BILL ANALYSIS Ó
AB 2726
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2726
(McCarty) - As Introduced February 19, 2016
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Personal income taxes: credit: Scholarshare account
contributions
SUMMARY: Allows a credit under the Personal Income Tax (PIT)
Law in an amount equal to the lesser of 20% of monetary
contributions made to one or more Scholarshare accounts or $500.
Specifically, this bill:
1)Allows a PIT credit for each taxable year beginning on or
after January 1, 2016 and before January 1, 2021, for
"qualified taxpayers" in an amount that is the lesser of the
following:
a) 20% of monetary contributions made by a "qualified
taxpayer" to one or more accounts established pursuant to a
"qualified tuition program" during the taxable year; or,
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b) $500.
2)Defines a "qualified taxpayer" as an individual who, on behalf
of a beneficiary, contributes money to a "qualified tuition
program" for which the individual is the account owner and has
an adjusted gross income of either:
a) $75,000 or less if the qualified taxpayer files as
single or married filing separately; or,
b) $150,000 or less if the qualified taxpayer files as head
of household, surviving spouse, or married filing jointly.
3)Defines a "qualified tuition program" in the same manner as a
qualified tuition program under Internal Revenue Code (IRC)
Section 529 and established as ScholarShare in California.
4)Requires, in the case of any distribution from an account in
excess of qualified higher education expenses and to the
extent the distribution is attributable to the contributions
for which a credit is claimed, that the credit claimed in any
taxable year be added to the tax owed by the qualified
taxpayer in the taxable year of the distribution.
5)Defines "qualified higher education expenses" in the same
manner as qualified higher education expenses under IRC
Section 529(e)(3).
6)Authorizes the Franchise Tax Board (FTB) to prescribe rules,
guidelines, or procedures necessary or appropriate to carry
out the purpose of the credit.
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7)Repeals the credit on December 1, 2021.
8)Provides the following objectives, performance indicators, and
data collection and reporting requirements in compliance with
Revenue and Taxation Code (R&TC) Section 41:
a) Objectives:
i) Provide a tax incentive to motivate
California families to open and contribute to a
Scholarshare account to save for college, thereby
encouraging more Californians to pursue postsecondary
education while accumulating less debt; and,
ii) Reduce the amount of student loan debt on a
dollar-for-dollar basis so individuals have greater
ability to buy a home, car, or other items that stimulate
the economy.
b) Performance Indicators:
i) Number of ScholarShare tax credits issued by
the FTB;
ii) Dollar amount of ScholarShare tax credits;
iii) Taxpayer income information of those who
qualified and used the ScholarShare credit; and,
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iv) Number of new ScholarShare accounts opened
during the calendar year.
c) Data collection and reporting requirements:
i) The ScholarShare Investment Board (SIB)
shall collect data on the amount of tax credits issued
and taxpayer income from the FTB within 120 days from the
tax return filing date for the taxable year;
ii) The SIB shall collect data on the total
amount of contributions made to ScholarShare accounts by
March 1 of each year the credit is claimed on a tax
return;
iii) The SIB shall survey new and existing
ScholarShare account owners to collect information about
their motivation to do the following:
A) Open a ScholarShare account;
B) Contribute to a ScholarShare account;
C) Increase the frequency and amount of
contributions to a ScholarShare account; and,
D) Refer a ScholarShare account to friends and
family; and,
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iv) The SIB shall compile an annual report with
prior year and cumulative baseline data to be delivered
to the Legislature by July 31 of each year the tax credit
is in effect.
9)Takes immediate effect as a tax levy.
EXISTING FEDERAL LAW:
1)Provides tax-exempt status to qualified tuition programs.
Qualified tuition programs 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 beneficiary. Contributions
to a qualified tuition program cannot exceed the amount
necessary to provide for the beneficiary's qualified higher
education expenses. Distributions to a beneficiary are
excluded from income. Contributions made to a qualified
tuition program are not deductible.
EXISTING STATE LAW:
1)Conforms to IRC Section 529 as of the "specified date" of
January 1, 2015, 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 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 distributions, when
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used for tuition and other qualified expenses, are federal and
state tax-free. If a ScholarShare distribution exceeds
qualified higher education expenses incurred by the
beneficiary, the excess amount is subject to income tax and an
additional tax of 2.5% for state purposes.
3)Limits the total amount of contributions to a beneficiary to
$475,000. Accounts that have reached the limit may continue
to accrue earnings.
4)Allows various tax credits under the PIT Law. These credits
are generally designed to encourage socially beneficial
behavior or to provide relief to taxpayers who incur specified
expenses.
