BILL ANALYSIS Ó
AB 1275
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 1275
(Gray) - As Introduced February 27, 2015
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Personal income taxes: exclusion: military
retirement pay
SUMMARY: Excludes from gross income, for taxable years
beginning on or after January 1, 2015, retirement pay received
by a taxpayer from the federal government for military service
performed in the Armed Forces of the United States (Armed
Forces), the reserve component of the Armed Forces, or the
National Guard. Specifically, this bill:
1)Excludes from gross income, for taxable years beginning on or
after January 1, 2015, survivor benefits received by a
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taxpayer from the federal government pursuant to Chapter 73 of
Title 10 of the United States Code.
2)Takes immediate effect as a tax levy.
EXISTING FEDERAL LAW:
1)Defines "gross income" as all income from whatever source
derived, except as otherwise provided. (Internal Revenue Code
(IRC) Section 61.) Gross income specifically includes
compensation for services, business income, gains from
property, interest, rents, royalties, dividends, and pensions.
2)Excludes from gross income compensation received for active
service as a member below the grade of commissioned officer in
the Armed Forces for any month during any part of which such
member:
a) Served in a combat zone, as defined; or,
b) Was hospitalized as a result of wounds, disease, or
injury incurred while serving in a combat zone, as
specified. (IRC Section 112(a).)
The term "compensation" specifically excludes pensions and
retirement pay. (IRC Section 112(c).)
3)Excludes from gross income amounts received as a pension,
annuity, or similar allowance for personal injuries or
sickness resulting from active service in the armed forces of
any country, as specified. (IRC Section 104(a)(4).)
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4)Excludes from gross income any "qualified military benefit".
(IRC Section 134(a).) A "qualified military benefit" is
defined as any allowance or in-kind benefit that:
a) Is received by any member or former member of the
uniformed services of the United States or any dependent of
such member by reason of the member's status or service;
and,
b) Was excludable from gross income on September 9, 1986,
under any provision of law, regulation, or administrative
practice in effect on such date, as provided. (IRC Section
134(b).)
EXISTING STATE LAW:
1)Provides that IRC Section 61, relating to the definition of
gross income, shall apply, except as specified. (Revenue and
Taxation Code (R&TC) Section 17071.)
2)Provides various exclusions from gross income in determining
tax liability under the Personal Income Tax Law. (R&TC
Section 17131 et seq.)
3)Excludes from gross income specified death benefits received
by the surviving spouse or designated beneficiary of any
member of the California National Guard, State Military
Reserve, or Naval Militia who dies or is killed in the
performance of duty, as specified. (R&TC Section 17132.4.)
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4)Defines the term "Armed Forces of the United States" to
include all regular and reserve components of the uniformed
services which are subject to the jurisdiction of the
Secretary of Defense, the Secretary of the Army, the Secretary
of the Navy, or the Secretary of the Air Force, and the Coast
Guard. The members of such forces include commissioned
officers and personnel below the grade of commissioned
officers in such forces. (R&TC Section 17022.)
FISCAL EFFECT: The Franchise Tax Board (FTB) estimates that
this bill would reduce General Fund revenues by $330 million in
fiscal year (FY) 2015-16, by $210 million in FY 2016-17, and by
$210 million in FY 2017-18.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
As California grows, it will need experienced employees and
business owners who understand how to lead and manage
California's most valuable resource - its people. Who
better to lead than a retired NCO or officer? Making
military retirement pay tax-free makes California a more
enticing employment opportunity for retiring military
personnel, offsetting some of the costs that drive retirees
elsewhere.
After 20 years in the service, retirees are entitled to a
pension worth half their base pay, but that rarely provides
enough compensation for most to stop working. Many leave
the service between the ages of 38 to 45, with every
intention of staring a second career. With the anticipated
decline in US Military participation in Iraq and
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Afghanistan, significant numbers of new military retirees
will begin their search for a place to call home. They
will bring their leadership, expertise, and capital with
them.
For California to remain an attractive and competitive
place to live, we must keep up with the 30 other states
[that] have already acknowledged the mutual benefit of this
policy: higher property and sales tax revenues for the
state and more money in the pockets of our retired
Veterans.
2)Proponents of this bill note the following:
We support your effort to eliminate California income tax
on veterans [sic] military retirement pay. A majority of
states offer some sort of tax relief, whether partial
relief or complete exemption from state income tax. Many
veterans from California relocate to those states because
of the tax friendly environment. This bill will make
California a veteran friendly state.
