BILL ANALYSIS
AB 1735
Page 1
Date of Hearing: May 3, 2010, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 1735 (Harkey) - As Introduced: February 4, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income tax: education and training expenses: credit.
SUMMARY : Allows, for each taxable year beginning on or after
January 1, 2010, a credit for the 50% of the costs paid or
incurred by a taxpayer for education and training.
Specifically, this bill :
1)Allows a credit, under both the Personal Income Tax (PIT) Law
and the Corporation Tax (CT) Law, in an amount equal to 50% of
the costs paid or incurred by a taxpayer during the taxable
year for education and training provided to either the
taxpayer or its employees.
2)Defines "education and training" as education and training
provided to the:
a) Taxpayer's employees to maintain or improve a skill
required for the taxpayer's trade or business.
b) Taxpayer in order to comply with the express
requirements imposed by the taxpayer's employer or by laws
or regulations as a condition of the taxpayer's retention
of an established employment relationship, status, or rate
of compensation.
3)Authorizes the taxpayer to carry forward the tax credit to the
following tax year, and succeeding years, if necessary, until
the credit is exhausted.
4)Disallows any deduction for the amount of qualified expenses
for which a credit is allowed to the taxpayer.
5)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
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1)Allows a tax credit, called the Lifetime Learning Credit, of
up to $2,000 for qualified educational expenses, which include
tuition and certain related expenses required for enrollment
in a course at an eligible educational institution. The
course must either be part of a post-secondary degree program
or taken by the student to acquire or improve job skills.
This tax credit is phased out if the taxpayer's adjusted gross
income (AGI) is between $50,000 and $60,000 ($100,000 and
$120,000 for taxpayers filing a joint return).
2)Excludes from the taxpayer's gross income payments received by
the taxpayer from his/her employer, up to $5,250, for tuition,
fees, books, supplies, and equipment under the employer's
educational assistance program. Educational assistance does
not include a) tools or supplies retained by the employee
after completion of the instruction; b) meals, lodging or
transportation; or c) courses involving sports, games, or
hobbies. The term "education" includes any form of
instruction or training that improves or develops the
capabilities of an individual. Education may be furnished
directly by the employer, or through a third party such as an
educational institution. Education is not limited to courses
that are job related or part of a degree program.
EXISTING STATE LAW :
1)Provides various tax credits designed to provide tax relief
for taxpayers who incur certain expenses or to influence
taxpayers' behavior.
2)Does not conform to the federal Lifetime Learning Credit law,
nor does it provide for a comparable tax credit.
3)Conforms, in general, to the exclusion of up to $5,250 of
employer-provided educational assistance benefits from an
employee's gross income.
FISCAL EFFECT : The Franchise Tax Board's (FTB) staff estimates
that this bill will result in an annual loss of $260 million in
the fiscal year (FY) 2010-11, $230 million in FY 2011-12, and
$240 million in FY 2012-13.
COMMENTS :
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1)Author's Statement . The author states that, "This bill would
allow a tax credit of 50% of the costs paid or incurred in
connection with additional education and training for purposes
of career advancement or retention."
2)Arguments in Support . The author argues that, as California
crawls out of the recession, our economy will require a
dynamic and educated workforce that is able to compete in the
global marketplace. At a time when so many people are going
back to school, AB 1735 would provide an incentive for both
employees and employers to seek out educational opportunities.
Workers want more education but may not be able to afford the
cost, and employers want their workers to learn more but often
need help in defraying the cost of continuing education. This
bill would give employers an incentive to invest in their
businesses and their employees.
3)Arguments in Opposition . The opponents argue that this bill
is not based on sound tax policy because, instead of
encouraging new economic activity, it simply rewards activity
that will take place anyway. They further claim that both
employers and employees are already motivated to seek
additional training to increase productivity and improve their
income-earning opportunities, respectively. Finally, the
opponents conclude that California's labor force is among the
most productive in the world because of the opportunities
provided by our education system, and not because of tax
credits for skill improvement.
