BILL ANALYSIS
SB 1827
Page 1
Date of Hearing: June 19, 2006
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Johan Klehs, Chair
SB 1827 (Migden) - As Amended: June 14, 2006
Majority vote. Fiscal Committee.
SENATE VOTE : 25-13
SUBJECT : Personal Income Tax: Domestic partners
SUMMARY : Requires registered domestic partners to file joint or
separate state tax returns, as specified. Specifically, this
bill :
1)Contains legislative declarations and findings on the
treatment of registered domestic partners with respect to
state income taxes.
2)Requires registered domestic partners to either file (a) a
joint state income tax return, or (b) a separate state income
tax return by applying the standards applicable to spouses who
file separately under federal income tax law.
3)Provides a rule to determine the application of limits based
on adjusted gross income for domestic partners by combining
the amounts reflected as adjusted gross income on the federal
income tax return of each domestic partner.
4)Revises existing provisions of law to treat registered
domestic partners as spouses for purposes of filing status as
follows:
a) If couples were registered as domestic partners as of
the close of the taxable year, they may file separate
returns if either partner was either an active member of
the Armed Forces or any auxiliary branch thereof, or was a
nonresident for the entire taxable year who had no income
from a California source.
b) Domestic partners may not file separate returns for any
taxable year where a joint return has already been filed
after the original filing period to file a return has
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expired.
c) No joint return can be made if the domestic partners
have different taxable years, subject to exception.
d) Extends to registered domestic partners the same rules
with respect to filing status that are applicable in the
event of the death of one or both spouses.
5)Applies the California community property rules to registered
domestic partners in the same manner as married couples.
EXISTING FEDERAL LAW specifies:
1)Five different filing status choices for federal tax purposes.
The appropriate filing status to select is based on the
following rules:
a) An individual may choose the filing status "married
filing jointly" if any of the following apply:
i) An individual is married at the end of the taxable
year, even if that individual did not live with their
spouse at the end of the year;
ii) An individual whose spouse died during the taxable
year, and the individual did not remarry during that same
taxable year; or
iii) An individual was married at the end of the taxable
year and the spouse died in the next taxable year but
before the tax return is filed.
b) An individual may choose the filing status "married
filing separately" if the individual is married and chooses
to file a separate tax return from the spouse. Each spouse
reports on separate returns half of the couple's community
income and the total amount of the spouse's separate
income. Generally, an individual choosing this filing
status will pay more tax.
c) An individual may choose the filing status "head of
household" if the individual is unmarried at the end of the
tax year (or treated as unmarried) and provides a home for
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certain individuals for more than half of the tax year.
d) An individual shall choose the filing status "single" if
the individual was any of the following:
i) Never married;
ii) Legally separated according to state law, under a
decree of divorce or separate maintenance; or
iii) Widowed before the beginning of the tax year and did
not marry during the tax year.
e) An individual may choose the filing status "qualifying
widow(er) with dependent child" if all of the following
apply:
i) The spouse died in either of the prior two taxable
years;
ii) The widow(er) has a child or stepchild whom is
claimed as a dependent;
iii) The child lived with the widow(er) for all of the
taxable year, except for temporary absences for special
circumstances;
iv) The widow(er) paid over half the cost of keeping up
the home; and
v) The widow(er) could have filed a joint return with
the spouse in the year of death.
2)That registered domestic partners only have the filing status
choices of "single" or "head of household."
EXISTING LAW :
1)Requires an individual to use the same filing status as that
used on the federal income tax return for the same taxable
year; therefore, registered domestic partners only have the
filing status choices of "single" or "head of household" for
state purposes.
2)Provides that earned income will not be treated as community
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property for state income tax purposes for registered domestic
partners.
3)Specifies that registered domestic partnerships include
same-sex partnerships and opposite-sex partnerships in which
one or both partners are age 62 or older and receive Social
Security benefits.
4)Provides that registered domestic partners shall have the same
rights, protections, and benefits and shall be subject to the
same responsibilities, obligations, and duties as imposed upon
a spouse.
FISCAL EFFECT : Franchise Tax Board (FTB) staff estimate a
revenue loss of $8 million in fiscal year (FY) 2007-08, $9
million in FY 2008-09, and $10 million in FY 2009-10.
Proposition 98 Fiscal Effect : Based upon the anticipated FY
2006-07 Budget, this bill will have no revenue impact on funding
for K-14 schools in FY 2006-07. Committee staff estimate that
the revenue loss to K-14 school funding will be $4.32 million in
FY 2007-08, and between $3.2 million and $4.8 million in FY
2008-09.
