BILL ANALYSIS Ó
AB 1041
Page A
Date of Hearing: May 11, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 1041
(Baker) - As Introduced February 26, 2015
Majority vote. Tax levy.
SUBJECT: Personal income taxes: education savings accounts
SUMMARY: Provides an "above-the-line" deduction for amounts
contributed to a Coverdell Education Savings Account (ESA) from
gross income, up to $750 per taxable year. Specifically, this
bill:
1)Provides a deduction for an amount contributed by a taxpayer
during the taxable year to an ESA, not to exceed $750 per
taxable year, except as otherwise provided.
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2)Defines a "coverdell education savings account" by reference
to the Internal Revenue Code (IRC) Section 530, as modified by
Revenue and Taxation Code (R&TC) Section 23712.
3)Provides that for purposes of applying IRC Section 530, the
basis for the ESA shall be reduced by an amount equal to this
deduction.
4)Provides that for taxable years beginning on or after January
1, 2014, IRC Section 62(a) is modified to provide that this
deduction shall be allowed in computing adjusted gross income.
5)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Conforms to IRC Section 530 as of the "specified date" of
January 1, 2009, with modifications, and thus generally
conforms to the federal rules that apply to qualified
education expenses. California modifies the additional
10-percent tax on excess distributions to instead be an
additional tax of 2.5 percent for state purposes. California
law does not allow a deduction for qualified higher education
expenses. IRC Section 530 provides for the use of ESAs, which
are used exclusively for the purpose of paying qualified
education expenses of a named beneficiary. ESAs are an
investment trust account specifically designated for qualified
education costs, which include both K-12 expenses and higher
education expenses. For 2013, the maximum annual
contributions to an ESA may not exceed $2,000 per designated
beneficiary and may not be made after the designated
beneficiary reaches age 18, except in cases of a special needs
beneficiary. Provides a phase out of contributions for
taxpayers with modified AGI between 95,000 and 110,000
($190,000 and $220,000 for married taxpayers filing a joint
return).
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2)Defines "qualified educational expenses," under IRC Section
530, to include "qualified higher education expenses" and
"qualified elementary and secondary education expenses." The
term "qualified higher education expenses" includes tuition,
fees, books, supplies, and equipment required for the
enrollment or attendance of the designated beneficiary at an
eligible education institution, regardless of whether the
beneficiary is enrolled at an eligible educational institution
on a full-time, half-time, or less than half-time basis. The
funds for "qualified elementary and secondary education
expenses" can be used to cover the costs of attending
elementary and secondary school. In addition to tuition,
these costs can include uniforms, tutoring, computers,
software, and transportation.
3)Provides that contributions to an ESA are not tax-deductible,
but the earning grow-tax free, and so do withdrawals, as long
as the distributions are used for qualified education
expenses. However, ESAs are subject to the unrelated business
income tax imposed by IRC section 511. Distributions from an
ESA are excludable from the gross income of the distributee
(i.e., the student) to the extent that the distribution does
not exceed the qualified education expenses incurred by the
beneficiary during the year the distribution is made. The
earnings portion of an ESA distribution not used to pay
qualified education expenses is includible in the gross income
of the distributee and generally is subject to an additional
10-percent tax.<1>
4)Conforms to IRC Section 529 as of the "specified date" of
January 1, 2009, with certain modifications, including a
modification to the 10% tax on excess distributions to instead
be an additional tax of 2.5% for state purposes.
---------------------------
<1>This 10-percent additional tax does not apply if a
distribution from an education savings account is made on
account of the death or disability of the designated
beneficiary, or if made on account of a scholarship received by
the designated beneficiary.
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5)Provides its own IRC Section 529 qualified tuition program,
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 is generally
subject to income tax and an additional 2.5% tax for state
purposes. Limits the total amount of contributions to a
beneficiary in a 529 qualified tuition program 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 $350,000 in fiscal year (FY) 2015-16,
$450,000 in FY 2016-17, and $450,000 in FY 2017-18.
COMMENTS:
1)Author's Statement: The author has provided the following
statement in support of this bill:
This bill proposes a new state tax deduction of up to $750
for contributions made to Coverdell education savings
accounts that will encourage parents to invest in their
children's kindergarten through college education. The
deduction would be "above the line," which means it will be
available to all taxpayers regardless of whether they
itemize deductions on their tax returns. By providing an
additional incentive for more people to save money for
their child's kindergarten through college education,
children will benefit in the long term with a more solid
foundation upon which to further their education.
