BILL ANALYSIS �
PURSUANT TO SENATE RULE 29.10
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1271 HEARING: 8/29/2014
AUTHOR: Evans FISCAL: Yes
VERSION: 8/27/2014 TAX LEVY: Yes
CONSULTANT: Bouaziz
PERSONAL INCOME TAX LAW: CANCELLATION OF INDEBTEDNESS:
STUDENT LOAN FORGIVENESS.
Excludes loan amounts repaid by the United States Secretary
of Education (SSE) or canceled pursuant to Education Code
Section 1098e from gross income.
Background and Existing Law
When a lender cancels a borrower's debt, federal and state
law generally treats the amount of debt cancelled as income
taxable to the borrower. Taxpayers do not include borrowed
funds in income in the year he or she receives loan
proceeds because of the obligation to repay the loan; the
taxpayer is financially no better off because the loan must
be repaid. When lenders reduce the repayable amount, the
taxpayer realizes a gain in his or her financial situation
because a portion of the loan proceeds already received and
not previously taxed need not be repaid, thereby increasing
the taxpayer's net worth. The taxpayer's income has
increased by the amount forgiven plus interest.
Specifically, in the case of student loan forgiveness, the
amount forgiven generally represents taxable income for
income tax purposes in the year it is cancelled with some
exceptions. Generally, student loan forgiveness is
excluded from income if the forgiveness is contingent upon
the student working for a specific number of years in
certain professions.
When the student participates in public service loan
forgiveness, teacher loan forgiveness, law school loan
repayment assistance programs and the National Health
Service Corps Loan Repayment Program, cancelled debt is
excluded from income. However, loan discharges for closed
schools, false certification, unpaid refunds, and death and
SB 1271 -- 08/27/14 -- Page 2
disability is taxable income. The forgiveness of the
remaining balance under the federal income based repayment
program (IBR) after 25 years in repayment is considered
taxable income.
In 2010, Congress modified the IBR program for students
borrowing qualified educational loans on or after January
1, 2014. The IBR program was modified to reduce the IBR
repayment program from 25 years to 20 years for new
borrowers.
Proposed Law
Senate Bill 1271 excludes from gross income loan amounts
repaid or forgiven by the United States Secretary of
Education (SSE) under the federal 25 or 20 year income
based repayment plan.
Senate Bill 1271 applies to taxable years beginning on or
after January 1, 2014 and as a tax levy takes effect
immediately.
State Revenue Impact
According to the Franchise Tax Board (FTB), under the
federal income-based repayment programs, the first year
that qualified student debt may be forgiven is 2019, so,
there would be no revenue impact prior to fiscal year (FY)
2018-19. Based on a proration of an estimate prepared by
the Joint Committee on Taxation, FTB estimates that the
revenue loss from this bill would be approximately $5,000
in FY 2018-19, gradually increasing to a loss of
approximately $100,000 by FY 2023-24.
Comments
1. Purpose of the bill. According to the author, "SB 1271
will ensure that California tax law does not penalize
taxpayers whose federal student loan debt is forgiven
pursuant to federal law. Senator Evans, sponsor of SB
1271, is deeply concerned about the burden that student
loan debt places on Californians. SB 1271 is a modest step
toward helping alleviate the crushing, long-term financial
burden of a college education for Californians."
2. Reverse Nonconformity. California law does not
SB 1271 -- 08/27/14 -- Page 3
automatically conform to changes to federal tax law, except
under specified circumstances. Instead, the Legislature
must affirmatively conform to federal changes. Generally,
when the federal government changes its tax laws,
California catches up by enacting its own legislation the
following year to reduce differences between the two codes,
thereby easing the tax preparation burden on taxpayers, tax
preparers, and the Franchise Tax Board. Currently,
California is in conformity with federal law with regard to
student loan debt forgiveness. If SB 1271 becomes law,
taxpayers would exclude from income the forgiven loan for
state tax purposes, but include it for federal tax
purposes.
3. Forgive me. A student currently participating in the
25 or 20 year IBR program must make payments based on a
percentage of their income. After the 25 or 20 year period
of payments, the remaining amount of the unpaid loan is
cancelled. Under current law, the year the debt is
cancelled, the amount cancelled is taxable income. SB 1271
would excuse cancelled debt for state purposes, thereby
reducing the student's California tax liability.
4. Incentivizing non-payment. Cancelling a student loan
debt at the end of the 25 or 20 year IBR program may
incentivize students to pay as little as possible, even if
payment of the entire debt is possible for some
individuals. What motivation will a student have to pay
off the loan completely if they can simply make minimum
payments and have the debt cancelled without any state tax
ramifications?
5. Gut and amend. Prior to August 27, 2014, SB 1271 was a
measure that prohibits the search of information contained
in a portable electronic device. Recent amendments removed
those provisions from the bill and inserted the measure's
current contents.
6. Why Now? As noted by the FTB, the first year debt may
be forgiven is 2019, so it is unclear why this bill needs
to makes its way through the legislative process in the
last few days of session and not through the normal
legislative process.
Assembly Actions
SB 1271 -- 08/27/14 -- Page 4
Assembly Revenue and Taxation9-0
Assembly Floor 65-3
Support and Opposition (08/28/14)
Support : None received.
Opposition : None received.