BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 1148 |Hearing |5/4/16 |
| | |Date: | |
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|Author: |Stone |Tax Levy: |Yes |
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|Version: |4/25/16 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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Personal income taxes: deductions: qualified tuition
Allows an "above-the-line" deduction for qualified tuition and
related expenses for higher education.
Background
Federal law allows for the deduction of certain expenses when
calculating adjusted gross income (AGI), such as moving
expenses, qualified tuition and related expenses, and interest
on education loans. Thus, all taxpayers with this type of
expense receive the benefit of the deduction. These are known as
"above-the-line" deductions.
Through the 2016 tax year, federal law allows a taxpayer to
deduct qualified tuition and related expenses for higher
education paid by the taxpayer during the taxable year. The
term "qualified tuition and related expenses" includes tuition
and fees required for the enrollment or attendance at an
eligible institution of higher education of the taxpayer, the
taxpayer's spouse, or any dependent of the taxpayer for whom the
taxpayer may claim a personal exemption. The expenses must be
in connection with enrollment at an institution of higher
education during the taxable year. The deduction is not allowed
to an individual if that individual is claimed as a dependent on
another taxpayer's return for that taxable year.
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The maximum deduction is $4,000 for an individual whose AGI for
the taxable year does not exceed $65,000 ($130,000 in the case
of a joint return), or $2,000 for other individuals whose AGI
does not exceed $80,000 ($160,000 in the case of a joint
return). No deduction is allowed for an individual whose AGI
exceeds the limitations, for a married individual who does not
file a joint return, or for an individual claimed as a dependent
by another taxpayer for the taxable year. In addition, the
deduction is phased out for individual taxpayers with modified
AGI of $65,000-$80,000 ($130,000 - $160,000 for joint returns).
The amount of qualified tuition and related expenses is reduced
by certain scholarships, educational assistance allowances, Hope
or Lifetime Learning credits claimed, and other amounts paid for
the benefit of the student. Qualified higher education expenses
are defined as the student's cost of attendance, which generally
includes tuition, fees, room and board, and related expenses.
California law allows various income tax credits, deductions,
and sales and use tax exemptions to provide incentives to
compensate taxpayers that incur certain expenses, such as child
adoption, or to influence behavior, including business practices
and decisions, such as research and development credits. The
Legislature typically enacts such tax incentives to encourage
taxpayers to do something that but for the tax credit, they
would not do. The Department of Finance is required to annually
publish a list of tax expenditures. Currently, tax expenditures
exceed $57 billion dollars. State law lacks a comparable
deduction to the federal education deduction.
Proposed Law
Senate Bill 1148 conforms to the federal deduction for qualified
tuition and related expenses for higher education with some
state law changes. Specifically, SB 1148:
Allows a $10,000 deduction versus the federal $4,000
deduction.
Sets the maximum AGI at $125,000 for an individual
filing single, and $250,000 for individuals filing a joint
return.
Requires the Franchise Tax Board to adjust AGI and
SB 1148 (Stone) 4/25/16 Page 3
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deduction limits annually for inflation beginning January
1, 2017.
SB 1148 remains in effect until December 1, 2021.
State Revenue Impact
Pending.
Comments
1. Purpose of the bill. According to the author, "Education
costs in California and across the nation have skyrocketed in
recent years. According to the PPIC, in-state tuition at both
the UC and CSU has more than tripled over the past 20 years.
They note that "From 2004 to 2013, the average tuition at UC and
CSU more than doubled from around $4,000 to more than $9,000."
These increases are a source of concern for Californians who
fear that they may be priced out of postsecondary education or
forced to borrow more money to complete their degrees" As more
students worry about rising costs and the impact student loans
will have once they leave college, pressure on both students and
their families to secure financing for their education is
escalating. Even more worrying is that these increased costs
disproportionately affect middle and low-income families. SB
1148 will allow individuals making below $125,000 or joint
filers making below $250,000 to claim a deduction of up to
$10,000 per child for payments made towards tuition and
qualified education expenses as defined by statute."
2. Tax expenditures. 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).
This bill would increase an existing tax expenditure. The
tradeoff for increasing the tax expenditure, resulting in
revenue losses, is higher taxes or reductions to other services
or programs.
3. How is tax expenditure different from a direct expenditure?
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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 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, once
enacted, it takes a two-thirds vote to rescind an existing tax
expenditure absent a sunset date.
4. Is conformity needed? Income tax credits, deductions, and
sales and use tax exemptions provide incentives and can
influence the behavior of taxpayers. In this case, there is
already a federal deduction available, which allows California
to reap the benefits of the federal incentive without having the
foregone revenue associated with providing a separate state
deduction. Although tax conformity eases compliance burdens,
conformity can also significantly impact state revenues.
Moreover, SB 1148 provides a significantly larger deduction to
taxpayers with almost double the maximum income level, adjusted
annually for inflation, allowed in federal law.
5. Above and below the line deductions. An above-the-line
deduction is a deduction that allows a taxpayer to subtract
amounts from gross income when calculating their AGI. If the
deduction is taken above the line, it is used to determine the
taxpayer's AGI. An above-the-line deduction can be taken by any
taxpayer regardless of whether the taxpayer itemizes. Moreover,
an above-the-line deduction reduces AGI, and having a smaller
AGI can lower many subsequent calculations which will further
reduce taxes. As a result, above-the-line deductions are more
advantageous than those taken below the line. Once AGI is
determined, a taxpayer can either itemize deductions or take the
standard deduction, whichever is greater. Once itemized
deductions exceed the standard deduction, other smaller
below-the-line deductions, such as miscellaneous expenses, can
be applied to increase tax savings. However, in order to take
advantage of a miscellaneous below-the-line deduction, total
expenses must exceed 2% of AGI and all deductions in total must
exceed the standard deduction. Currently, less than one-half of
California individuals itemize their deductions.
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6. Potential for reverse nonconformity. California law does
not automatically conform to changes to federal tax law, except
under specified circumstances. Instead, the Legislature must
affirmatively conform to federal changes. Generally, when the
federal government changes its tax laws, California catches up
by enacting its own legislation the following year to reduce
differences between the two codes, thereby easing the tax
preparation burden on taxpayers, tax preparers, and the
Franchise Tax Board. Currently, under federal tax law there is
a deduction for qualified tuition and related expenses for
higher education and SB 1148 conforms with some changes to the
federal deduction. However, the federal deduction is set to
sunset at the end of this year. If the federal deduction is not
extended, taxpayers would be entitled to a deduction for state
tax purposes, but not for federal tax purposes after January 1,
2017.
Support and
Opposition (4/28/16)
Support : California Academy of Family Physicians.
Opposition : California Tax Reform Association.
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