BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 324 (Pavley) - Income taxation: savings plans: Qualified ABLE Program ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: April 15, 2015 |Policy Vote: GOV. & F. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: April 27, 2015 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: SB 324 would (1) establish a California Achieving a Better Life Experience (ABLE) program and (2) modify state income tax law to generally conform to the federal income tax treatment of ABLE accounts. Fiscal Impact: The Franchise Tax Board (FTB) indicates that this bill would lead to a revenue loss (General Fund) of $100,000 in 2015-16, $400,000 in 2016-17, and $900,000 in 2017-18. Additional, FTB would incur minor costs to implement its provisions of the bill. SB 324 (Pavley) Page 1 of ? The State Treasurer's Office (STO), the entity that would administer ABLE accounts on behalf of qualified Californians, would incur annual costs in the hundreds of thousands of dollars minimally. The precise amount would depend on how the bill is implemented. Background: The federal ABLE Act of 2014 created a new type of tax-favored savings program beginning in taxable year 2015 for individuals who become blind or disabled before reaching age 26. ABLE accounts generally follow the same rules as education savings accounts allowed by Section 529 of the Internal Revenue Code (529s). Specifically, individuals can make nondeductible cash contributions to an ABLE account in the name of a specified beneficiary, and account's earnings grow tax free. ABLE account distributions are also not included in the beneficiary's income so long as they're used for qualified services, and distributions don't exceed the cost of the qualified services. The ABLE Act imposes a federal 10 percent tax on distributions that exceed those costs. Congress created ABLE accounts to offer an alternative to Special Needs and Supplement Needs Trusts. The ABLE Act directed states to establish one ABLE account for each resident beneficiary. SB 324 implements the ABLE Act in California, and directs the State Treasurer to administer ABLE accounts on behalf of qualified Californians. Proposed Law: This bill would establish a California ABLE program, and would generally conform to the federal income tax treatment of ABLE accounts; STO would administer the program in compliance with federal law. Neither federal nor state taxes would apply to ABLE account earnings or distributions used for qualified services. The additional federal contribution, rollover, and distribution rules would apply-meaning the portion of any ABLE distribution that is includible in income generally would be subject to a 2.5 percent tax for state purposes (in addition to the 10-percent additional tax imposed for federal purposes). SB 324 (Pavley) Page 2 of ? Related Legislation: AB 449 (Irwin) is substantially similar to this bill, except that it would provide that ABLE account amounts would be required to be disregarded for purposes of determining eligibility for state and local means-tested programs that provide assistance to disabled individuals. The bill is currently in the Assembly Revenue and Taxation Committee. Staff Comments: The FTB revenue estimate for this bill is based on a proration of the Joint Committee on Taxation's (JCT) estimate for the federal ABLE Act. JCT's estimated losses, converted to calendar years, for 2016 through 2019 are $5.5 million, $13.5 million, $30.3 million, and $57.3 million. These estimated losses are attributable to projected earnings in ABLE accounts that are exempt from taxation and distributions that do not exceed qualified expenses that are excluded from gross income. JCT estimated losses are reduced by approximately 88 percent based on Social Security Disability Insurance data to reflect California's estimated share of the federal exclusion. The results are then reduced an additional 70 percent to reflect the difference between federal and state tax rates. JCT estimates that revenue losses are projected to continue to increase, and prorating the last year included in the JCT estimate would result in an estimated state loss of approximately $10 million in 2025-26.