BILL ANALYSIS
AB 675
Page 1
Date of Hearing: May 18, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 675 (Gilmore) - As Introduced: February 25, 2009
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Personal Income Tax Law: deductions: 529 college
savings plans
SUMMARY : Allows a deduction under the Personal Income Tax Law
for contributions made to a qualified tuition program (QTP), as
specified. Specifically, this bill :
1)Allows, for taxable years beginning on or after January 1,
2009, a deduction equal to the lesser of:
a) The amount contributed by a "qualified taxpayer" during
the taxable year to a QTP under Internal Revenue Code (IRC)
Section 529, as modified by state law; or,
b) $3,000 in the case of a taxpayer who is single or is a
married individual filing a separate return, or $6,000 in
the case of a taxpayer who is a married individual filing a
joint return or an individual filing a head of household
return.
2)Defines "qualified taxpayer" as an individual who, on behalf
of a beneficiary, contributes money to a QTP and meets all of
the other applicable requirements of IRC Section 529, as
modified by state law.
3)Provides that the deduction shall not be subject to the 2%
floor that generally applies to miscellaneous itemized
deductions.
4)Provides that the deduction shall be taken with respect to the
taxable year in which the contribution is made.
5)Take immediate effect as a tax levy.
AB 675
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EXISTING LAW :
1)Allows individuals to deduct either a fixed amount, indexed
for inflation, known as the standard deduction, or the amount
of a taxpayer's itemized deductions, whichever is greater.
Certain expenses, such as medical expenses, charitable
contributions, interest, and taxes, are deductible as itemized
deductions. The law also provides for "miscellaneous itemized
deductions", which are those itemized deductions not
specifically listed in IRC Section 67(b). As a general rule,
miscellaneous itemized deductions are allowed only to the
extent that the aggregate of such deductions exceeds 2% of
adjusted gross income.
2)Provides tax-exempt status to QTPs. QTPs are programs
established and maintained by a State (or by an eligible
educational institution) under which a person may purchase
tuition credits or make cash contributions to meet the
qualified higher education expenses of a designated
beneficiary. Contributions to a QTP cannot exceed the amount
necessary to provide for the beneficiary's qualified higher
education expenses. Distributions to a beneficiary are
excluded from income. However, contributions made to a QTP
are not deductible.
FISCAL EFFECT : The Franchise Tax Board estimates that this bill
would reduce state revenues by $25 million in fiscal year (FY)
2009-10, $29 million in FY 2010-11, and $35 million in FY
2011-12.
COMMENTS :
1)The author states, "Facing rising costs and economic
uncertainty, more and more Central Valley families are having
a difficult time affording a college education for their
children. It is a tragedy that all that is standing in the
way of a college education and a bright future for so many
students in our community is cost. By allowing pre-tax
deductions for contributions for college savings, we can make
the dream of a college education come true for so many more
deserving students in California."
2)Proponents state, "In creating the 529 program the federal
government left it up to the states to add further incentives.
The enormity of the cost of post-secondary education can be
AB 675
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alleviated if parents and young people have a clear incentive
to start saving early."
3)Opponents state, "The state already provides enormous college
benefits to Californians through the state university, college
and community college system. We do not believe state
taxpayers should be asked to subsidize additional college
savings accounts, particularly since the motivation to save
for college is already so strong. More specifically, the
families that cannot afford college education are in lower tax
brackets and cannot save, and therefore those most in need of
assistance will not benefit from this program. The cost of
such savings would be better put to direct student aid."
4)Committee Staff Notes:
a) Conformity issues : As noted above, California conforms
to IRC Section 529, with slight modifications. In general,
state conformity with federal law promotes greater
simplicity and eases administration of complex tax laws.
By providing a deduction for contributions made to QTPs,
this bill would bring California out of conformity with
federal law.
b) What are "qualified higher education expenses"? : IRC
Section 529 defines the term to mean "tuition, fees, books,
supplies, and equipment required for the enrollment or
attendance of a designated beneficiary at an eligible
educational institution." The American Recovery and
Reinvestment Act, however, temporarily expanded the list of
expenses eligible for tax-free withdrawals from a 529
account. In 2009 and 2010, the term "qualified higher
education expenses" includes, at the federal level,
"computer technology or equipment" and Internet access and
related services.
c) Related legislation :
i) SB 323 (Oropeza) of the current Legislative Session
would allow taxpayers to direct an amount in excess of
their tax liability to a QTP account. This bill is
currently in the Senate Appropriations Committee.
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ii) AB 819 (Runner) of the 2007-08 Legislative Session
would have allowed an above-the-line deduction for
contributions made by a qualified taxpayer to a QTP. AB
819 was held in this Committee.
iii) SB 643 (Florez) of the 2007-08 Legislative Session
would have allowed a deduction for contributions made by
a qualified taxpayer to a QTP. SB 643 was held in the
Senate Committee on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
Board of Equalization Member Bill Leonard
Securities Industry and Financial Markets Association
Opposition
American Federation of State, County and Municipal Employees,
AFL-CIO
California School Employees Association, AFL-CIO
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098