BILL ANALYSIS Ó
AB 1791
Page 1
Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 1791
(Lopez) - As Amended March 18, 2016
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Personal income taxes: exclusion: military
retirement pay
SUMMARY: Excludes military retirement pay and survivor benefits
from gross income under the Personal Income Tax (PIT) Law.
Specifically, this bill:
1)Excludes from gross income, for taxable years beginning on or
after January 1, 2016, both of the following types of payments
received by an individual taxpayer during the taxable year:
a) Retirement pay from the federal government for military
service performed in the Armed Forces of the United States
(U.S.), the reserve component of the Armed Forces of the
U.S., or the National Guard.
b) Survivor benefits payments from the federal government
pursuant to Chapter 73 of Title 10 of the U.S. Code.
AB 1791
Page 2
2)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
1)Provides that "gross income" includes all income from whatever
source derived, including compensation for services, business
income, gains from property, interest, dividends, rents, and
royalties, unless specifically excluded.
2)Excludes from gross income certain types of income received by
an individual as a result of the individual's active service
in the Armed Forces of the U.S. as follows:
a) A pension, annuity, or similar payment for personal
injuries or sickness that resulted from combat-related
service in the Armed Forces or a disability annuity
(Internal Revenue Code (IRC) Section 104);
b) Compensation received for active service by a member of
the U.S. Armed Forces below the grade of commissioned
officer for any month during which the individual served in
combat zones or was hospitalized as a result of wounds,
disease, or injury incurred in a combat zone (IRC Section
112);
c) The premium paid into a survivor annuity account for the
qualified survivors of military personnel;
d) Disability retirement pay that is computed on the basis
of the percentage of disability (IRC Section 104);
e) Dividends and proceeds from maturing government
endowment insurance contracts under the National Service
Life Insurance Act of 1940 and all other acts relating to
veterans;
AB 1791
Page 3
f) Interest left on deposit with the Veterans
Administration (VA);
g) Veterans' benefits under any law administered by the
U.S. Department of Veterans Affairs (VA), including amounts
paid to veterans or their families in the form of
educational, training, or subsistence allowances,
disability compensation and pension payments for
disabilities, compensation for participation in a work
therapy programs (38 U.S.C. §5301 and following); and,
h) Armed Forces allowances. (IRC Section 265.)
3)Defines "combat-related injuries" as injuries incurred as a
direct result of armed conflict, while engaged in
extra-hazardous service, or in the performance of duty under
conditions simulating war.
4)Exempts from taxation military death benefits paid to
qualified survivors. (IRC Section 134).
5)Does not exclude from gross income military retirement pay and
survivor benefits received by a taxpayer.
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 PIT Law. (R&TC Section 17131 et seq.)
3)Generally conforms to the federal tax law with respect to
AB 1791
Page 4
various exclusions from gross income of amounts received as
veterans' benefits.
4)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.)
5)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) staff estimates
that this bill will result in an annual General Fund loss of
$330 million in the fiscal year (FY) 2016-17, $210 million in FY
2017-18, and $210 million in FY 2018-19.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"Those who have served our country and that have retired from
the military should be extended benefits for the amount of
dedication that they have given our country. Creating a tax
exemption on military retirement pay is the least that our
AB 1791
Page 5
state can do for those who have served for our country at
length."
2)Existing Tax Treatment of Military Compensation under Federal
and State Laws . Prior to the enactment of the Tax Reform Act
of 1986, a variety of benefits for military personnel were
excluded from gross income under federal law and various
regulations. In 1986, Congress determined that in the future
no such exclusions would be permitted except under some
provisions of the IRC, but "grandfathered" all of the previous
non-Code exclusions. (IRC Section 134.) Currently, under
both federal and California law, a variety of income of an
individual in active service in the U.S. Armed Forces is
excluded from gross income. For example, military death
benefits paid to qualified survivors, military pay for service
in combat zones, and premium paid to a survivor annuity
account for the qualified survivors of military personnel are
not taxable. Under existing federal law, members of the U.S.
Armed Forces may elect to reduce their retired pay or retainer
pay to provide an annuity to their survivors and the reduction
is excluded from gross income. However, for both federal and
state tax purposes, military retirement pay and survivor
benefits received by a taxpayer are currently taxable.
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 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
AB 1791
Page 6
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.)
3)What Does This Bill Do ? The author states that California has
the third largest population of military retirees in the
country, with an estimated 165,000 retired military personnel.
This bill is intended to create an exclusion from gross
income for one type of military retiree compensation -
retirement pay received by a taxpayer for the military service
performed in the U.S. Armed Forces, the reserve component of
the U.S. Armed Forces, or the National Guard. This exclusion
from gross income would be provided for military pay, as well
as survivor benefits, received in taxable years beginning on
or after January 1, 2016.
4)No Income Limitation . This bill provides an exclusion from
gross income for military pay or survivor benefit received by
all military retirees or survivors regardless of their income.
Tax exemptions are often granted with some type of income
limitation.
5)Lack of Conformity : State conformity with federal law
promotes greater simplicity and eases the administration of
complex tax laws. 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.
6)Potential Precedent : While cognizant of the personal and
AB 1791
Page 7
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).
7)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.
8)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 was held on the Assembly
Committee on Appropriations' Suspense File.
AB 1275 (Gray) 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. AB 1275 on the Assembly Committee on
Appropriations' Suspense File.
9)Prior Legislation :
a) SB 401 (Wolk), Chapter 14, Statutes of 2010, provided
specified date conformity to the IRC, including the gross
income exclusions for combat-related injury pay and
AB 1791
Page 8
combat-related disability pay.
b) AB 53 (Klehs), Chapter 1138, Statutes of 1987, repealed
the pension and retirement pay exclusions as a result of
active duty in the Armed Forces.
REGISTERED SUPPORT / OPPOSITION:
Support
None on file
Opposition
California Tax Reform Association
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098
AB 1791
Page 9