5)Applies performance measurement standards to any new tax
credit under either the PIT Law or Corporation Tax (CT) Law if
enacted by a bill introduced on or after January 1, 2015.
Specifically, existing law requires all of the following:
a) Specific goals, purposes, and objectives that the tax
credit will achieve;
b) Detailed performance indicators for the Legislature to
use when measuring whether the tax credit meets the goals,
purposes, and objectives stated in the bill; and,
c) Data collection requirements to enable the Legislature
to determine whether the tax credit is meeting, failing to
meet, or exceeding those specific goals, purposes, and
objectives. The requirements shall include the specific
data and baseline measurements to be collected and remitted
in each year the credit is in effect, for the Legislature
to measure the change in performance indicators, and the
specific taxpayers, state agencies, or other entities
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required to collect and remit data. (R&TC Section 41)
FISCAL EFFECT: The FTB's revenue estimate for this bill is
currently pending. However, the FTB estimated last year that
similar legislation would have resulted in General Fund revenue
losses of $24 million in fiscal year (FY) 2015-16, $48 million
in FY 2016-17, and $55 million in FY 2017-18.
COMMENTS:
1)Author's Statement : The author has provided the following
statement in support of this bill:
One of the greatest hurdles families face when
contemplating whether to pursue a post-secondary education
is the skyrocketing cost of attending college, which has
grown at a rate of two to three times the rate of
inflation. Nationally, tuition and fees at public four-
and two-year institutions have increased 40% and 29%,
respectively, over the past 10 years. From 2005-06 through
2014-15, tuition and fees at the University of California,
California State University, and California Community
Colleges jumped by 114%, 117%, and 130%, respectively.
During this same period, federal financial aid funding has
shifted away from student grants towards guaranteed student
loans. Today, nearly 60% of all federal financial aid is
in the form of loans, substantially increasing the number
of college graduates faced with the burden of repaying
enormous student loan debt upon entering the workforce.
According to the Institute for College Access and Success,
the average student loan debt has soared 56% from $18,550
in 2004 to $28,950 in 2014. Nationally, total student loan
debt has now surpassed $1.3 trillion.
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Yet, despite this alarming trend, only 49% of families with
children under the age of 18 are saving for college. Of
those families, only 27% use a tax-advantaged 529 savings
account. That percentage drops to 20% for families earning
$35,000-$100,000. Further, research indicates that low-
and moderate-income children with college savings of just
$500 or less are 3 times more likely to enroll in college
and 4 times more likely to graduate.
Incentivizing families to establish college savings
accounts will ensure obtaining a higher education degree
remains an achievable goal without burdening students with
tremendous amounts of debt.
2)Arguments in Support : The sponsor of this bill, California
State Treasurer John Chiang, notes the following:
California is one of a minority of states that does not
offer a tax incentive for families who save for college, as
33 other states and the District of Columbia already offer
some type of incentive. With college costs only going up
and not enough financial assistance to help each student
attend college debt-free, our state should be encouraging
fiscal planning by all means possible, and AB 2726
accomplishes just that.
3)Arguments in Opposition : Opponents of this bill state that
"those most in need of help with higher education cannot
benefit from tax credits and deductions because their income
tax liability is negligible" and that "college tuition credits
put into law in the 1990s have been demonstrated to have
little impact on college participation and funding, and were
proposed for elimination by the Obama administration."
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4)What is a "Tax Expenditure" ? Existing law provides various
credits, deductions, exclusions, and exemptions for particular
taxpayer groups. In the late 1960s, United States 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 of them (in
the form of forgone revenues). This bill would enact a new
tax expenditure program in the form of a tax credit for
contributions to a ScholarShare account.
5)Tax Expenditure vs. 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. This can offer taxpayers greater certainty, but it can
also result in tax expenditures remaining 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.
This bill includes a five-year sunset date for the tax credit
as generally recommended by this Committee. However, the
proposed tax credit would be allowed beginning with the 2016
taxable year, allowing individuals currently making
Scholarshare contributions to claim the credit for behavior
that already occurred before this bill's enactment. The
Committee may wish to consider shifting the allowance of the
credit to taxable years between January 1, 2017 and January 1,
2022.
6)Conformity Issues : As noted above, California conforms to IRC
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Section 529, with slight modifications. In general, state
conformity with federal law promotes greater simplicity and
eases administration of complex tax laws. The Federal
Government does not provide a credit for contributions to a
529 plan. By providing a credit for contributions made to
qualified tuitions programs, this bill would bring California
out of conformity with federal law.