4)Existing Tax Incentives for Continuing Training and Education .
Current California tax law provides for several tax
incentives for employers and employees who invest in
continuing education and training. The expenses incurred by
employers in training employees are uniformly regarded as a
business expenditure, which means that these expenses can be
fully deducted from gross income as "ordinary and necessary"
business expenses. The cost of continuing education provided
to the employer - the business owner - is also deductible as a
business expense as long as the education maintains or
improves skills required in the employer's trade or business,
or that is required by law or regulations for maintaining a
license to practice, keep the salary, or hold a job. For
example, a practicing attorney may deduct the cost of
continuing legal education if the continuing legal education
is a requirement for maintaining the membership in the State
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Bar Association. However, expenses for re-training for
another position or expenses necessary to meet the minimum
requirements for a position are not eligible for a deduction
(e.g., a law student may not deduct the cost of a bar exam
even if she/he working part-time at a law firm while studying
the exam).
An individual taxpayer may also deduct certain educational
expenses, but only to the extent those expenses are
work-related and they exceed 2% of the taxpayer's AGI. The
costs of preparing for state credentialing (certification,
licensing or registration) examinations that are required in
order to practice certain professions are not currently
deductible. In addition, an individual may exclude from
his/her gross income payments, up to $5,250, received from
his/her employer for tuition, fees, books, supplies, or
equipment under the employer's educational assistance program.
Education under this program does not have to be job-related
or be part of a degree program.
5)Deductions vs. Credits. This bill proposes a tax credit for,
what seems to be, the same expenses that could be currently
deducted by an employer, or in some instances by an employee
as well. But the value of a tax credit greatly exceeds the
value of a deduction. A tax credit is more valuable because
it lowers the tax liability dollar for dollar. A deduction
decreases the taxable income, so the value depends on one's
tax bracket. For example, if a taxpayer is in the 25%
bracket, a $1,000 deduction would lower the taxpayer's tax
bill by $250. In contrast, a $1,000 credit decreases the tax
liability by the full $1,000, regardless of the tax bracket.
6)The Costs of Training of Non-California Employees Would
Qualify for the Credit . Clearly, a highly educated workforce
is one of the most important factors of sustaining a healthy
and diversified economy in California. However, the
application of this bill is not limited to California
workforce and, arguably, would be extended to the qualified
costs incurred by employers in providing education and/or
training to their employees based outside of California.
Committee staff suggests that this bill be amended to limit
its application only to costs of providing education and
training to California-based employees.
7)The Limitation on the Amount of Credit . This bill limits the
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amount of credit that could be taken by a taxpayer to 50% of
the amount of qualified educational and training expenses. It
also prevents double-dipping by specifying that no taxpayer
may claim a deduction for the same expenses for which a credit
is claimed. Nonetheless, this bill still presents an
opportunity for taxpayers to engage in tax planning by
allowing taxpayers to control the timing of incurring the
qualified expenses and the amount spent for education or
training of their employees. The Committee may wish to
consider amending this bill to cap the amount of credit at the
lesser of 50% of the qualified costs or a specific dollar
amount.
8)No Recapture Provision . While this bill is intended to make
it easier for an employer to invest in its employees, it does
not require the employer to retain those employees on its
payroll once the credit has been claimed. In fact, there is
no condition imposed on the employers to maintain a certain
number of jobs (if not re-trained employees) for a specified
time period. The Committee may wish to consider requiring
employers to repay a portion of the credit amount if they fail
to retain their employees for at least one calendar year
following the taxable year in which the credit was claimed.
9)California Workforce Development Programs: Tax Credits vs.
Grants. Although well intentioned, this bill represents an
attempt to use the tax code to accomplish a public policy
objective that would be more efficiently addressed through
direct outlay of state funds.
There are several workforce development programs in the state.
