BILL ANALYSIS �
AB 1831
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Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1831 (Conway) - As Amended: April 21, 2014
Majority vote. Fiscal committee.
SUBJECT : California Health Insurance Fairness Act: personal
income tax: deduction: medical insurance.
SUMMARY : Allows individual taxpayers, for taxable years
beginning on or after January 1, 2014, to deduct their medical
insurance premiums in computing their adjusted gross income
(AGI), as an alternative to the deduction allowed under current
law for itemized medical expenses subject to the 7.5% threshold.
Specifically, this bill :
1)Contains legislative findings and declarations relating to the
Affordable Care Act (ACA), which mandates individuals to
obtain health insurance by March of 2014, and the need to
level the playing field between those who receive insurance
from an employer and those purchasing it in the individual
market;
2)Allows an income tax deduction to a taxpayer, under the
Personal Income Tax (PIT) law, in computing his/her AGI for
the amounts paid during the taxable year for "medical care" of
the taxpayer.
3)Provides that the term "medical care" means, in modified
conformity to Internal Revenue Code (IRC) Section
213(d)(1)(D), amounts paid for the: (a) diagnosis, cure,
mitigation, treatment, or prevention of disease, or for the
purpose of affecting any structure or function of the body;
(b) transportation primarily for, and essential to, medical
care; and (c) insurance premiums covering medical care.
4)Excludes from the definition of "medical care" Medicare Part B
supplemental medical insurance and insurance for long-term
care services.
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5)Allows an individual taxpayer to choose between deducting
medical care amounts as a proposed deduction or as an itemized
deduction for medical expenses subject to the 7.5% of the AGI
threshold.
6)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
1)Allows an individual taxpayer to deduct unreimbursed medical
expenses as an itemized deduction, but only to the extent that
such expenses exceed 10% of the individual's adjusted gross
income (AGI).
2)Provides a temporary exception from the 10% AGI threshold for
tax years 2013 through 2016, for individuals who turn 65 years
of age before the end of the taxable year. Those individuals
are eligible to itemize their deduction for unreimbursed
medical expenses to the extent that the expenses exceed 7.5%
of AGI.
3)Defines "medical expenses" as amounts paid for: (a) the
diagnosis, cure, mitigation, treatment, or prevention of
disease, or for the purpose of affecting any structure or
function of the body, (b) transportation primarily for and
essential to such medical care, (c) medical insurance that
covers such medical care (including essential transportation
and amounts paid as premiums for Medicare Part B supplemental
medical insurance), and (d) long-term care services.
EXISTING LAW conforms, as of January 1, 2009, to the federal
provisions relating to itemized deductions for unreimbursed
medical expenses. Because the federal AGI threshold of 7.5% was
increased to 10% after January 1, 2009, the 7.5% threshold is
still effective under the PIT law.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual revenue loss of $470 million in the fiscal
year (FY) 2014-15, $550 million in FY 2015-16, and $600 million
in FY 2016-17.
COMMENTS :
1)The Author's Statement. The author has provided the following
statement in support of this bill:
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"Prior to 2010, taxpayers were able to deduct non-reimbursed
medical expenses from their federal personal income taxes in
excess of 7.5 percent of the taxpayer's adjusted gross income.
The federal Affordable Care Act increased that threshold to
10 percent, as of 2013.
"Assembly Bill 1831 would level the playing field for persons
not employed by large companies by allowing taxpayers to fully
deduct medical expenses.
"The vast majority of people who instead buy health insurance on
their own do not receive any tax relief and are buying health
insurance with post-tax dollars.
"Passing Assembly Bill 1831 would give these individuals some
much-needed relief from rising health care costs, especially
as they will face an increase in costs resulting from the
Affordable Care Act's (ACA) tax increase.
"Under the bill, taxpayer would choose between deducting their
medical insurance costs under this new deduction or as an
itemized deduction for amounts paid for medical care."
2)Arguments in support. The proponents of this bill state that
"one of the main barriers to health care coverage is the high
cost of obtaining and maintaining that coverage." They point
out that many middle income taxpayers "are not eligible to
receive subsidized coverage for health care through Covered
California," and "many others prefer to purchase coverage
outside of the Exchange in order to access wider networks of
providers." The proponents argue that this bill "provides an
equitable way help reduce the impact of new mandated health
care costs on Californians, thereby making healthcare coverage
more affordable in this state." Finally, they assert that
those individuals who do not have health insurance through an
employer "should not be punished, especially considering the
high volatility of the workforce and the insurance coverage
gap for those laid-off from their jobs and seeking new
employment."
3)Arguments in opposition . The opponents argue that the
proposed tax deduction is not necessary because the Affordable
Care Act allowed over 1 million Californians to obtain
affordable health insurance, with subsidies for those of
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moderate means. The opponents also state that, as a matter of
tax policy, "there is no evidence that [the proposed
deduction] would likely [make a difference] when it comes to
health insurance being affordable for poor and working class
families." Finally, the opponents note that "the vast
reduction in General Fund revenues that would result from [the
proposed deduction] would likely mean a reduction of General
Fund spending for programs that help those in need of medical
care who are outside the current insurance system."