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2)Arguments in Support : The California Catholic Conference
states that, "[f]inancial pressures weighing upon California
families have made it difficult to ensure a quality elementary
and secondary education and to generate funds for college.
While families can set aside funds in support of their
children's learning needs as they arise through a Coverdell
ESA, additional state tax relief is needed to encourage such
educational planning."
3)Favoring Higher Income Earners . According to a report by the
Government Accountability Office (GAO), less than 3% of
families have 529 or ESA 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 ESA 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 and ESA 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 and ESA plans, such as a lack of
awareness, confusion as to how the plan works, and differences
among the various 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.
4)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
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skyrocketing costs of an education by providing a deduction
for contributions made to ESA. 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.
5)Proposition 30 . In general, Proposition 30 increased the
marginal tax rate for those making above $250,000 and
increased the statewide sales tax rate from 7.25% to 7.5%.
Proposition 30 was estimated to increase General Fund revenue
by about $6 billion per year, which would primarily be used to
restore funding to California's public school system. The
provisions of this bill are meant to counteract the lack of
funding once available to K-12 education. Specifically, this
bill seeks to remedy the fact that many schools are unable to
provide school supplies and books. However, as noted in the
Governor's Budget Summary, the budget for FY 2014-15 provides
$61.6 billion in Proposition 98 funding, an increase of $6.3
billion over the 2013 budget act level. It appears that new
revenues, provided in part because of the passage of
Proposition 30, have translated into additional funding for
California's K through 12 school system.
6)Is This Bill Needed ? The California Supreme Court ruled in
Hartzell v. Connell (1984) 35 Cal.3d 899, 201) that pupil fees
violate the constitutional right to a free education.
Specifically, the court ruled that extracurricular activities
also must be free because they are an integral component of
public education and a part of the educational program. In
September 2010, the American Civil Liberties Union (ACLU)
filed a class action lawsuit alleging the unconstitutional
assessment of pupil fees by school districts [Jane Doe, et al.
v. State of California, et al., (Super. Ct. Los Angeles
County, 2010, BC445151)]. The lawsuit was brought forward
because ACLU reports showed that more than 50 public school
districts required pupils to pay fees for textbooks,
workbooks, science labs, physical education uniforms,
classroom materials, and extracurricular activities. Instead
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of moving forward with the lawsuit, the ACLU and interested
parties sought a legislative solution. As a result, AB 1575
(Lara), Chapter 776, Statutes of 2012, which was sponsored by
ACLU, codified the long held constitutional prohibition on the
imposition of pupil fees and established procedures to ensure
compliance with the prohibition.
Since the passage of AB 1575, many schools have stopped
imposing fees for participation and, in some cases, are paying
for items that were traditionally paid for by pupils and
parents. Most recently, school districts have informed
parents that caps and gowns will be provided free of charge.
Within the last year, parents throughout California have been
utilizing compliance procedures to challenge school districts
that require families to pay for Advanced Placement exams,
classrooms supplies, workbooks, and school uniforms. (Loretta
Kalb, California to Schools: Student don't have to pay for
graduation attire, other items 'integral' to education,
Sacramento Bee, May 7, 2014.) In some cases, parents and
activists are even challenging "supply lists" posted by school
for returning student. One parent, in the San Juan School
District, received a letter outlining a list of supplies that
children would need at the beginning of the year. The list
included items such as tissue paper, binders, pencils and
pens. The supplies cost parents between $70 and $100. In
response to the challenge to required supplies, the school
notified parents that all necessary materials will be provided
to school children and that "supply lists" are suggestions,
not required for full participation. Schools across
California have begun making similar changes to "required"
items and fees that are imposed on pupils. In most cases,
schools have stated that items will be provided free of
charge.
1)Private School Subsidy : Unlike a 529 College Savings plan,
ESA plans allow taxpayers to withdraw and make payments for
K-12 educational expenses. K-12 educational expenses,
however, are not limited to public schools. Funds can also be
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used to pay for private school tuition. The Committee may
wish consider whether subsidizing private education and
educational courses is an appropriate use of public funds.
REGISTERED SUPPORT / OPPOSITION:
Support
California Catholic Conference
Opposition
None on file
Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098