BILL ANALYSIS �
AB 1786
Page 1
Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1786 (Olsen) - As Amended: April 1, 2014
Majority vote. Fiscal committee. Tax levy.
SUBJECT : Personal Income taxes: deduction: education expenses
SUMMARY : Allows an "above-the-line" deduction for the cost of
education-related expenses of the taxpayer's dependent child
attending public or private school, not to exceed $2,500.
Specifically, this bill :
1)Allows an "above-the-line" deduction, beginning on or after
January 1, 2015, and before January 1, 2020, for an amount
equal to the qualified amount that was paid or incurred for
qualified education-related expenses for one or more dependent
children by a qualified taxpayer during the taxable year.
2)Defines "dependent children" as children who attended
kindergarten or any grades 1 through 12 in California at a
public, charter, or private school that has a current private
school affidavit on file with the State Department of
Education in the taxable year and meets the requirements of
Internal Revenue Code (IRC) Section 152(c)(1)(D) and (E).
3)Defines "qualified amount" as the amount paid or incurred for
qualified education-related expenses, not to exceed $2,500.
4)Defines "qualified education-related expenses" as the
following costs, incurred for kindergarten or for any grades 1
through 12:
a) Textbooks;
b) School supplies, which include, but are not limited to,
pens, paper, pencils, calculators, and rulers;
c) Rental or purchase of educational equipment required for
classes during the regular school day;
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d) School uniforms that are not part of a co-curricular
activity;
e) Computers, computer hardware, and educational computer
software used to learn academic subjects;
f) Fees for college courses at public institutions or
independent nonprofit colleges, or for summer school
courses that satisfy high school graduation requirements;
g) Psycho-educational diagnostic evaluations to assess the
cognitive and academic abilities of pupils;
h) Special education and related services for pupils who
have an individualized education program or its equivalent;
i) Out-of-school enrichment programs, tutoring, and summer
programs that are academic in nature; and,
j) Public transportation or third-party transportation
expenses for traveling directly to and from school.
5)Provides that "qualified education-related expenses" shall not
include any expenses for the items listed under the definition
of "qualified education-related expenses" that are used in a
trade or business.
6)Defines a "qualified taxpayer" as a parent or legal guardian
of a full-time pupil who is under 21 years of age at the close
of the school year who meets both of the following
requirements:
a) Both pupil and the parent or guardian reside in
California when the qualified education-related expenses
are paid or incurred; and,
b) The household income does not exceed 300% of the federal
Income Eligibility Guidelines published by the Food and
Nutrition Service of the United States Department of
Agriculture for use in determining eligibility for reduced
price meals.
7)Defines "household income" by reference to IRC Section 61.
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8)Provides that the deduction may not exceed $2,500 in a taxable
year. If more than one qualified taxpayer may be allowed this
deduction for a dependent child, the sum of all deductions
allowed under this section for the dependent child shall not
exceed $2,500 in a taxable year.
9)Provides that the Franchise Tax Board (FTB) may prescribe
rules, guidelines, or procedures necessary or appropriate to
carry out the purpose of this bill.
10)Provides that the provisions of this bill shall remain in
effect until December 1, 2020, and as of that date is
repealed.
11)Takes effect immediately as a tax levy.
EXISTING LAW :
1)Provides 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.
2)Provides that certain types of income are excluded from gross
income, such as amounts received as a gift or inheritance,
certain compensation for injuries and sickness, qualified
scholarships, educational assistance programs, foster care
payments, and interest received on certain state or federal
obligations.
3)Allows individuals to deduct certain expenses, such as medical
expenses, charitable contributions, interest, and taxes as
itemized deductions. Other expenses from the production of
income and certain employee business expenses are considered
miscellaneous itemized deductions.
4)Allows for an "above-the-line" deduction for certain expenses
when calculating adjusted gross income. These expenses
include expenses and interest on education loans, certain
ordinary and necessary trade and business expenses, losses
from the sale or exchange of certain property, contributions
for pension, profit-sharing and annuity plans of self-employed
individuals, retirement savings, and alimony. Thus, all
taxpayers with these types of expenses receive the benefit of
the deduction, regardless of whether the taxpayer itemizes
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deductions or uses the standard deduction.
FISCAL EFFECT : The FTB estimates that this bill will reduce
general fund revenue by $40 million in fiscal year (FY) 2015-16,
$41 million in FY 2016-17, and $43 million in FY 2017-18.
COMMENTS :
1)Author's Statemen t. The author has provided the following
statement in support of this bill:
Tax relief for citizens who shoulder an extra weight in
pursuit of a public good has long been considered sound
public policy. In 1983, the U.S. Supreme Court ruled that
such education tax relief programs are constitutional.
Fifteen states have education tax relief and/or incentive
programs which benefit children attending both public and
private schools. Almost half of these provide personal tax
deductions and /or credits to help support families with
the educational expenses of their school children.
In this spirit, such education tax policy is also available
on the federal level through Coverdell Education Savings
Accounts for certain expenses associated with elementary,
secondary, or postsecondary education in public or private
schools.