They are primarily administered through the Labor and
Workforce Development Agency and the California Community
College System. One of the largest programs of its kind in
the nation is the Employment Training Panel (ETP), a business-
and labor-supported state agency that funds job skill
development initiatives that have good pay potential. The ETP
provides customized training to new and current workers of
California employers, particularly those facing out-of-state
competition. One source of funding is provided by an
assessment of one tenth of 1% of unemployment insurance wages
paid by every private, for-profit employer in the state, as
well as some non-profits amounting to no more than $7.00 per
covered employee per year. This past year, ETP also received
American Recovery and Reinvestment Act of 2009 funding and, in
2010, the Governor is proposing a new $500 million multi-year
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training program. ETP has paid more than $1 billion in
training funds since its inception, and trained more than
660,000 California workers. In California, 60,000 businesses
have been served, with 80% of companies having been small
businesses with fewer than 250 employees per firm. Research
has shown that for every $1.00 invested in the ETP Program,
$5.00 is returned in economic benefits. (Keeping the Promise:
Examination of Workforce Training and Job Development
Services for Veterans, a Report by the Assembly Committee on
Jobs, Economic Development and the Economy, March 2, 2010).
As noted by the California Budget Project, nearly two-thirds of
the projected 2020 labor force is already past high-school
age, and meeting the needs of working adults requires changes
in the areas that include financial aid policies, supportive
services, such as child care and transportation, new
approaches to teaching and curriculum design, and flexibility
in the scheduling of classes. (California Budget Project,
Mapping California's Workforce Development System: A guide to
Workforce Development Programs in California, 2009). It was
also suggested that one promising strategy for addressing both
the needs of workers and employers is employment and training
programs that target a specific industry and work to meet its
local labor market needs. (Id.).
This bill uses the tax system as a convenient means of
delivering a specific subsidy to those companies that either
provide training and continuing education to their employees
or pay to a third party to train and educate those employees.
But, it appears that a stand-alone tax credit is not
sufficient to improve the state's workforce or to ensure that
the state's workers have the skills needed to compete in the
global marketplace. The Committee may wish to consider
whether a direct grant program would be a better vehicle to
achieve these goals.
10)Sunset Date . This bill contains neither a sunset date nor a
requirement to review the effectiveness of the education and
training tax credit. The Committee may wish to ask the author
to add a five-year sunset to this bill and require the
Legislative Analyst to prepare a study regarding the impact of
this tax credit on the California economy and to report back
to the Legislature its findings prior to the sunset date.
11)Unlimited Carryover Period . This bill allows for an
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unlimited carryover period, which means that qualified
taxpayers may use the credit to offset their tax liability
indefinitely. Typically, tax credits are enacted with a
limited carryover period since it has been shown, as noted by
FTB, that credits, generally, are exhausted within eight years
of being earned.
12)Suggested FTB Amendments .
a) As noted in the FTB analysis, this bill lacks the
definitions of "employee," "skills required," "established
employment relationship," "status," and "qualified
expenses." The absence of definitions may lead to disputes
between taxpayers and FTB, and could complicate the
administration of this credit.
b) The FTB staff also states that it is unclear who would
certify whether employees have met the education and
training requirements to qualify for the credit. The FTB
staff suggests that an agency that possesses the relevant
experience be designated for purposes of providing a
confirmation or certification that could be attached to the
taxpayer's return.
c) It is unclear what types of employees qualify the
taxpayer for the credit and whether all job classifications
would be included.
d) The FTB staff recommends that this bill be clarified to
ensure that the credit cannot be claimed by both the
employee and employer.
e) On page 2, lines 14 and 15, strike out "next tax" and
insert "net tax"
f) On page 2, strike out line 27 and in line 28, strike out
"(1)"
g) On page 2, strike out lines 31 through 35.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
AB 1735
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Opposition
California Labor Federation
California Tax Reform Association
Analysis Prepared by : Oksana G. Jaffe / REV. & TAX. / (916)
319-2098