BILL ANALYSIS Ó
AB 2519
Page 1
Date of Hearing: May 5, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2519 (Patterson) - As Amended: April 24, 2014
Majority vote. Tax levy.
SUBJECT : Personal income taxes: credit: tuition expenses
SUMMARY : Allows, for each taxable year beginning on or after
January 1, 2014, a credit in an amount equal to 50% of the
tuition paid or incurred by a taxpayer for education and
training obtained by the taxpayer or the taxpayer's dependent at
a vocational institution, as defined. Specifically, this bill :
1)Allows a credit, under the Personal Income Tax (PIT) Law, in
an amount equal to 50% of the tuition paid or incurred by a
taxpayer during the taxable year for education and training
obtained by the taxpayer or the taxpayer's dependent at a
vocational institution for job training and career advancement
studies.
2)Defines a "vocational institution" as a private, postsecondary
institution that meets both of the following requirements:
a) It grants only certificates or associate degrees; and,
b) It teaches students job-specific skills in a variety of
fields, including, but not limited to, the fields of
pharmacy technician and automotive technician.
3)Authorizes the taxpayer to carry forward the tax credit to the
following tax year, and succeeding seven years, if necessary,
until the credit is exhausted.
4)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
1)Allows a tax credit, called the Lifetime Learning Credit, of
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up to $2,000 for qualified educational expenses, which include
tuition and certain related expenses required for enrollment
in a course at an eligible educational institution. The
course must either be part of a post-secondary degree program
or taken by the student to acquire or improve job skills.
This tax credit is phased out if the taxpayer's modified
adjusted gross income (AGI) is between $53,000 and $63,000
($107,000 and $127,000 for taxpayers filing a joint return).
2)Allows a tax credit, called the American Opportunity Credit,
of up to $2,000 for the first $2,000 of qualified tuition and
related expenses, and a 25% credit for the next $2,000 of
qualifying expenses, for a total tax credit of $2,500 each
year per student. Up to 40% of the tax credit is refundable.
This tax credit is phased out if the taxpayer's modified AGI
is between $80,000 and $90,000 ($160,000 and $180,000 for
taxpayers filing a joint return). This credit is limited to
an eligible student's first four years of postsecondary
education.
3)Excludes from the taxpayer's gross income payments received by
the taxpayer from his/her employer, up to $5,250, for tuition,
fees, books, supplies, and equipment under the employer's
educational assistance program. Educational assistance does
not include a) tools or supplies retained by the employee
after completion of the instruction; b) meals, lodging or
transportation; or c) courses involving sports, games, or
hobbies. The term "education" includes any form of
instruction or training that improves or develops the
capabilities of an individual. Education may be furnished
directly by the employer, or through a third party such as an
educational institution. Education is not limited to courses
that are job related or part of a degree program.
EXISTING STATE LAW :
1)Provides various tax credits designed to provide tax relief
for taxpayers who incur certain expenses or to influence
taxpayers' behavior.
2)Does not conform to the federal Lifetime Learning Credit law,
nor does it provide for a comparable tax credit.
3)Does not conform to the American Opportunity Credit, nor does
it provide for a comparable tax credit.
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4)Conforms, in general, to the exclusion of up to $5,250 of
employer-provided educational assistance benefits from an
employee's gross income.
FISCAL EFFECT : The Franchise Tax Board's (FTB) staff estimates
that this bill will result in an annual loss of $390 million in
the fiscal year (FY) 2014-15, $400 million in FY 2015-16, and
$490 million in FY 2016-17.
COMMENTS :
1)Author's Statement . The author provided the following
statement in support of this bill:
"As California emerges from the recent recession, the need for
skilled labor is on the rise. Our UCs and CSUs are severely
impacted despite the fact that many of the state's current
labor demands do not necessarily require a Bachelor's Degree.
"Certificates and Associate's Degrees obtained at vocational
institutions serve just as well, if not better, than
traditional higher education for jobs in many of California's
most in demand professions such as auto mechanics, vocational
nurses and pharmacy technicians.'