4) A new tax expenditure . Existing law provides various
credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, U.S.
Treasury officials began arguing that these features of the
tax law should be referred to as "expenditures" since they
are generally enacted to accomplish some governmental
purpose and there is a determinable cost associated with
each (in the form of foregone revenues). As the Department
of Finance notes in its annual Tax Expenditure Report,
there are several key differences between tax expenditures
and direct expenditures. First, tax expenditures are
reviewed less frequently than direct expenditures once they
are put in place. This can offer taxpayers greater
economic certainty, but it can also result in tax
expenditures remaining a part of the tax code without
demonstrating any public benefit. Second, there is
generally no control over the amount of revenue losses
associated with any given tax expenditure. Finally, once
enacted, it takes a two-thirds vote to rescind an existing
tax expenditure absent a sunset date, effectively resulting
in a "one-way ratchet" whereby tax expenditures can be
conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority
vote. This bill would create a new tax expenditure in the
form of a deduction. The tradeoff for providing a new tax
expenditure, resulting in revenue losses, is higher taxes
or reductions in spending for other services or programs.
5) Affordable Care Act . Congress enacted the Patient
Protection and Affordable Care Act (Act) in March 2010,
which requires health plans and health insurers that offer
coverage in the individual market or the small group market
to provide coverage that is equivalent to the benefits of a
specified essential health benefits benchmark plan. As a
result of the new coverage minimum standards, 1.1 million
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individuals in California lost their existing health
insurance, but were able to purchase new, more
comprehensive health care plans. Under the ACA,
individuals with household income less than 400% of the
federal poverty level purchasing health plans through the
California Health Benefit Exchange are eligible for
cost-sharing subsidies and a refundable tax credit,
available on a sliding scale. Furthermore, starting with
2014, businesses with 50 or more full-time employees have
to offer health insurance plans. The ACA also increased
the federal AGI threshold of 7.5% for purposes of deducting
medical expenses, including payments for health insurance,
to 10%.
6)Need for the bill . Most Californians receive employer-paid
health insurance, the value of which is not included in the
employee's gross income. Self-employed taxpayers may deduct
premiums paid for medical, dental and qualifying long-term
care insurance coverage as an "above-the-line" deduction to
reduce their gross income. However, taxpayers who are neither
self-employed nor receive health insurance from their
employers may deduct their unreimbursed medical care expenses,
including health insurance premiums, only as an itemized
deduction. The intent of the author is to make health
insurance more affordable for taxpayers by allowing a tax
deduction from gross income, instead of an itemized deduction,
for the costs of health insurance and healthcare premiums.
According to the author, individuals who buy health insurance
on their own need relief from rising health care costs,
especially as the costs increase due to the ACA. Thus, this
bill proposes to eliminate the current 7.5% of the AGI
threshold and to allow an "above-the-line" deduction for
qualified medical care expenses.
7)"Above-the-line" vs. "below-the-line" deductions . An
"above-the-line" deduction is used to derive a taxpayer's AGI,
while a "below-the-line" deduction reduces California AGI to
derive taxable income. "Above-the-line" deductions are more
desirable than itemized deductions because they are more
available since they are not phased out or subject to a floor
like many itemized deductions. Furthermore, they can be
claimed even if the taxpayer does not itemize deductions.
Finally, they lower the taxpayer's AGI, which can allow the
taxpayer to qualify for more and/or larger deductions. While
providing a greater relief to taxpayers, could the proposed
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deduction push health insurance premium rates up, given the
indirect greater subsidy from the state?
8)The value of a tax deduction . Under existing law, taxpayers
may only claim an itemized deduction for unreimbursed medical
expenses, subject to the AGI threshold of 7.5% for all
individuals. A deduction is generally more valuable to
high-income taxpayers because the "value" of a deduction
varies with the marginal tax rate (or tax bracket) of the
taxpayer. For example, an individual taxpayer in the 10% tax
bracket would receive a tax benefit of $10 on a $100
deduction. In contrast, a taxpayer in the 25% tax bracket
will save $25 in tax out of every $100 deducted from gross
income. Thus, assuming the same level of deductions,
high-income taxpayers, presumably with a greater ability to
pay taxes, would receive a greater tax benefit from the
proposed deduction than the lower income taxpayer.
9)Non-Conformity to federal law . State conformity with federal
law promotes greater simplicity and eases administration of
complex tax laws. By providing "above-the-line" deduction
from gross income for health care premiums, this bill would
bring California further out of conformity with the federal
law.
10)Sunset date . This bill contains neither a sunset date nor a
requirement to review the tax deduction. The Committee may
wish to consider adding a five-year sunset to this bill and
requiring the Legislative Analyst to prepare a study regarding
the impact of this tax deduction on the health insurance rates
and to report back to the Legislature its findings prior to
the sunset date.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Health Underwriters
California Chapter of the American College of Emergency
Physicians (California ACEP)
Independent Insurance Agents and Brokers of California
Opposition
The California Tax Reform Association
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Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098