2)Arguments in Support . Supporters argue that schools have
continued to cut services and items that were once provided
free of charge, such as books, tutoring, after school
programs, and transportation. Supporters state that "tax
relief for citizens who shoulder an extra weight in pursuit of
the common good is sound policy. AB 1786 would empower
families to care for the K-12 learning needs specific to their
own children which they know most intimately; needs that
cannot be addressed by their particular schools. Such
education tax relief will help close summer learning gaps,
promote drop-out prevention and recovery, and lessen the
number of high school graduates who enter college needing
remedial assistance."
3)Arguments in Opposition . Opponents are against "any reduction
in revenue to the State's General Fund which would reduce
Proposition 98 funding. In the last several years, K-12
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education alone has taken over $20 billion in cuts. This does
not include cuts that have hit the California Community
Colleges, [California State University] and the [University of
California] systems. Likewise, we must not forget the cuts
that have also hit our social and health services, safety
programs, and many other essential services." Opponents
further state that many organizations "worked hard in the fall
of 2012 to add revenues to the General Fund via the tax
initiative, Proposition 30. Why would the Legislature
consider a measure that will take away from the General Fund,
when so many people worked so hard to increase those General
Fund revenues? We need to restore the cuts."
4)Proposition 30 . In general, Proposition 30 increased the
marginal tax rate for those making above $250,000 and
increased the statewide sales tax rate from 7.25% to 7.5%.
Proposition 30 was estimated to increase General Fund revenue
by about $6 billion per year, which would primarily be used to
restore funding to California's public school system. The
provisions of this bill are meant to counteract the lack of
funding once available to K-12 education. Specifically, this
bill seeks to remedy the fact that many schools are unable to
provide school supplies and books. However, as noted in the
Governor's Budget Summary, the budget for FY 2014-15 provides
$61.6 billion in Proposition 98 funding, an increase of $6.3
billion over the 2013 budget act level. It appears that new
revenues, provided in part because of the passage of
Proposition 30, have translated into additional funding for K
through 12.
5)Is This Bill Needed ? The California Supreme Court ruled in
Hartzell v. Connell (1984) 35 Cal.3d 899, 201) that pupil fees
violate the constitutional right to a free education.
Specifically, the court ruled that extracurricular activities
also must be free because they are an integral component of
public education and a part of the educational program. In
September 2010, the American Civil Liberties Union (ACLU)
filed a class action lawsuit alleging the unconstitutional
assessment of pupil fees by school districts [Jane Doe, et al.
v. State of California, et al., (Super. Ct. Los Angeles
County, 2010, BC445151)]. The lawsuit was brought forward
because ACLU reports showed that more than 50 public school
districts required pupils to pay fees for textbooks,
workbooks, science labs, physical education uniforms,
classroom materials, and extracurricular activities. Instead
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of moving forward with the lawsuit, the ACLU and interested
parties sought a legislative solution. As a result, AB 1575
(Lara), Chapter 776, Statutes of 2012, which was sponsored by
ACLU, codified the long held constitutional prohibition on the
imposition of pupil fees and established procedures to ensure
compliance with the prohibition.
Since the passage of AB 1575, many schools have stopped
imposing fees for participation and, in some cases, are paying
for items that were traditionally paid for by pupils and
parents. Most recently, school districts have informed
parents that caps and gowns will be provided free of charge.
Within the last year, parents throughout California have been
utilizing compliance procedures to challenge school districts
that require families to pay for Advanced Placement exams,
classrooms supplies, workbooks, and school uniforms. (Loretta
Kalb, California to Schools: Student don't have to pay for
graduation attire, other items 'integral' to education,
Sacramento Bee, May 7, 2014.) In some cases, parents and
activists are even challenging "supply lists" posted by school
for returning student. One parent, in the San Juan School
District, received a letter outlining a list of supplies that
children would need at the beginning of the year. The list
included items such as tissue paper, binders, pencils and
pens. The supplies cost parents between $70 and $100. In
response to the challenge to required supplies, the school
notified parents that all necessary materials will be provided
to school children and that "supply lists" are suggestions,
not required for full participation. Schools across
California have begun making similar changes to "required"
items and fees that are imposed on pupils. In most cases,
schools have stated that items will be provided free of
charge.
6)Implementation Considerations . The FTB's staff analysis notes
that "[t]his bill provides that if a deduction is allowed to
more than one qualified taxpayer for the same dependent child,
the total combined deduction amount allowed under this bill
cannot exceed $2,500 per taxable year. It is unlikely that the
parents or guardians would be aware of the other's qualified
expenses, and at the time returns are being processed, the
department would be unable to determine if the taxpayers had
exceeded the total combined limit of the deduction amount."
Additionally, FTB's staff analysis states that certain terms
are undefined and could lead to disputes.
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7)Technical Consideration . The FTB's staff analysis has
provided the following technical amendment to the
"above-the-line" deduction:
On page 4, strikeout lines 18 through 21 inclusive, and
insert:
"(d) Section (62)(a) of the Internal Revenue Code is
modified to provide that the deduction under Section
17052.5 shall be allowed in determining adjusted gross
income."
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Private School Organizations
California Catholic Conference
Concerned Women for America of California
20 individuals
Opposition
California Teachers Association
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098