COMMENTS :
1)The author comments, "Under current law, married couples have
more favorable tax treatment than domestic partners. Domestic
partners share the same expenses as married couples and
deserve the same tax treatment."
2)FTB staff note that automated systems are used to compare
taxpayer return information to files received from other state
and federal agencies, including the Internal Revenue Service
(IRS). These automated systems search through IRS records by
Social Security Number and name and compares information on
the taxpayer's federal income tax return to the information on
the California income tax return. Current law generally
requires the filing status of the taxpayer for the state tax
return to be the same filing status as on the federal return;
the information systems have the ability to verify joint
returns based on the primary taxpayer's information. Domestic
partners are required to file separate federal income tax
returns and this bill would allow domestic partners to file a
joint state income tax return; the department anticipates a
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significant delay in the ability of the automated systems to
compare taxpayer information. The systems would be required
to process the federal information more than once as the
systems search for the primary taxpayer and the secondary
taxpayer individually because each taxpayer would have a
separate return at the federal level. The systems would need
additional programming and testing prior to being operational.
3)In the case where a "head of household" filer and a "single"
filer combine tax returns to file jointly there could be an
increase in tax. This is due to the fact that we provide
incentives for head of households meant to mitigate the tax
burden associated with a single taxpayer with multiple
dependents. This bill would negate that incentive. It is
important to note that there is no marriage penalty in
California for joint returns.
4)The Secretary of State estimates that the total number of
registered domestic partners in California will be 40,950 by
December 2007.
5)FTB staff estimate that of all tax returns associated with
this bill, 59% would see a reduction in taxes; 29% would
experience no change in taxes; and 12% would experience an
increase in taxes.
6)Committee staff note that a different filing status for
domestic partners on their state and federal returns could
lead to confusion related to the federal deduction of state
tax and the inclusion in income of a refund previously
received for this deduction. There might not be a direct
match between state and federal reported income, leading to an
increase in federal inquiries or audits.
7)According to supporters of this bill, there have been unfair
financial burdens on domestic partners and their families,
especially those they bear under the state's tax laws. After
the passage of the comprehensive domestic partnership law
enacted in 2003, registered domestic partners have assumed
mutual financial responsibility of each other on the same
terms as spouses. Yet, the state's laws deny them equal
treatment with respect to state income taxes denying the
convenience and financial benefits that sometimes come with
filing a joint return. This bill, according to the
supporters, will make a significant difference in the lives of
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thousands of same-sex couples in the state and will be a
statement of respectful inclusion for all.
8)Opponents assert that the tax benefit that is conferred to
domestic partners under this bill is the last marital benefit
still reserved for married couples. They comment that the
benefits of marriage have been largely transferred to same-sex
relationships without the consent of California voters,
despite the passage of Proposition 22, which defined marriage
as between one man and one woman. Opponents also comment that
this bill could create confusion with federal law - leading to
additional taxpayer expense.
9)AB 205 (Goldberg), Chapter 421, Statutes of 2003, as
introduced on January 28, 2003, allowed domestic partners to
file personal income tax returns as either (a) married filing
joint, or (b) married filing separate. In addition, the bill,
as chaptered, made changes to various California laws
regarding domestic partners, including the creation of
community property rights. It also added language that
required the same filing status on a state income tax return
as used on the federal income tax return and provided that
earned income is not community property for state income tax
purposes. The provisions of joint filing were removed from
the bill. AB 25 (Migden), Chapter 893, Statutes of 2001,
allowed several existing taxpayer benefits for medical
expenses and health insurance benefits to include a taxpayer's
domestic partner and a domestic partner's dependents.
10)For tax periods ending on or after May 16, 2004,
Massachusetts recognizes the right of same-sex couples to be
married. As a consequence, same-sex spouses that marry shall
file Massachusetts income tax returns as married filing joint
or married filing separate. Massachusetts is not a community
property state.
REGISTERED SUPPORT / OPPOSITION :
Support
Attorney General Bill Lockyer
Equality California (sponsor)
Gay and Lesbian Alliance of the Central Coast
Lambda Letters Project
L.A. Gay & Lesbian Center
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San Francisco AIDS Foundation
San Francisco LGBT Community Center
State Controller Steve Westly
State Treasurer Phil Angelides
Stonewall Democratic Club of Greater Sacramento
Opposition
California Catholic Conference
Concerned Women for America
Analysis Prepared by : Sabrina Landreth / REV. & TAX. / (916)
319-2098