BILL ANALYSIS Ó
AB 894
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 894
(Patterson) - As Introduced February 26, 2015
Majority vote. Tax levy. Fiscal Committee
SUBJECT: Personal income taxes: credit: education expenses
SUMMARY: Allows, for each taxable year beginning on or after
January 1, 2016, a credit in an amount equal to 15% of the
tuition paid or incurred by a taxpayer for education and
training obtained by the taxpayer or the taxpayer's dependent at
a vocational institution, as defined. Specifically, this
bill:
1)Allows a credit, under the Personal Income Tax (PIT) Law, in
an amount equal to 15% of the tuition paid or incurred by a
taxpayer during the taxable year for education and training
obtained by the taxpayer or the taxpayer's dependent at a
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vocational institution.
2)Limits the amount of the credit allowed to be claimed to
$2,500 per taxable year.
3)Defines a "vocational institution" as a private, postsecondary
institution that grants only certificates or associate
degrees.
4)Authorizes the taxpayer to carry forward the tax credit to the
following tax year, and succeeding seven years, if necessary,
until the credit is exhausted.
5)Disallows the credit if the tuition costs are claimed by the
taxpayer as an ordinary and necessary business expense.
6)Disallows the credit to a taxpayer who pays for the tuition at
a vocational institution with distributions from the
taxpayer's Golden State Scholarshare College Savings Account.
7)Contains legislative findings and declarations regarding the
goals, purposes and objectives of this credit as well as the
performance indicators, data collection requirements and
baseline measurements, as required by Revenue and Taxation
Code (R&TC) Section 41.
8)Takes effect immediately as a tax levy.
EXISTING LAW:
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1)Allows a tax credit, called the Lifetime Learning Credit, of
up to $2,000 for qualified educational expenses, which include
tuition and certain related expenses required for enrollment
in a course at an eligible educational institution. The
course must either be part of a post-secondary degree program
or taken by the student to acquire or improve job skills.
This tax credit is phased out if the taxpayer's modified
adjusted gross income (AGI) is between $53,000 and $63,000
($107,000 and $127,000 for taxpayers filing a joint return).
2)Allows a tax credit, called the American Opportunity Credit,
of up to $2,000 for the first $2,000 of qualified tuition and
related expenses, and a 25% credit for the next $2,000 of
qualifying expenses, for a total tax credit of $2,500 each
year per student. Up to 40% of the tax credit is refundable.
This tax credit is phased out if the taxpayer's modified AGI
is between $80,000 and $90,000 ($160,000 and $180,000 for
taxpayers filing a joint return). This credit is limited to
an eligible student's first four years of postsecondary
education.
3)Excludes from the taxpayer's gross income payments received by
the taxpayer from his/her employer, up to $5,250, for tuition,
fees, books, supplies, and equipment under the employer's
educational assistance program. Educational assistance does
not include a) tools or supplies retained by the employee
after completion of the instruction; b) meals, lodging or
transportation; or c) courses involving sports, games, or
hobbies. The term "education" includes any form of
instruction or training that improves or develops the
capabilities of an individual. Education may be furnished
directly by the employer, or through a third party such as an
educational institution. Education is not limited to courses
that are job related or part of a degree program.
EXISTING STATE LAW:
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1)Provides various tax credits designed to provide tax relief
for taxpayers who incur certain expenses or to influence
taxpayers' behavior.
2)Does not conform to the federal Lifetime Learning Credit law,
nor does it provide for a comparable tax credit.
3)Does not conform to the American Opportunity Credit, nor does
it provide for a comparable tax credit.
4)Conforms, in general, to the exclusion of up to $5,250 of
employer-provided educational assistance benefits from an
employee's gross income.
FISCAL EFFECT: The Franchise Tax Board's (FTB) staff estimates
that this bill will result in an annual loss of $30 million in
the fiscal year (FY) 2015-16, $75 million in FY 2016-17, and
$110 million in FY 2017-18.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"As California emerges from the recent recession, the need for
skilled labor is on the rise. Our UCs and CSUs are severely
impacted despite the fact that many of the state's current
labor demands do not necessarily require a Bachelor's Degree.
