BILL ANALYSIS �
AB 2004
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Date of Hearing: April 9, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2004 (Knight) - As Introduced: February 23, 2012
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income tax: gross income exclusions: combat zone
compensation and disability retirement payments.
SUMMARY : Excludes from gross income Combat-Related Special
Compensation (CRSC) and
Concurrent Retirement and Disability Pay (CRDP) payments, as
defined. Specifically, this bill :
1)Excludes from gross income, for taxable years beginning on or
after January 1, 2013, CRSC and CRDP payments received by an
eligible individual.
2)Defines an "eligible individual" as an active, reserve, or
retired member of the United States (U.S.) military who served
on active duty.
3)Defines "CRSC" as payments received by an eligible individual
who performed service in a combat zone, as provided in Section
641 of Public Law 108-136.
4)Defines "CRDP" as payments received by an eligible individual
who is retired and entitled to receive disability income, as
provided in Section 642 of Public Law 108-375.
5)Provides that no inference should be drawn with respect to the
proper tax treatment of any CRSC or CRDP payments received
before January 1, 2013.
6)Takes effect immediately as a tax levy.
EXISTING FEDERAL/STATE LAW :
1)Provide that "gross income" includes all income from whatever
source derived, including compensation for services, business
income, gains from property, interest, dividends, rents, and
royalties, unless specifically excluded.
AB 2004
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2)Exclude from gross income certain types of income received by
an individual as a result of the individual's active service
in the Armed Forces of the U.S. as follows:
a) A pension, annuity, or similar payment for personal
injuries or sickness that resulted from combat-related
service in the Armed Forces or a disability annuity.
�Internal Revenue Code (IRC) Section 104];
b) Compensation received for active service by a member of
the U.S. Armed Forces below the grade of commissioned
officer for any month during which the individual served in
combat zones or was hospitalized as a result of wounds,
disease, or injury incurred in a combat zone. (IRC Section
112);
c) The premium paid into a survivor annuity account for the
qualified survivors of military personnel;
d) Disability retirement pay that is computed on the basis
of the percentage of disability. (IRC Section 104);
e) Dividends and proceeds from maturing government
endowment insurance contracts under the National Service
Life Insurance Act of 1940 and all other acts relating to
veterans;
f) Interest left on deposit with the Veterans
Administration;
g) Veterans' benefits under any law administered by the
U.S. Department of Veterans Affairs (VA), including amounts
paid to veterans or their families in the form of
educational, training, or subsistence allowances,
disability compensation and pension payments for
disabilities, compensation for participation in a work
therapy programs (38 U.S.C. �5301 and following); and,
h) Armed Forces allowances. (IRC Section 265).
3)Defines "combat-related injuries" as injuries that were
incurred as a direct result of armed conflict, while engaged
in extra-hazardous service, or in the performance of duty
under conditions simulating war.
AB 2004
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4)Does not exclude from gross income CRDP, which is paid for
non-combat related injuries.
5)Exempts from taxation military death benefits paid to
qualified survivors. (IRC Section 134).
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
that this bill will result in an annual General Fund loss of $38
million in the fiscal year (FY) 2013-14 and $26 million in FY
2014-15.
COMMENTS :
1)Author's Statement . The author states that, " As more and
more troops return from combat, we believe that these special
classifications of payments, Combat Related Special
Compensation and Concurrent Retirement and Disability Pay,
which are based upon combat injuries sustained in battle,
should not be included in gross income for state taxes as they
are exempt for federal taxes. California's veterans returning
from hazardous missions overseas have selflessly put
themselves in harm's way, and deserve to fully take advantage
of the state and federal benefits they have earned."
2)Existing Tax Treatment of Military Compensation Under Federal
and State Laws . Prior to the enactment of the Tax Reform Act
of 1986, a variety of benefits for military personnel were
excludable from gross income under federal law and various
regulations. In 1986, Congress determined that, in the
future, no such exclusions would be permitted except under
some provisions of the IRC, but "grandfathered" all of the
previous non-Code exclusions. (IRC Section 134).
