BILL ANALYSIS �
AB 2367
Page 1
Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2367 (Donnelly) - As Introduced: February 21, 2014
Majority vote. Tax levy.
SUBJECT : Personal income taxes: credits: health care coverage
SUMMARY : Establishes an income tax credit for an increase in
health insurance expenses, as provided. Specifically, this
bill :
1)Allows a credit, under the Personal Income Tax (PIT) law, in
an amount equal to the difference between the annual premium
amount paid during the taxable year by a qualified taxpayer
for an individual health care service plan, or individual
policy of health insurance, and the annual premium amount paid
by the taxpayer prior to March 31, 2014.
2)Provides that the credit is allowed for taxable years
beginning on or after January 1, 2014, and before an
unspecified date.
3)Provides that an "individual health care service plan
contract" means a plan contract, as defined in Health and
Safety Code Section 1345, issued to an individual.
4)Provides that an "individual policy of health insurance" means
a policy issued to an individual for health insurance, as
defined in Insurance Code Section 106.
5)Defines a "qualified taxpayer" as an individual who satisfies
both of the following requirements:
a) His/her individual health care service plan contract or
individual policy of health insurance was canceled between
December 31, 2013, and March 31, 2014, inclusive, pursuant
to either Health and Safety Code Section 1365(a)(5) or (6)
or Insurance Code Section 10273.6(d) or (e); and,
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b) He/she purchased a new individual plan contract or
policy and paid or incurred an annual premium amount that
exceeded the annual premium amount paid or incurred prior
to the cancellation of his/her individual plan contract or
policy.
6)Authorizes a carryover of the credit to reduce the tax in the
following taxable year, and succeeding seven years, if
necessary, until the credit if exhausted.
7)Reduces the amount of the deduction paid or incurred by the
qualified taxpayer by the amount of the credit established by
this bill.
8)Requires qualified taxpayer to claim the credit on a timely
filed original return.
9)Authorizes the Franchise Tax Board (FTB) to prescribe rules,
guidelines, or procedures that are necessary or appropriate,
as specified.
10)Exempts the rules, guidelines, or procedures prescribed by
the FTB from the requirements of the Administrative Procedures
Act.
11)Takes effect immediately as a tax levy.
EXISTING LAW :
1)Defines a "health care service plan" or "specialized health
care service plan" as either of the following:
a) Any person who undertakes to arrange for the provision
of health care services to subscribers or enrollees, or to
pay for or to reimburse any part of the cost for those
services, in return for a prepaid or periodic charge paid
by or on behalf of the subscribers or enrollees; or,
b) Any person, whether located within or outside of
California, who solicits or contracts with a subscriber or
enrollee in California to pay for or reimburse any part of
the costs of, or who undertakes to arrange or arranges for,
the provision of health care services that are to be
provided wholly or in part in a foreign country in return
for a prepaid or periodic charge paid by or on behalf of
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the subscriber or enrollee.
2)Defines the term "health insurance" as an individual or group
disability insurance policy that provides coverage for
hospital, medical, or surgical benefits. It excludes any of
the following kinds of insurance:
a) Accidental death and accidental death and dismemberment;
b) Disability insurance, including hospital indemnity,
accident only, and specified disease insurance that pays
benefits on a fixed benefit, cash payment only basis;
c) Credit disability, as defined in Insurance Code Section
779.2(2);
d) Coverage issued as a supplement to liability insurance;
e) Disability income, as defined in Insurance Code Section
799.01(i);
f) Insurance under which benefits are payable with or
without regard to fault and that is statutorily required to
be contained in any liability insurance policy or
equivalent self-insurance;
g) Insurance arising out of a workers' compensation or
similar law; and,
h) Long-term care.
3)Defines the term "specialized health insurance policy" as a
policy of health insurance for covered benefits in a single
specialized area of health care, including dental-only,
vision-only, and behavioral health-only policies.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual General Fund revenue loss of $320 million in
the fiscal year (FY) 2014-15, $230 million in FY 2015-16, and
$250 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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"With the passage of the ACA [Affordable Care Act], many did
not think how it would directly affect the entire population,
including the middle class, aside from the point that it would
supposedly provide healthcare for those who couldn't afford it
before. While the ACA provided some assistance to some, it
had a significant burden to a large portion of the middle
class. With the passage of AB 2367, the government will be
taking responsibility for their decisions and hopefully
provide those who used to pay less for healthcare some
relief."
2) Arguments in opposition . The opponents assert that this
bill would provide a credit for higher premiums even if the
increase in the premium "occurred because of an increase in
rates unrelated to the Affordable Care Act," such as for
example, due to an increase in underlying health care
costs, the individual's age, or simply because the new
health coverage is more comprehensive. Thus, the opponents
argue that this bill "opens the door for the frivolous
spending of general fund dollars to no benefit to those
most in need."
3) 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,
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irrespective of their efficacy, without a supermajority
vote. This bill would create a new tax expenditure. The
tradeoff for providing a new tax expenditure, resulting in
revenue losses, is higher taxes or reductions in spending
for other services or programs.
4) 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
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.
5) Need for the bill ? The intent of the author is to
provide relief to individuals who have experienced an
increase in their health insurance premiums due to the
implementation of the ACA. However, there is no nexus
requirement between the amount of the credit and the loss a
taxpayer may have incurred. Although many health care
premiums have increased as a result of the ACA, it has not
been shown that the higher price does not correlate to the
better coverage many individuals are now required to carry.
Furthermore, it is unclear whether this bill would push
health insurance premium rates up, given the indirect
subsidy from the state. It appears that the relief
available under this bill far exceeds any burden on
individuals whose health care policies were cancelled.
6) The Best Credit Ever ? This bill provides a tax subsidy
to taxpayers in the form of a credit for the increase in
the amounts paid by the individual for his/her health
insurance premiums. As such, this bill proposes a 100%
credit for the full amount of the increase. If enacted,
this credit would be one the most generous tax credits
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California has ever allowed. Under existing law, taxpayers
may only claim an itemized deduction for the health
insurance premiums paid by individuals, unless
self-employed. 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. The value of a tax credit, on other hand, is the
same, regardless of the tax rate. Thus, it is generally
more appealing to taxpayers. The Committee may wish to
consider reducing the proposed credit rate percentage from
100% to 10% or 15%, which would be more in line with other
tax credits, such as, for example, the general research tax
credit.
7) Sunset Date . This bill contains neither a sunset date
nor a requirement to review the tax credit. 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 credit on the health
insurance rates and to report back to the Legislature its
findings prior to the sunset date.
8) Technical Amendment . The FTB staff suggests the
following technical amendments to clarify the definition of
"qualified taxpayer."
a) Amendment 1:
On page 2, line 27, strike out "plan contract or policy" and
insert:
"health care service place contract or individual policy of
health insurance"
b) Amendment 2:
On page 2, line 30, strike out "plan contract or policy" and
insert:
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
AB 2367
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Opposition
American Federation of State, County and Municipal
Employees (AFSCME), AFL-CIO
California Tax Reform Association
Health Access California
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098