7)ScholarShare 529 College Savings Plans : ScholarShare,
administered by the SIB chaired by the State Treasurer, serves
as California's state-sponsored IRC Section 529 qualified
tuition program. The savings accounts enabled by ScholarShare
provide families with a valuable tool that offers a diverse
set of investment options, tax-deferred growth, and
withdrawals free from state and federal taxes when used for
qualified higher education expenses such as tuition and fees,
books, certain room and board costs, computer equipment, and
other required supplies. According to the author's office,
Scholarshare has grown to include over 270,000 accounts and
over $6.3 billion in total plan assets since its launch in
1999. In 2015, over $333 million was withdrawn by families
for qualified higher education expenses. However, the
author's office notes that the outcomes in the 33 other states
and District of Columbia that provide additional tax
incentives for saving indicate that these numbers could be
even higher, and that the incentive provided in this bill is
projected to result in the opening of more than 65,000 new
accounts over three years.
8)Higher Income Earners More Likely to Save : 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. The report also stated that
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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 lack of money as the major reason for not
participating. Experiments in Michigan and Oklahoma that
matched contributions from low-income families into a 529 plan
resulted in an overall increase in savings, but by a very
incremental amount. In the end, it may be difficult to
encourage families to save for college when they have little
or no disposable income.
9)Lower Income Earners May Never See a Credit : This bill
provides a nonrefundable credit, meaning that taxpayers may
not see a benefit if their tax liability is insufficient to be
offset by a credit. Accordingly, lower income earners, who
often have little to no tax liability, may not be able to take
advantage of the proposed credit as readily as higher income
earners.
10) Rising Costs of Higher Education : State support for higher
education has been dramatically reduced because of budget
crises over the last 10 years. According to a report by the
Public Policy Institute of California, in-state tuition at
both the University of California (UC) and the California
State University (CSU) has more than tripled, largely driven
by dramatic reductions in state subsidies.<1> The provisions
of this bill are meant to counteract the skyrocketing costs of
postsecondary education by providing a credit for
---------------------------
<1> Hans Johnson, Kevin Cook, Patrick Murphy, and Margaret
Weston, Higher Education in California: Institutional Costs.
Public Policy Institute of California, November 2014.
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contributions made to qualified tuition programs. Instead of
forgoing General Fund revenues in a manner that predominantly
favors higher income earners and may be used to fund college
expenses out of state, the Committee may wish to consider
whether funds would be better spent in direct support of UC,
CSU, California Community Colleges, or financial aid programs.
11) Section 41 : SB 1335 (Leno), Chapter 845, Statutes of 2014
added R&TC Section 41, which recognized that the Legislature
should apply the same level of review used for government
spending programs to tax preference programs, including tax
credits. Thus, Section 41 requires any bill that is
introduced on or after January 1, 2015 and allows a new PIT
Law or CT Law credit to contain specific goals, purposes, and
objectives that the tax credit will achieve. In addition,
Section 41 requires detailed performance indicators for the
Legislature to use when measuring whether the tax credit meets
the goals, purposes, and objectives so-identified.
This bill provides a number of thoughtful performance measures
with which to evaluate the effectiveness of the proposed tax
credit. The author may also wish to consider adding more
performance indicators such as the number of new contributions
made to existing ScholarShare accounts and how often a tax
credit must be added back to taxes owed by the taxpayer
because non-qualified distributions are made from an account,
and a provision in the report about how taxpayers claiming the
credit learned about both the credit and ScholarShare
generally to enhance education and outreach efforts. Such a
provision may also help gage whether the credit, if enacted,
incentivizes new savings or primarily benefits individuals
otherwise already saving.
12) Related Legislation : AB 17 (Bonilla) was substantially
similar to this bill. AB 17 was held under submission by the
Committee on Appropriations.
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13) Prior Legislation : AB 1956 (Bonilla), of the 2013-14
Legislative Session, was substantially similar to this bill
but provided that the tax credit would have been refundable.
AB 1956 was held under submission by the Committee on
Appropriations.
REGISTERED SUPPORT / OPPOSITION:
Support
California State Treasurer, John Chiang (Sponsor)
California Business Roundtable
Common Sense Kids Action
EARN
Fiona Ma, Chair, Board of Equalization
Kidspace Children's Museum
Koreatown Youth and Community Center
Mexican American Opportunity Foundation
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Mission Asset Fund
Opportunity Fund
San Diego Foundation
Zimmer Children's Museum
Opposition
California Tax Reform Association
Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098