BILL ANALYSIS                                                                                                                                                                                                    Ó



                         PURSUANT TO SENATE RULE 29.10

                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  SB 1271                     HEARING:  8/29/2014
          AUTHOR:  Evans                        FISCAL:  Yes
          VERSION:  8/27/2014                   TAX LEVY:  Yes
          CONSULTANT:  Bouaziz                  

             PERSONAL INCOME TAX LAW: CANCELLATION OF INDEBTEDNESS:  
                           STUDENT LOAN FORGIVENESS.
          

          Excludes loan amounts repaid by the United States Secretary  
          of Education (SSE) or canceled pursuant to Education Code  
          Section 1098e from gross income.  


                           Background and Existing Law  

          When a lender cancels a borrower's debt, federal and state  
          law generally treats the amount of debt cancelled as income  
          taxable to the borrower.  Taxpayers do not include borrowed  
          funds in income in the year he or she receives loan  
          proceeds because of the obligation to repay the loan; the  
          taxpayer is financially no better off because the loan must  
          be repaid.  When lenders reduce the repayable amount, the  
          taxpayer realizes a gain in his or her financial situation  
          because a portion of the loan proceeds already received and  
          not previously taxed need not be repaid, thereby increasing  
          the taxpayer's net worth. The taxpayer's income has  
          increased by the amount forgiven plus interest.

          Specifically, in the case of student loan forgiveness, the  
          amount forgiven generally represents taxable income for  
          income tax purposes in the year it is cancelled with some  
          exceptions.  Generally, student loan forgiveness is  
          excluded from income if the forgiveness is contingent upon  
          the student working for a specific number of years in  
          certain professions.

          When the student participates in public service loan  
          forgiveness, teacher loan forgiveness, law school loan  
          repayment assistance programs and the National Health  
          Service Corps Loan Repayment Program, cancelled debt is  
          excluded from income.  However, loan discharges for closed  
          schools, false certification, unpaid refunds, and death and  




          SB 1271 -- 08/27/14 -- Page 2



          disability is taxable income. The forgiveness of the  
          remaining balance under the federal income based repayment  
          program (IBR) after 25 years in repayment is considered  
          taxable income. 

          In 2010, Congress modified the IBR program for students  
          borrowing qualified educational loans on or after January  
          1, 2014.  The IBR program was modified to reduce the IBR  
          repayment program from 25 years to 20 years for new  
          borrowers.

                                   Proposed Law
                                         
          Senate Bill 1271 excludes from gross income loan amounts  
          repaid or forgiven by the United States Secretary of  
          Education (SSE) under the federal 25 or 20 year income  
          based repayment plan.

          Senate Bill 1271 applies to taxable years beginning on or  
          after January 1, 2014 and as a tax levy takes effect  
          immediately.

                              State Revenue Impact
           
          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, so,  
          there would be no revenue impact prior to fiscal year (FY)  
          2018-19.  Based on a proration of an estimate prepared by  
          the Joint Committee on Taxation, FTB estimates 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.   Purpose of the bill.   According to the author, "SB 1271  
          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  
          1271, is deeply concerned about the burden that student  
          loan debt places on Californians.  SB 1271 is a modest step  
          toward helping alleviate the crushing, long-term financial  
          burden of a college education for Californians."  

          2.   Reverse Nonconformity.   California law does not  





          SB 1271 -- 08/27/14 -- Page 3



          automatically conform to changes to federal tax law, except  
          under specified circumstances.  Instead, the Legislature  
          must affirmatively conform to federal changes.  Generally,  
          when the federal government changes its tax laws,  
          California catches up by enacting its own legislation the  
          following year to reduce differences between the two codes,  
          thereby easing the tax preparation burden on taxpayers, tax  
          preparers, and the Franchise Tax Board.  Currently,  
          California is in conformity with federal law with regard to  
          student loan debt forgiveness.  If SB 1271 becomes law,  
          taxpayers would exclude from income the forgiven loan for  
          state tax purposes, but include it for federal tax  
          purposes.  

          3.   Forgive me.   A student currently participating in the  
          25 or 20 year IBR program must make payments based on a  
          percentage of their income. After the 25 or 20 year period  
          of payments, the remaining amount of the unpaid loan is  
          cancelled.  Under current law, the year the debt is  
          cancelled, the amount cancelled is taxable income.  SB 1271  
          would excuse cancelled debt for state purposes, thereby  
          reducing the student's California tax liability.

          4.   Incentivizing non-payment.   Cancelling a student loan  
          debt at the end of the 25 or 20 year IBR program may  
          incentivize students to pay as little as possible, even if  
          payment of the entire debt is possible for some  
          individuals.  What motivation will a student have to pay  
          off the loan completely if they can simply make minimum  
          payments and have the debt cancelled without any state tax  
          ramifications?      

          5.   Gut and amend.   Prior to August 27, 2014, SB 1271 was a  
          measure that prohibits the search of information contained  
          in a portable electronic device.  Recent amendments removed  
          those provisions from the bill and inserted the measure's  
          current contents. 

          6.   Why Now?   As noted by the FTB, the first year debt may  
          be forgiven is 2019, so it is unclear why this bill needs  
          to makes its way through the legislative process in the  
          last few days of session and not through the normal  
          legislative process.   

                                 Assembly Actions  






          SB 1271 -- 08/27/14 -- Page 4



          Assembly Revenue and Taxation9-0
          Assembly Floor           65-3


                        Support and Opposition  (08/28/14)

           Support  :  None received.

           Opposition  :  None received.