BILL ANALYSIS Ó
AB 17
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Date of Hearing: May 27, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
17 (Bonilla) - As Amended May 21, 2015
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|Policy |Revenue and Taxation |Vote:|9 - 0 |
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Urgency: Yes State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill provides a tax credit, beginning on or after January
1, 2016, and before January 1, 2021, in the amount of 20% of the
contributions made to a qualified tuition program, not to exceed
$500 per return. Specifically, this bill:
1)Defines a "qualified tuition program" in the same manner as a
qualified tuition program under Internal Revenue Code (IRC)
Section 529.
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2)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
an adjusted gross income of either:
a) $75,000 or less if the qualified taxpayer files as
single, married filing separately, or domestic registered
partner filing separately; or,
b) $150,000 or less if the qualified taxpayer files as head
of household, surviving spouse, married filing jointly, or
domestic partner filing jointly.
3)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.
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4)Declares the intent of the Legislature to enact future
legislation to provide 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.
FISCAL EFFECT:
1)Potentially substantial costs to the Franchise Tax Board (FTB)
to establish a refundable credit program and to develop
processes and regulations to administer the program.
2)Estimated GF revenue decreases of $24 million, $48 million,
and $55 million for FY 2015-16, FY 2016-17, and FY 2017-18,
respectively. If the tax credit were made refundable pursuant
to the intent language included in the bill, those GF revenue
decreases would be $27 million, $55 million, and $65 million,
respectively.
COMMENTS:
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1)Purpose. According to the author, children with college
savings accounts are seven times more likely to attend
college. This bill is intended to increase the number of
families saving for college as well as increase the amount of
money being saved. The author claims California is one of
only six states with personal income taxes that does not offer
tax-advantaged savings with a 529 plan.
Proponents further argue student debt continues to rise and
places a damper on the state's overall economic activity
because debt holders have less disposable income with which to
make other purchases. The author believes AB 17 will
stimulate additional economic activity by providing college
graduates with more disposable income.
2)Tax Incentives vs Investment in Education. Opponents argue
K-12 education endured budget cuts of $20 billion during the
recession years, and that additional revenues should be spent
on restoring those budgets instead of being used for tax
incentives. This may be particularly true for college savings
plans, which may be used to fund college expenses out of
state. The committee may wish to consider whether increased
funding to existing programs would be a more efficient
approach to achieving the policy goals of this bill.
3)Refundable Intention. Though this bill removed its
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refundability feature as part of the most recent amendments,
it retains Legislative intent to restore this feature in the
future. Opponents claim refundable tax credits create greater
opportunities for fraud. An August 2013 report, by the US
Treasury's inspector general for tax administration, estimated
that 21% to 25% of federal earned income tax credit payments
were improperly issued during 2012, amounting to approximately
$11 billion in improper payments. California's two popular,
formerly refundable credits - the renters' credit and the
child and dependent care expenses credit - also had very high
fraud rates.
This bill declares the refundable credit, if restored, would
only be paid to taxpayers upon appropriation by the
Legislature. As a result, taxpayers relying on the
refundability of the credit may not ever receive the credit
owed. Additionally, the bill is unclear as to whether the
appropriated funds would apply to a single taxable year or to
multiple years.
Without the refundability feature, however, this tax credit
will primarily benefit taxpayers at the higher end of the
eligible income spectrum, as low-income families will often
not have sufficient tax liability to make use of the credit.
Without refundability, the committee may wish to consider
whether this credit targets the demographic with the highest
need.
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4)Is Section 41 Already Doomed? Tax credits are often used to
encourage or influence socially beneficial behavior, and
provide relief to taxpayers who incur expenses from desired
behavior. Tax credits are often more appealing than tax
deductions as the taxpayer may take the same credit regardless
of income.
This bill ignores the requirements of Section 41 of the
revenue and taxation code, authorized just last year in SB
1335 (Leno), Statutes of 2014, which requires tax credits to
articulate specific goals, purposes, and objectives for the
credit, as well as establish performance indicators to measure
the credit's success in achieving those goals. While the
policy goals of this bill may be laudable, there is no
indication that 20% or $500 of qualified expenses is the
appropriate credit to achieve the desired increase in
education savings, and that taxpayers seeking the credit would
not have made education fund contributions absent the credit.
Indeed, federal tax law already provides significant
incentives to save in 529 programs. In addition, there are no
metrics proposed with which to evaluate whether the credit is
achieving its aims of increasing savings or college
enrollment. Ensuring the Legislature conducts some objective
and dispassionate evaluation of tax credits was the goal of SB
1335, and the committee might wish to consider whether this is
precisely the type of tax credit for which Section 41 ought to
apply.
5)Prior Legislation. AB 1956 (Bonilla) of 2014 would have
provided a refundable tax credit very similar to the one
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proposed here. AB 1956 was held on the Suspense File of this
committee.
Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081