"Certificates and Associate's Degrees obtained at vocational
institutions serve just as well, if not better, than
traditional higher education for jobs in many of California's
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most in-demand professions such as auto mechanics, vocational
nurses and pharmacy technicians.
"California needs to incentivize attendance at these types of
institutions in order to meet current demands of the job
market and to help students obtain a fast and affordable
education.
"Instituting a state tax credit to help offset the costs of
attending a vocational school, will incentivize people to
attend these types of institutions and gain the skills
necessary to obtain gainful employment.'
"By lowering the cost of attendance at one of these
institutions, California will encourage its residents who may
be looking to earn a certificate or license in a high-demand
job field to attend these schools and gain these
certifications that will make them career-ready and
sought-after by employers in the state."
2)Arguments in Support . The proponents of this bill note that
"[v]ocational school students are typically working parents
tasked with supporting a family and completing their
education." They argue that this bill is "California's
opportunity to support hard-working students who are getting
back into the classroom to get hands-on job training."
3)Arguments in Opposition . The opponents state that when "the
for-profit private education setting has been objectively
studied, the default rates, graduation rates, and job
placement rates have all consistently lagged far behind the
value of less expensive alternatives; alternatives that do not
require the student to incur as much debt." They argue that
this bill "would misdirect tax dollars without accountability"
and that the "substantial revenue loss from this program
could?be far better directed in terms of directly paying for
job training and upgrading of skills" rather than tax credits.
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4)For-Profit Career Schools . State support for higher education
has been dramatically reduced because of budget crises over
the last 10 years, impacting not only the University of
California and California State University, but also the
state's Community College system. Many potential students had
no other option but to enroll in for-profit vocational schools
that offered certificates and associate degrees in various
fields, including health, accounting, and computer services,
among others. These schools promised practical training,
professional certification, and placement at high-paying jobs
after graduation. Some vocational schools, however, have
been criticized for misrepresenting job placement rates to
students and investors, leaving former students jobless and in
debt, and violating California's false advertising and unfair
competition laws. In fact, the California Attorney General
recently filed a lawsuit alleging that Corinthian Colleges,
which is a for-profit company offering postsecondary
education, violated consumer protection and securities laws,
misrepresented job placement rates to students and investors,
advertised for programs that it did not offer, and subjected
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students to unlawful debt collection practices.<1> On April
26, 2015, Corinthian Colleges, Inc., announced that it has
"ceased substantially all operations and discontinued
instruction" at several campuses and filed for bankruptcy on
May 4, 2015 .<2> A few other for-profit career schools are
currently under investigation by state attorneys' general in
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<1> Corinthian Colleges, Inc. (CCI) owned Heald, Everest, and
WyoTech campuses in California. CCI institutions offered a
range of programs, including 8- to 12-month certificate
programs, with tuition and fees that ranged from $13,100 to
$21,338, 24-month associate's degree programs with tuition and
fees that ranged from $33,120 and $42,820; and bachelor's degree
programs that were between $60,096 and $75,384. According to a
2014 complaint filed by the Consumer Financial Protection Bureau
(CFPB), most students attending CCI were low-income, or the
first in their families to seek an education beyond high school.
In 2012, CCI reported that 85% of its students had family
incomes of less than $45,000 per year. An estimated 57% of CCI
students had household incomes of $19,000 or less, and 35% of
CCI students had a household income of less than $10,000. Most
students attending CCI received federal financial aid; according
to CCI's filing with the Securities and Exchange Commission, CCI
received 84.8% of their net revenue from federal financial aid
(Title IV: Pell Grants and Federal Loans).
<2> According to the California Attorney's General Office, the
closure follows oversight and enforcement actions by state and
federal agencies, including the California Department of
Justice, the U.S. Department of Education, the U.S. Consumer
Financial Protection Bureau, the California Student Aid
Commission, the California Bureau of Private Postsecondary
Education, and several other state attorney generals.
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various states.<3>
5)Funding for Community Colleges . 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.)