"California needs to incentivize attendance at these types of
institutions in order to meet current demands of the job
market and to help students obtain a fast and affordable
education.'
"Instituting a state tax credit to help offset the costs of
attending a vocational school, will incentivize people to
attend these types of institutions and gain the skills
necessary to obtain gainful employment."
2)Existing Tax Incentives for Continuing Training and Education .
Current California tax law provides for several tax
incentives for individuals who invest in continuing education
and training. The expenses incurred by employers in training
employees are uniformly regarded as a business expenditure,
which means that these expenses can be fully deducted from
gross income as "ordinary and necessary" business expenses.
The cost of continuing education provided to the employer -
the business owner - is also deductible as a business expense
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as long as the education maintains or improves skills required
in the employer's trade or business, or that is required by
law or regulations for maintaining a license to practice, keep
the salary, or hold a job. For example, a practicing attorney
may deduct the cost of continuing legal education if the
continuing legal education is a requirement for maintaining
the membership in the State Bar Association. However,
expenses for re-training for another position or expenses
necessary to meet the minimum requirements for a position are
not eligible for a deduction (e.g., a law student may not
deduct the cost of a bar exam even if she/he working part-time
at a law firm while studying the exam).
An individual taxpayer may also deduct certain educational
expenses, but only to the extent those expenses are
work-related and they exceed 2% of the taxpayer's AGI.
However, the costs of preparing for state credentialing
(certification, licensing or registration) examinations that
are required in order to practice certain professions are not
currently deductible. In addition, an individual may exclude
from his/her gross income payments, up to $5,250, received
from his/her employer for tuition, fees, books, supplies, or
equipment under the employer's educational assistance program.
Education under this program does not have to be job-related
or be part of a degree program.
3)Credit and Deduction: "Double Dipping" ? Existing law already
provides a tax incentive, in the form of a deduction, for
certain education and training costs. This bill would allow a
qualified taxpayer a double benefit: first, a deduction and
then a credit for the same qualified educational expenses.
Generally, a credit is allowed in lieu of a deduction in order
to eliminate multiple tax benefits for the same item or
expense. A tax credit is more valuable because it lowers the
tax liability dollar for dollar. In contrast, a deduction
decreases the taxable income, so its value depends on one's
tax bracket. For example, if a taxpayer is in the 25%
bracket, a $1,000 deduction would lower the taxpayer's tax
bill by $250. In contrast, a $1,000 credit decreases the tax
liability by the full $1,000 regardless of the tax bracket.
The Committee may wish to consider amending this bill to deny a
deduction for the costs of tuition for which the credit is
claimed.
Existing federal and state laws also allow taxpayers to
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contribute to qualified tuition programs under the Internal
Revenue Code Section 529, known in California as the Golden
State Scholarshare Trust (ScholarShare). ScholarShare enables
taxpayers to save for college by putting money in
tax-advantaged investments. Neither earnings nor
disbursements, when used for tuition and other qualified
expenses, are subject to income taxes. This bill would
potentially provide a double benefit to taxpayers who use the
tax-deferred funds in a ScholarShare account pay for tuition
and then claim the credit for the same amounts. The Committee
may wish to disallow this double tax benefit.
4)The Costs of Training of Non-California Workforce Would
Qualify for the Credit . Clearly, a highly educated workforce
is one of the most important factors of sustaining a healthy
and diversified economy in California. However, the
application of this bill is not limited to California
workforce and, arguably, would be extended to the tuition
costs incurred by a taxpayer in paying for education and/or
training of dependents based outside of California. The
Committee may wish to limit this bill's application only to
costs of tuition for education and training obtained by
California-based workforce.