3)Opponents of this bill note the following:
We have no problem with providing tax relief to those who
were disabled in combat, or for survivor benefits for those
who were killed in combat, but this bill is far too broad
and exempts substantial amounts of income for those who
receive generous and deserved retirement benefits from
military service. Many of those who receive retirement
benefits - teachers, first responders and others - serve
their country as well, but income should be counted as
income except in the exceptional cases of service mentioned
above.
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4)Committee Staff Comments
a) What is a "tax expenditure" ? Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, U.S.
Treasury officials began arguing that these features of the
tax law should be referred to as "expenditures" since they
are generally enacted to accomplish some governmental
purpose and there is a determinable cost associated with
each (in the form of foregone revenues).
b) 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. While this affords taxpayers greater financial
predictability, it can also result in tax expenditures
remaining a part of the tax code without demonstrating any
public benefit. 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, effectively resulting
in a "one-way ratchet" whereby tax expenditures can be
conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy or cost, without a
supermajority vote.
c) General background : The FTB notes that, for taxable
years beginning December 22, 1972, through January 1, 1986,
California law provided taxpayers an annual $1,000 income
exclusion for compensation received during active duty in
the Armed Forces or State Military Reserve. State law also
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provided taxpayers an exclusion of up to $500 per month for
any compensation received during active duty in the
National Guard in connection with an emergency.
Additionally, an income exclusion applied to pensions or
retirement pay received by an individual for his or her
service in the Armed Forces, the State Military Reserve, or
the National Guard. (See former R&TC Section 17146.)
For taxable years beginning on or after January 1, 1987,
and before January 1, 1992, a member of the Armed Forces
was allowed a credit, rather than an exclusion from gross
income, in an amount equal to 4% of the eligible income
received by an individual whose adjusted gross income was
less than $27,000. Eligible income included salary, wages,
bonuses, allowances, pensions, retirement pay, and other
compensation received by an individual for his or her
services on extended active duty as a member of the Armed
Forces, including the California National Guard, or the
State Military Reserve. This law remained in effect until
January 1, 1992 and was repealed by its own terms as of
that date. (See former R&TC Section 17053.13.)
d) Lack of conformity : This bill would allow an exclusion
from gross income for military retirement pay and survivor
benefits for which federal law has no counterpart, thus
bringing state law out of conformity. State conformity
with federal law promotes greater simplicity and eases the
administration of complex tax laws.
e) A potential precedent : While cognizant of the personal
and professional sacrifices made by members of the
military, Committee staff notes that this bill would favor
one group of taxpayers over another, thereby establishing a
precedent for excluding the retirement benefits received by
other taxpayers the state wishes to recognize (e.g.,
police, firefighters, teachers).
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f) Absence of a sunset date : In its current form, this
bill's proposed tax expenditure lacks an automatic sunset
provision. This Committee has a longstanding policy
favoring the inclusion of sunset dates to allow the
Legislature periodically to review the efficacy and cost of
such programs. The author may wish to consider the
addition of appropriate sunset provisions.
g) Related legislation : AB 505 (Melendez) excludes from
gross income concurrent retirement and disability pay
payments received by an "eligible individual", defined as
an active, reserve, or retired member of the United States
military who served in active duty. AB 505 is scheduled to
be heard by this Committee on May 18, 2015.
h) Prior legislation :
i) AB 2329 (Melendez), of the 2013-14 Legislative
Session, would have excluded from gross income Concurrent
Retirement and Disability Pay payments received by an
eligible individual, defined as an active, reserve, or
retired member of the United States military who served
in active duty. AB 2329 was held on the Assembly
Appropriations Committee's Suspense File.
ii) AB 1077 (Anderson), of the 2009-10 Legislative
Session, would have excluded from gross income retired
pay and survivor annuities received by an individual as a
result of the active service of a member of the Armed
Forces. AB 1077 was held on this Committee's Suspense
File.
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REGISTERED SUPPORT / OPPOSITION:
Support
American Legion-Ceres Post 491
American Legion-Department of California
AMVETS-Department of California
California Association of County Veterans Service Officers
California Senior Legislature
California State Commanders Veterans Council
Military Officers Association of America, California Council of
Chapters
National Association for Uniformed Services
VFW-Department of California
Vietnam Veterans of America-California State Council
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9 private individuals
Opposition
California Tax Reform Association
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098