BILL ANALYSIS Ó AB 17 Page 1 Date of Hearing: May 27, 2015 ASSEMBLY COMMITTEE ON APPROPRIATIONS Jimmy Gomez, Chair AB 17 (Bonilla) - As Amended May 21, 2015 ----------------------------------------------------------------- |Policy |Revenue and Taxation |Vote:|9 - 0 | |Committee: | | | | | | | | | | | | | | ----------------------------------------------------------------- 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. AB 17 Page 2 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. AB 17 Page 3 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: AB 17 Page 4 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 AB 17 Page 5 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. AB 17 Page 6 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 AB 17 Page 7 proposed here. AB 1956 was held on the Suspense File of this committee. Analysis Prepared by:Joel Tashjian / APPR. / (916) 319-2081