BILL ANALYSIS Ó
AB 209
Page 1
Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 209
(Patterson) - As Introduced February 2, 2015
SUSPENSE
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Tax deductions: 529 college savings plans.
SUMMARY: Allows a deduction under the Personal Income Tax Law
for contributions made to a qualified tuition program (QTP), as
specified. Specifically, this bill:
1)Allows, for taxable years beginning on or after January 1,
2015, a deduction equal to the lesser of:
a) The amount contributed by a "qualified taxpayer" during
the taxable year to a QTP under Internal Revenue Code (IRC)
Section 529, as modified by state law; or,
b) $3,000 in the case of a taxpayer who is single or is a
married individual filing a separate return, or $6,000 in
AB 209
Page 2
the case of a taxpayer who is a married individual filing a
joint return or an individual filing a head of household
return.
2)Defines a "qualified taxpayer" as an individual who, on behalf
of a beneficiary, contributes money to a QTP and meets all of
the other applicable requirements under the Internal Revenue
Code (IRC) Section 529, as modified by state law.
3)Provides that the deduction shall not be subject to the 2%
floor that generally applies to miscellaneous itemized
deductions.
4)Provides that the deduction shall be taken with respect to the
taxable year in which the contribution is made.
5)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
1)Allows individuals to deduct either a fixed amount, indexed
for inflation, known as the standard deduction, or the amount
of a taxpayer's itemized deductions, whichever is greater.
Certain expenses, such as medical expenses, charitable
contributions, interest, and taxes, are deductible as itemized
deductions. The law also provides for "miscellaneous itemized
deductions", which are those itemized deductions not
specifically listed in IRC Section 67(b). As a general rule,
miscellaneous itemized deductions are allowed only to the
extent that the aggregate of such deductions exceeds 2% of
adjusted gross income.
2)Provides tax-exempt status to QTPs. QTPs are programs
established and maintained by a state (or by an eligible
education institution) under which a person may purchase
tuition credit or make cash contributions to meet the
qualified higher education expenses of a designated
AB 209
Page 3
beneficiary. Contributions to a QTP cannot exceed the amount
necessary to provide for the beneficiary's qualified higher
education expenses. Distributions to a beneficiary are
excluded from income. However, contributions made to a QTP
are not deductible.
EXISTING STATE LAW:
1)Conforms to IRC Section 529 as of the "specified date" of
January 1, 2009, with certain state modifications, including a
modification to the 10% tax on excess distributions to instead
be an additional tax of 2.5% for state purposes.
2)Provides its own IRC Section 529 QTP, known as the Golden
State Scholarshare Trust (ScholarShare). ScholarShare enables
taxpayers to save for college by putting money in
tax-advantaged investments. After-tax contributions allow
earnings to grow tax-deferred, and disbursements, when used
for tuition and other qualified expenses, are federal and
state tax-free. Distributions in excess of qualified higher
education expenses incurred for the beneficiary, the portion
of the excess that is treated as earnings generally is subject
to income tax and an additional 2.5% tax for state purposes.
3)Limits the total amount of contributions to a beneficiary to
$371,000. Accounts that have reached the limit may continue
to accrue earnings.
FISCAL EFFECT: The Franchise Tax Board (FTB) estimates general
fund revenue loss of $310 million in fiscal year (FY) 2015-16,
$200 million in FY 2016-17, and $210 million in 2017-18.
COMMENTS:
AB 209
Page 4
1)Author's Statement : The author has provided the following
statement in support of this bill:
Many families do not meet the income threshold for
financial aid yet do not make enough money to comfortably
pay for higher-education expenses. Over 30 other states -
including New York - have recognized this and allow tax
deductions for those who are able to contribute to their
children's 529 savings plans.
However, there is no tax relief for parents, grandparents
or others who have been able to save a little extra money
to put towards their student's college education. In an
environment where working families are struggling to get
ahead, granting a tax deduction for contributions will help
these families plan ahead and make it easier to pay for
college.
Over the past 20 years, in-state tuition at both The
University of California and the California State
University has more than tripled, according to a recent
Public Policy Institute of California report. In the
California State University system alone, tuition increased
from $1,428 in 2001/02 to $5,472 effective fall of 2011.
Parents need more tools to meet the increased demands.
Unfortunately, California is not one of the states that
have opted to provide relief for working families and
parents through a state tax deduction for ScholarShare
contributions.
As the cost of higher education increases, it is important
AB 209
Page 5
to provide parents with the financial tools and incentives
necessary to help their children save for college. AB 209
will provide tax relief in the form of a tax deduction for
contributions made to a ScholarShare account of up to
$3,000 for individual tax filers and up to $6,000 for
married individuals filing a joint return.
2)Arguments in Support : The Financial Services Institute argues
that "[a]s educational expenses continue to rise, it becomes
increasingly important that families engage in long-term
planning and saving for their children's education. To help
in this endeavor, "529" savings plans have been established in
the [IRC]. This bill creates a modest tax break to help make
such important savings more affordable. By creating this
incentive, the State of California is clearly sending the
message that education is a priority and that it values the
importance of long-term planning for achieving educational
goals."
3)Arguments in Opposition : The California Tax Reform
Association states that this bill "provides a break for those
who already can save for college and most likely can afford
college. The 529 program appears to benefit those who are
least in need of help in covering college costs." Opponents
further state that the "$300 million cost estimated by the FTB
represents a major loss to the general fund. To the extent
this program is directed at higher education costs, that $300
million could be used in a number of ways - lowering tuition,
improving CalGrants, and generally improving higher education
access. Instead, this bill would help those least in need and
not help those most in need, since it requires a level of
savings that low-income people cannot provide."