However, with the passage of Proposition 30, General Fund
(GF) revenue is estimated to increase by about $6 billion per
year, which would primarily be used to restore funding to
California's public school system. In January, Governor Brown
proposed to allocate $7.3 billion to community colleges in FY
2015-16, an increase of 8% from the current year. The new
funding will allow community colleges to enroll more students
and offer more classes.
This bill proposes to subsidize education and training
obtained by taxpayers at vocational for-profit institutions.
While a tax credit for educational expenses incurred at a
private school may encourage students to get vocational
--------------------------
<3> To date, 37 state attorney generals are participating in a
joint working group examining for-profit colleges, according to
the office of Kentucky Attorney General Jack Conway, and at
least 24 state attorney generals are actively investigating
specific for-profit colleges in their states. See, e.g.,
http://www.republicreport.org/2014/law-enforcement-for-profit-col
leges/
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training, it is questionable whether scarce GF moneys should
be used to subsidize private schools, especially given that
tax expenditure programs tend to decrease the amount of funds
available for public education funding in the first instance.
Instead of forgoing GF revenues, the Committee may wish to
consider whether these funds may be better utilized if
directly appropriated to the state's Community College system.
6)Existing Tax Incentives for Continuing Training and Education .
Current California tax law provides for several tax
incentives for individuals who invest in continuing education
and training. The expenses incurred by employers in training
employees are uniformly regarded as a business expenditure,
which means that these expenses can be fully deducted from
gross income as "ordinary and necessary" business expenses.
The cost of continuing education provided to the employer -
the business owner - is also deductible as a business expense
as long as the education maintains or improves skills required
in the employer's trade or business, or that is required by
law or regulations for maintaining a license to practice, keep
the salary, or hold a job. For example, a practicing attorney
may deduct the cost of continuing legal education if the
continuing legal education is a requirement for maintaining
the membership in the State Bar Association. However,
expenses for re-training for another position or expenses
necessary to meet the minimum requirements for a position are
not eligible for a deduction (e.g., a law student may not
deduct the cost of a bar exam even if she/he working part-time
at a law firm while studying the exam).
An individual taxpayer may also deduct certain educational
expenses, but only to the extent those expenses are
work-related and they exceed 2% of the taxpayer's AGI.
However, the costs of preparing for state credentialing
(certification, licensing or registration) examinations that
are required in order to practice certain professions are not
currently deductible. In addition, an individual may exclude
from his/her gross income payments up to $5,250 received from
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his/her employer for tuition, fees, books, supplies, or
equipment under the employer's educational assistance program.
Education under this program does not have to be job-related
or be part of a degree program.
7)Credit and Deduction. Existing law already provides a tax
incentive, in the form of a deduction, for certain education
and training costs. This bill would allow a qualified
taxpayer an alternative tax benefit, in lieu of a deduction.
A tax credit is more valuable because it lowers the tax
liability dollar-for-dollar. In contrast, a deduction
decreases the taxable income so the deduction's value depends
on one's tax bracket. For example, if a taxpayer is in the
25% bracket, a $1,000 deduction would lower the taxpayer's tax
bill by $250. In contrast, a $1,000 credit decreases the tax
liability by the full $1,000 regardless of the tax bracket.
8)529 Plans. Existing federal and state laws allow taxpayers to
contribute to qualified tuition programs under the Internal
Revenue Code Section 529, known in California as the "Golden
State Scholarshare Trust" (ScholarShare). ScholarShare
enables taxpayers to save for college by saving money in
tax-advantaged investments. Neither earnings nor
disbursements, when used for tuition and other qualified
expenses, are subject to income taxes. This bill would
disallow the credit to taxpayers who use the tax-deferred
funds in a ScholarShare account to pay for tuition. However,
this bill would not preclude taxpayers from claiming the
credit for tuition paid with funds accumulated on a tax-free
basis in other 529 plans.
9)The Costs of Training of Non-California Workforce Would
Qualify for the Credit . Clearly, a highly educated workforce
is one of the most important factors of sustaining a healthy
and diversified economy in California. However, the
application of this bill is not limited to California
workforce and, arguably, would be extended to the tuition
costs incurred by a taxpayer in paying for education and/or
training of dependents based outside of California. The
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Committee may wish to limit this bill's application only to
costs of tuition for education and training obtained by
California-based workforce.