Benefits administered by the VA, including disability
compensation, are not subject to federal income tax. As
explained by the FTB staff, before 2002, federal law
"prohibited the concurrent receipt of military retired pay and
disability compensation from the VA for the same period of
service. Consequently, the retired pay of a military retiree
was reduced by the amount of disability compensation received
from the VA. In 2002, federal law was amended to authorize
the payment of additional compensation for a combat-related
disability to certain military retirees, known as CRSC. The
CRSC payment is considered disability compensation and is
excluded from gross income under both federal and state tax
AB 2004
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laws. In 2003, Congress authorized additional payments to
those military retirees whose retired pay was reduced by the
amount of disability compensation administered by the VA.
However, the new retired pay, known as CRDP, is subject to
both federal and state income taxes.
3)What Does This Bill Do ? This bill is intended to create an
exclusion from gross income for two types of military retiree
compensation: CRSC and CRDP payments. CRSC compensation is
paid for combat-related injuries and, as explained above, is
considered disability compensation. It is currently not
taxable under the federal and state laws. In contrast, CRDP
payments are paid to a retired member of the U.S. military for
non-combat related injuries and are taxable under both federal
and state law. Thus, because one type of payments - CRSC - is
already excluded from gross income, this bill, in essence,
provides an exclusion from gross income only for CRDP
compensation received in taxable years beginning on or after
January 1, 2013.
4)Income Limitation . This bill provides an exclusion from gross
income for CRDP to all military retirees, regardless of their
income. Tax exemptions are, often, granted with some type of
income limitation.
5)Non-Conformity to Federal Law . State conformity with federal
law promotes greater simplicity and eases administration of
complex tax laws. By providing an exclusion from gross income
for retired pay and survivor annuities, this bill would bring
California out of conformity with the federal law.
6)Sunset Date . This bill lacks a sunset date to allow periodic
legislative review of this tax expenditure. The Committee
staff recommends an amendment to add a sunset date.
7)FTB's Proposed Amendments. In addition, the FTB staff
recommends several technical amendments to reflect a more
accurate description of the military payments in question.
8)Legislative History .
SB 401 (Wolk), Chapter 14, Statutes of 2010, provided specified
date conformity to the IRC, including the gross income
exclusions for combat-related injury pay and combat-related
disability pay.
AB 2004
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AB 1077 (Anderson), introduced in the 2009-10 Legislative
Session, would have allowed an individual to exclude
retirement pay and survivor annuities received as a result of
active service from gross income. AB 1077 was held under
submission in this Committee.
AB 2952 (Mountjoy), introduced in the 2003-04 Legislative
Session, would have exempted from income taxes the first
$50,000 of income of a surviving spouse of a member of the
Armed Forces who dies in a military combat or terrorist
action. AB 2952 failed passage in the Senate Revenue and
Taxation Committee.
SB 948 (Morrow), introduced in the 2003-2004 Legislative
Session, would have exempted from inclusion in gross income
all income of a spouse of a member of the Armed Forces who
dies as a result of certain military-type actions for the year
of the member's death and the following three years. SB 948
failed passage in the Senate Appropriations Committee.
AB 294 (Zettel and Kehoe), introduced in the 2001-02 Legislative
Session, would have allowed qualified individuals to exclude
from gross income the amount of survivor annuities received as
a result of active service in the Armed Forces of the U.S. AB
294 was held under submission in this committee.
AB 2168 (Bogh), introduced in the 2001-02 Legislative Session,
would have allowed qualified individuals to exclude from gross
income up to $10,000 of retirement income and benefits
received by qualified individuals. AB 2168 was held under
submission in this committee.
SB 1725 (Haynes), introduced in the 1999-2000 Legislative
Session, would have excluded from "gross income" all federal
military retirement benefits or payments received under the
Survivors Benefits Plan program and the first $20,000 of
military retirement pay. SB 1725 was held under submission in
the Senate Revenue and Taxation Committee.
AB 53 (Klehs), Chapter 1138, Statutes of 1987, repealed the
pension and retirement pay exclusions as a result of active
duty in the Armed Forces.
REGISTERED SUPPORT / OPPOSITION :
AB 2004
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Support
American Legion-Department of California
AMVETS - Department of California
California Association of County Veterans Service Officers
California State Commanders Veterans Council
Vietnam Veterans of America - California State Council
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098