4)Conformity Issues : As noted above, California conforms to IRC
Section 529, with slight modifications. In general, state
conformity with federal law promotes greater simplicity and
AB 209
Page 6
eases administration of complex tax laws. The Federal
Government does not provide a deduction for contributions to a
529 plan. By allowing a deduction for contributions made to
QTPs, this bill would bring California out of conformity with
federal law.
5)Favoring Higher Income Earners : According to a report by the
Government Accountability Office (GAO), less than 3% of
families have 529 or Coverdell plans and those who do tend to
be wealthier. (Higher Education: A Small Percentage of
Families Save in 529 Plans, GAO, Dec. 2012.) Specifically,
families with 529 and Coverdell plans had a median income of
$142,000 per year and a median financial asset value of about
$413,500. It was also said that families with 529 plans tend
to have higher levels of education, which may increase the
likelihood that their children will attend college.
The report outlined several reasons why low-income families
participate far less in 529 plans, such as a lack of
awareness, confusion as to how the plan works, and differences
among the various 529 plans. However, 68% of those surveyed
stated a lack of money as the major reason for not
participating. In the end, it is difficult to encourage
families to save for college when they have little or no
disposable income.
6)High Cost of a Formal Education : State support for higher
education has been dramatically reduced because of budget
crises over the last 10 years. According to a study by the
Public Policy Institute of California, in 2010-11, California
spent $1.6 billion less in higher education than it did 10
years earlier, adjusted for inflation. (Hans Johnson,
Defunding Higher Education: What are the Effects on College
Enrollment, Public Policy Institute of California, May 2012.)
The provisions of this bill are meant to counteract the
skyrocketing costs of an education by providing a credit for
AB 209
Page 7
contributions made to qualified tuition programs. Instead of
forgoing General Fund revenues that predominantly favor higher
income earners, these funds may be better utilized if directly
appropriated to the state's University of California,
California State University, and Community College system.
7)Further Incentivizing Behavior that Already Occurred :
Generally, tax credits and deductions are provided to
encourage socially beneficial behavior that likely would not
occur absent a financial incentive. Existing law already
encourages families to save for college by allowing earnings
on after tax contributions to 529 plans to grow tax-deferred.
Additionally, disbursements from 529 plans are federal and
state tax-free when used for tuition and other qualified
expenses. Because existing law already provides incentives to
save for a child's college education, it is unclear as to why
an additional incentive, such as the deduction provided for
under this bill, is needed. Furthermore, because this bill
applies to taxable years beginning on or after January 1,
2015, this bill would allow a deduction for behavior that had
already taken place before this bill's enactment. The
Committee may wish to consider the policy implications of
providing such an incentive.
8)How is a tax expenditure different from a direct expenditure ?
As the Department of Finance notes in its annual Tax
Expenditure Report, there are several key differences between
tax expenditures and direct expenditures. First, tax
expenditures are reviewed less frequently than direct
expenditures once they are put in place. Second, there is
generally no control over the amount of revenue losses
associated with any given tax expenditure. Finally, it should
also be noted that, once enacted, it takes a two-thirds vote
to rescind an existing tax expenditure absent a sunset date.
For this reason, the author may wish to include a five-year
sunset date for this deduction, to provide the opportunity for
future legislative review.
AB 209
Page 8
9)FTB concerns : FTB has raised the following implementation
concerns:
This bill would allow a qualified taxpayer to make a
contribution to a Section 529 plan, and generate a
deduction even if the funds are immediately withdrawn.
Additionally, the deduction would be allowed even if the
withdrawal was nonqualifying. If this is contrary to the
author's intent, the author may wish to amend the bill to
provide a recapture or disallowance provision.
This bill is silent on whether amounts transferred or
rolled over from another state's Section 529 Plan would
qualify for the deduction and how the department could
verify that a contribution was made to a qualified tuition
program. The lack of guidance could cause disputes between
taxpayers and the department and require the department to
open up an audit in order to verify the amount of
contributions made by taxpayers.
10)Related Legislation :
a) AB 17 (Bonilla) would provide a credit in the amount of
20% of the contributions made to a QTP, not to exceed $500
per return. AB 17 will be heard by this Committee today.
AB 209
Page 9
11)Prior Legislation :
a) AB 1956 (Bonilla), of the 2013-14 Legislative Session,
would have provided a credit in the amount of 20% of the
contributions made to a QTP, not to exceed $500 per return.
AB 1956 was held in the Assembly Appropriations Committee.
b) AB 675 (Gilmore), of the 2009-10 Legislative Session,
would have allowed a deduction for contributions made to a
QTP. AB 675 was held in this Committee.
c) AB 819 (Runner), of the 2007-08 Legislative Session,
would have allowed an above-the-line deduction for
contributions made by a qualified taxpayer to a QTP. AB
819 was held in this Committee.
d) SB 643 (Florez), of the 2007-08 Legislative Session,
would have allowed a deduction for contributions made to a
QTP. SB 643 was held in the Senate Committee on Revenue
and Taxation
REGISTERED SUPPORT / OPPOSITION:
Support
Associate Students, Inc.
California Communities United Institute
Clovis Unified School District
AB 209
Page 10
Securities Industry and Financial Markets Association
25 individuals
Opposition
American Federation of State, County and Municipal Employees
California Tax Reform Association
Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098