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        |
          |Committee:   |                               |     |             |
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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