5)The Limitation on the Amount of Credit . This bill limits the
amount of the credit to 50% of the tuition costs. If enacted,
the 50% credit would be one the most generous tax credits
California has ever allowed. This bill also presents an
opportunity for taxpayers to engage in tax planning by
allowing taxpayers to control the timing of incurring the
qualified expenses and the amount spent for education or
training. The Committee may wish to consider placing a cap on
the amount of the credit allowable to a taxpayer during a
taxable year. The Committee may also wish to consider
reducing the proposed credit rate from 50% to 10% or 15%,
which would be more in line with other tax credits, such as,
for example, the general research tax credit.
6)Reward or Incentive ? Generally, tax credits are designed to
either influence taxpayer behavior or provide tax relief.
Because this bill applies to taxable years beginning on or
after January 1, 2014, this bill would be providing a credit
for behavior that had already taken place before this bill's
enactment. The Committee may wish to consider the policy
implications of providing such an incentive for the 2014
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taxable year.
7)California Workforce Development Programs: Tax Credits vs.
Grants . Although well intentioned, this bill represents an
attempt to use the tax code to accomplish a public policy
objective that would be more efficiently addressed through
direct outlay of state funds.
There are several workforce development programs in California;
they are primarily administered through the Labor and
Workforce Development Agency and the California Community
College System. One of the largest programs of its kind in
the nation is the Employment Training Panel (ETP), a business-
and labor-supported state agency that funds job skill
development initiatives that have good pay potential. The ETP
provides customized training to new and current workers of
California employers, particularly those facing out-of-state
competition. One source of funding is provided by an
assessment of one tenth of 1% of unemployment insurance wages
paid by every private, for-profit employer in California, as
well as some non-profits amounting to no more than $7.00 per
covered employee per year. In fiscal years (FY) 2010-11 and
2011-12, the ETP received alternative funding aimed at
training workers for jobs emerging in the recovering economy.
As noted by the California Budget Project, nearly two-thirds of
the projected 2020 labor force is already past high-school
age, and meeting the needs of working adults requires changes
in the areas that include financial aid policies; supportive
services, such as child care and transportation; new
approaches to teaching and curriculum design; and flexibility
in the scheduling of classes. (California Budget Project,
Mapping California's Workforce Development System: A guide to
Workforce Development Programs in California, 2009.) It was
also suggested that one promising strategy for addressing both
the needs of workers and employers is employment and training
programs that target a specific industry and work to meet its
local labor market needs. (Id.).
It appears that a stand-alone tax credit is not sufficient to
improve the state's workforce or to ensure that the state's
workers have the skills needed to compete in the global
marketplace. The Committee may wish to consider whether a
direct grant program to cover tuition of individuals at
vocational institutions would be a better vehicle to achieve
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these goals.
8)Sunset Date . This bill contains neither a sunset date nor a
requirement to review the effectiveness of the education and
training tax credit. The Committee may wish to ask the author
to add a five-year sunset to this bill and require the
Legislative Analyst to prepare a study regarding the impact of
this tax credit on the California economy and to report back
to the Legislature its findings prior to the sunset date.
9)Implementation Concerns . As noted in the analysis prepared by
the Franchise Tax Board (FTB) staff, this bill does not define
several phrases, such as "career advancement studies," "job
training," and "job-specific skills." The absence of
definitions may lead to disputes between taxpayers and the
FTB, and could complicate the administration of this credit.
10)Prior Legislation .
a) AB 1735 (Harkey), of the 2010-11 Legislative Session,
would have allowed a credit, under both the Personal Income
Tax Law and the Corporation Tax Law, in an amount equal to
50% of the costs paid or incurred by a taxpayer during the
taxable year for education and training provided to either
the taxpayer or its employees. AB 1735 was held in this
Committee.
b) SB 1163 (Vasconcellos), of the 2001-02 Legislative
Session, would have allowed a 100% credit for amounts paid
or incurred, not to exceed $1500, for information
technology training for the taxpayer or any employee of the
taxpayer. SB 1163 was never heard by the Senate Committee
on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Tax Reform Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
AB 2519
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319-2098