wealthier. (Higher Education: A Small
Percentage of Families Save in 529 Plans, GAO, Dec. 2012.)
Specifically, families with 529 and Coverdell plans had 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 that their
children will attend college.
The report outlined several reasons why low-income families
participate far less in 529 plans, such as a lack of
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awareness, 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. In the end, it is difficult to
encourage families to save for college when they have
little or no disposable income.
c) Low-Income Earners May Never See a Credit . This bill
provides that the portion of the credit that is in excess
of tax liability shall, upon an appropriation by the
Legislature, be paid to the qualified taxpayer. By
providing a refundable credit for contributions made to a
qualified tuition program, this provision may encourage
low-income families to save for college. However, this
bill, as currently written, requires a subsequent
appropriation of funds by the Legislature, which means
certain taxpayers may not receive a credit despite making
contributions. Additionally, the bill is unclear as to
whether the appropriated funds would apply to a single
taxable year or to multiple years. The fact that the
refundability of the credit is not certain means that
low-income families are less likely to participate.
d) High Cost of a Formal Education . State support for
higher education has been dramatically reduced because of
budget crises over the last 10 years. According to a study
by the Public Policy Institute of California, in 2010-11,
California spent $1.6 billion less in higher education than
it did 10 years earlier, adjusted for inflation. (Hans
Johnson, Defunding Higher Education: What are the Effects
on College Enrollment, Public Policy Institute of
California, May 2012.) The provisions of this bill are
meant to counteract the skyrocketing costs of an education
by providing a credit for contributions made to qualified
tuition programs. Instead of forgoing general fund
revenues that predominantly favor higher income earners,
these funds may be better utilized if directly appropriated
to the state's University of California, California State
University, and Community College system.
e) Related Legislation . AB 1796 (Linder) would allow a
deduction for contributions made to a qualified tuition
program. AB 1796 is pending hearing by this Committee.
f) Prior Legislation . AB 675 (Gilmore), of the 2009-10
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Legislation Session, would have allowed a deduction for
contributions made to a qualified tuition program. AB 675
was held in this Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Bill Lockyer, California State Treasurer (Sponsor)
Asset Building Strategies
California Association of Private School Organizations
California Catholic Conference
Financial Services Institute
National Association of Insurance Advisors-California
State Farm Mutual Automobile Insurance Company
Opposition
The American Federation of State, County and Municipal Employees
California Tax Reform Association
California Taxpayers Association
California Teachers Association
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098