BILL ANALYSIS Ó
SB 1271
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Date of Hearing: August 29, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
SB 1271 (Evans) - As Amended: August 27, 2014
SENATE VOTE : Not relevant
SUBJECT : Personal income tax law: cancellation of
indebtedness: student loan forgiveness
SUMMARY : Excludes loan amounts repaid by the United States
Secretary of Education (SSE) or canceled pursuant to Education
Code Section 1098e from gross income. Specifically, this bill :
1)Excludes, for taxable years beginning on or after January 1,
2014, loan amounts repaid by the SSE or canceled pursuant to
Education Code Section 1098e from gross income.
2)Takes effect immediately as a tax levy.
EXISTING LAW :
1)Provides that "gross income" includes all income from whatever
source derived, including compensation for services, business
income, gains from property, interest, dividends, rents, and
royalties, unless specifically excluded.
2)Provides that in the case of an individual, gross income does
not include any amount which would be included by reason of
discharge of any student debt if such discharge was pursuant
to a provision of such loan under which all or part of the
indebtedness of the individual would be discharged if the
individual worked for a certain period of time in certain
professions for any of a broad class of employers. (Internal
Revenue Code (IRC) Section 108(f).)
FISCAL EFFECT : According to the Franchise Tax Board (FTB),
under the federal income-based repayment programs, the first
year that qualified student debt may be forgiven is 2019; thus,
there would be no revenue impact prior to fiscal year (FY)
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2018-19. Based on a proration of an estimate prepared by the
Joint Committee on Taxation, it is estimated that the revenue
loss from this bill would be approximately $5,000 in FY 2018-19,
gradually increasing to a loss of approximately $100,000 by FY
2023-24.
COMMENTS :
1)Author's Statement . The author has provided the following
statement in support of this bill:
SB 1003 will ensure that California tax law does not
penalize taxpayers whose federal student loan debt is
forgiven pursuant to federal law. Senator Evans, sponsor
of SB 1003, is deeply concerned about the burden that
student loan debt places on Californians. SB 1003 is a
modest step toward helping alleviate the crushing,
long-term financial burden of a college education for
Californians
2)Federal Income-Based Repayment (IBR) Programs . The IBR plan
is a repayment plan for the federal student loans made under
the Federal Family Education Loan (FFEL) program and the
William D. Ford Federal Direct Loan (DL) program that allows
borrowers to make payments based on their federal student loan
debt and their discretionary income. A borrower qualifies for
IBR if he or she has a "partial financial hardship," which may
occur if total annual payments, as calculated according to a
standard 10-year repayment schedule, are greater than 15% of
the amount by which the borrower's adjusted gross (AGI) income
exceeds 150% of the poverty line applicable to the borrower's
family size. If a borrower's AGI increases to the point where
the borrower no longer has a partial financial hardship, the
borrower's monthly payment will increase to the amount that
would have been required based on a standard 10-year repayment
schedule. If the borrower has a federal student loan balance
remaining after repaying according to the IBR plan of 25
years, the remaining balance will be forgiven.
In 2010, the IBR program was modified for student borrowing
qualified educational loans on or after January 1, 2014. The
threshold to qualify for IBR and setting the maximum monthly
payment was reduced from 15% of income that exceeds 150% of
the poverty line to 10% of income that exceeds 150% of the
poverty line. The IBR program was also modified to reduce the
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IBR repayment program from 25 years to 20 years for new
borrowers.
3)Taxable/Non-Taxable IBR Loan Forgiveness . In general, the IBR
program allows borrowers to have their loans forgiven after 20
or 25 years, depending on when the loans were taken out.
Existing law defines "gross income" as including all income
from whatever source derived unless specifically excluded.
IRC Section 108(f) provides that gross income does not include
a discharge of student debt if it is dependent upon the
borrower working for a certain period of time in certain
professions for a broad class of employers.
Under the Public Service Loan Forgiveness (PSLF) program,
individuals are encouraged to enter full-time public service
employment by forgiving the remaining balance of their
qualifying student loans after they have made 120 qualifying
payments while employed full-time by a public service
organization or governmental entity. As such, loans forgiven
as part of the PSLF program are not taxable because the
program requires a borrower to work for certain employers for
a specified period of time. On the other hand, because the
IBR program, by itself, does not require a borrower to work
for a specified period of time or for a specified employer,
loans forgiven after the 20 or 25 year payment plan are
includible in gross income and subject to tax.
4)What Does this Bill Do ? As noted above, loan forgiveness
under one of the IBR programs, by itself, is subject to tax.
This bill would exclude, for state tax purposes, loan amounts
repaid by the SSE or canceled pursuant to Education Code
Section 1098e from gross income. Education Code Section 1098e
includes all loans covered under the IBR plan. Providing an
exclusion from gross income would allow borrowers to have
their loans forgiven after the 20 or 25 year period without
paying income tax on the forgiven loan amount.
5)Why Now ? This bill excludes the discharge of student loan
debt under the IBR plan from gross income. According to the
FTB, the first year that qualified student loan debt may be
forgiven is 2019, and the estimated revenue loss for FY
2018-19 will be $5,000. Because this bill will have no impact
until FY 2018-19, it may be more appropriate to have the bill
move through the normal legislative process instead of
amending a bill during the last few days of session.
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6)Rationale of Taxing Forgiven Debt . The practice of taxing
debt cancellation reflects sound tax policy because it
recognizes the fact that an individual's net worth has
increased by the cancellation of debt. According to
Commissioner v. Glenshaw, the Court defined "income" as an
accession to wealth that is clearly realized and over which
the taxpayer has complete dominion. (Commissioner v. Glenshaw
Glass Co., 348 U.S. 426, 431 (1955).) When debt is cancelled,
money that would have been used to pay that loan is now free
to be used on whatever the taxpayer wants. Therefore, because
certain assets have been freed, the taxpayer has experienced
an accession to wealth. Additionally, under the rule of
symmetry, a loan is not considered income to the borrower nor
is it a deduction to the lender. A borrower's increased
wealth when the loan is taken out is also offset by the
obligation to pay the same amount. If the debt is cancelled,
the symmetry is destroyed. The borrower is in a much better
position after the debt is cancelled. Additionally, as noted
by Debora A. Grier, Professor of Law of Cleveland State
University, in her statement before the United States Senate
Committee on Finance, without this tax rule, "the borrower
will have received permanently tax-free cash in the year of
the original receipt," i.e. the year in which the borrower
received the loan.
7)Out of Conformity . As noted above, California conforms to
federal law with respect to the taxability of student loan
forgiveness. In general, state conformity with federal law
promotes greater simplicity and eases administration of
complex tax laws. By excluding all loan amounts repaid by the
SSE or cancelled pursuant to Education Code Section 1098e from
gross income, this bill would take California out of
conformity with federal law.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
SB 1271
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Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098