BILL ANALYSIS Ó
SB 1271
Page 1
( Without Reference to File )
SENATE THIRD READING
SB 1271 (Evans)
As Amended August 27, 2014
Majority vote. Tax levy
SENATE VOTE :Vote not relevant
REVENUE & TAXATION 9-0
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|Ayes:|Bocanegra, Harkey, Beth | | |
| |Gaines, Gordon, Mullin, | | |
| |Nestande, Pan, | | |
| |V. Manuel Pérez, Ting | | |
| | | | |
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SUMMARY : Excludes loan amounts repaid by the United States
Secretary of Education (SSE) or canceled pursuant to Education
Code Section 1098(e) 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 1098(e) 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).)
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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)
2018-19. Based on a proration of an estimate prepared by the
Joint Taxation Committee, 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 : 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
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 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 income (AGI) 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
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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 IBR
repayment program from 25 years to 20 years for new borrowers.
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 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.
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
1098(e) from gross income. Education Code Section 1098(e)
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.
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
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$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.
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 Finance Committee, 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.
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 1098(e) from gross
income, this bill would take California out of conformity with
federal law.
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098
FN: 0005582
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