10)California Workforce Development Programs: Tax Credits vs.
Grants . Although well intentioned, this bill represents an
attempt to use the tax code to accomplish a public policy
objective that would be more efficiently addressed through
direct outlay of state funds.
There are several workforce development programs in California;
they are primarily administered through the Labor and
Workforce Development Agency and the California Community
College System. One of the largest programs of its kind in
the nation is the Employment Training Panel (ETP), a business-
and labor-supported state agency that funds job skill
development initiatives that have good pay potential. The ETP
provides customized training to new and current workers of
California employers, particularly those facing out-of-state
competition. One source of funding is provided by an
assessment of one-tenth of 1% of unemployment insurance wages
paid by every private, for-profit employer in California, as
well as some non-profits amounting to no more than $7 per
covered employee per year. In fiscal years (FY) 2010-11 and
2011-12, the ETP received alternative funding aimed at
training workers for jobs emerging in the recovering economy.
As noted by the California Budget Project, nearly two-thirds of
the projected 2020 labor force is already past high-school
age, and meeting the needs of working adults requires changes
in the areas that include financial aid policies; supportive
services, such as child care and transportation; new
approaches to teaching and curriculum design; and flexibility
in the scheduling of classes. (California Budget Project,
Mapping California's Workforce Development System: A guide to
Workforce Development Programs in California, 2009.) It was
also suggested that one promising strategy for addressing both
the needs of workers and employers is employment and training
programs that target a specific industry and work to meet its
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local labor market needs. (Id.).
It appears that a stand-alone tax credit is not sufficient to
improve the state's workforce or to ensure that the state's
workers have the skills needed to compete in the global
marketplace. The Committee may wish to consider whether a
direct grant program to cover tuition of individuals at
vocational institutions would be a better vehicle to achieve
these goals.
11)Sunset Date . This bill does not contain a sunset date. It
should be noted that, once enacted, it takes a two-thirds vote
to rescind an existing tax expenditure absent a sunset date,
effectively resulting in a "one-way ratchet" whereby tax
expenditures can be conferred by majority vote, but cannot be
rescinded, irrespective of their efficacy, without a
supermajority vote. The Committee may wish to add a five-year
sunset to this bill and require the Legislative Analyst to
prepare a study regarding the impact of this tax credit on the
California economy and to report back to the Legislature its
findings prior to the sunset date.
12)Implementation Concerns . As noted in the analysis prepared
by the Franchise Tax Board (FTB) staff, this bill would allow
a credit to a taxpayer who pays for, or incurs, vocational
school tuition for the taxpayer or his/her dependent. The
term "taxpayer" may refer to one individual or a married
couple. Furthermore, the term "dependent of the taxpayer" is
an undefined phrase. The FTB staff recommends that this bill
be amended to clarify these terms to avoid any disputes
between taxpayers and the FTB.
13)Prior Legislation .
a) AB 2519 (Patterson), of the 2013-14 Legislative Session,
is substantially similar to this bill. AB 2519 was held on
the Assembly Appropriations Committee's Suspense File.
b) AB 1735 (Harkey), of the 2010-11 Legislative Session,
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would have allowed a credit, under both the Personal Income
Tax Law and the Corporation Tax Law, in an amount equal to
50% of the costs paid or incurred by a taxpayer during the
taxable year for education and training provided to either
the taxpayer or its employees. AB 1735 was held on this
Committee's Suspense File.
c) SB 1163 (Vasconcellos), of the 2001-02 Legislative
Session, would have allowed a 100% credit for amounts paid
or incurred, not to exceed $1500, for information
technology training for the taxpayer or any employee of the
taxpayer. SB 1163 was never heard by the Senate Committee
on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION:
Support
Valley Regional Occupational Program
Clovis Unified School District
Opposition
American Federation of State, County and Municipal Employees
(AFSCME), AFL-CIO
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California Tax Reform Association
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098