The Personal Income Tax Law, in modified conformity with federal income tax laws, allows various deductions from gross income in computing adjusted gross income under that law, including deductions for payments to individual retirement accounts, alimony payments, and interest on educational loans. That law also allows an itemized deduction for unreimbursed employee expenses that exceed 2% of adjusted gross income.

This bill, for each taxable year beginning on or after January 1, 2018, and before January 1, 2023, would allow as a deduction from gross income an amount equal to the amount paid or incurred for member dues paid by a taxpayer during the taxable year to specified labor organizations.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law, in modified conformity with federal income tax laws, allows various deductions from gross income in computing adjusted gross income under that law, including deductions for payments to individual retirement accounts, alimony payments, and interest on educational loans. That law also allows an itemized deduction for unreimbursed employee expenses that exceed 2% of adjusted gross income.

This bill, for each taxable year beginning on or after January 1, 2018, would allow as a deduction from gross income an amount equal to the amount paid or incurred for member dues paid by a taxpayer during the taxable year to specified labor organizations.

This bill would take effect immediately as a tax levy.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2017 - 2018 Regular Session

AB 2577 (Gray) - Personal income taxes: deductions: labor organization dues

This bill meets the criteria for referral to the Suspense File.

Bill Summary: AB 2577 would create an above the line deduction equal to amounts paid or incurred by a taxpayer for member dues to a labor organization.

Fiscal Impact: The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $220 million in 2018-19, $150 million in 2019-20, and $160 million in 2020-21. FTB’s would incur minor and absorbable administrative costs.

Background: Tax expenditure programs (TEPs) are special tax provisions that reduce the amount of revenues the “basic” tax system would otherwise generate in order to provide (1) benefits to certain groups of taxpayers, and/or (2) incentives to encourage certain types of behavior and activities, such as charitable giving. Specifically, current law provides for, among other things, various income and corporation tax credits and deductions, as well as exemptions from the sales and use tax. The Department of Finance is required to publish a list of TEPs (currently totaling several hundred), which currently $61 billion annually.

Both federal and state tax law allow for the deduction of certain expenses from gross income (referred to as “above the line” deductions) when calculating adjusted gross income (AGI). Examples include payments to individual retirement accounts and education loans. Unlike other deductions, such as those for donations to charity and mortgage interest, taxpayers do not need to itemize to obtain the benefit of above the line deductions.

In addition to above the line deductions, both federal and state tax law permits taxpayers to claim other deductions when calculating taxable income. Specifically, taxpayers can claim the standard deduction or itemized deductions; both lower taxable income. The standard deduction lowers income by one fixed amount. Conversely, itemized deductions are made up of a list of eligible expenses. The most common itemized deductions include the mortgage interest deduction and the charitable contributions deduction. Certain itemized deductions — such as unreimbursed employee business expenses like union dues — are considered Miscellaneous Itemized Deductions, which allows taxpayers to deduct expenses that exceed two percent of the taxpayer’s AGI. Taxpayers add together all their itemized deductions, compare this total to the standard deduction, and then generally claim the larger option. In other words, taxpayers can claim whichever lowers their tax bill the most.

In December 2017, federal tax law changed significantly on many fronts. Among other things, the changes suspended the deduction for Miscellaneous Itemized Deductions subject to the two percent floor. As a result, among other things, labor or union dues are not deductible for federal tax purposes beginning with taxable year 2018.

As a result of a recent United State Supreme Court decision (Janus v. AFSCME, 585), unions cannot compel employees to pay agency fees without the employees’ consent. Consequently, public-sector employees will no longer have to pay fees or dues to their unions, even if those unions collectively bargain on behalf of those employees. Union membership and revenues will likely decline as a result. Currently, for state tax purposes, labor or union dues are considered unreimbursed employee business expenses. Thus, they remain a Miscellaneous Itemized Deduction.

Proposed Law: This bill would allow taxpayers an above the line deduction for amounts paid or incurred during the taxable year for member dues to a labor organization. To qualify as a “labor organization”, the organization must be a tax exempt entity under state law. The deduction is available for taxable years 2018 through 2022. These same expenses cannot also be classified as unreimbursed employee business expenses and then deducted as an itemized deduction on the taxpayer’s state tax return.

Staff Comments: FTB’s revenue estimate incorporates data from the Bureau of Labor Statistics, and the California Labor Federation. From these sources, FTB estimated that (1) there would be 2.9 million members who paid member dues to labor organizations in California in 2018, and (2) members of labor organizations would pay an average of $800 per year in member dues. The result is $2.4 billion in member dues paid in taxable year 2018. FTB then assumed an average tax rate of six percent, resulting in an estimated revenue loss of $150 million for taxable year 2018.

To arrive at the offsetting tax effect of miscellaneous itemized deduction that would otherwise be allowed under current law, FTB estimated that qualified taxpayers would be able to deduct approximately $230 million in member dues, multiplied by the average tax rate of 6 percent, producing an estimated offsetting gain of $14 million in 2018. This results in an estimated taxable year 2018 net revenue loss of $140 million.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Personal income taxes: deductions: labor organization dues

Creates an above the line deduction equal to amounts paid or incurred by a taxpayer for member dues to a labor organization.

Background

Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives to compensate taxpayers for incurring certain expenses, such as child adoption, and/or to influence certain behavior, such as charitable giving. The Legislature uses tax incentives to encourage taxpayers to do something that but for the tax credit, they would otherwise not do. The Department of Finance is required to annually publish a list of tax expenditures, currently totaling around $61.3 billion per year.

Above the line deductions. Both federal and state laws allow for the deduction of certain expenses from gross income when calculating adjusted gross income (AGI). Some examples include moving expenses, education loans, certain ordinary and necessary trade and business expenses, and alimony. These are known as “above the line” deductions or “adjustments.” Unlike other deductions, such as charitable deductions and mortgage interest deductions, all taxpayers with these types of expenses may take the corresponding deduction. In other words, the taxpayer does not need to itemize their deductions to obtain the benefit of that particular deduction.

Standard and itemized deduction. In addition to above the line deductions, both federal and state laws allow taxpayers to claim either the standard deduction or the itemized deduction when calculating taxable income. The standard deduction is the government’s built-in deduction that taxpayers can take to decrease their taxable income. The amount depends on the taxpayer’s filing status and it’s indexed to inflation annually.

The federal standard deduction amounts for the 2017 taxable year are as follows:

• $6,350 for a taxpayer who is single or married filing separately;
• $9,350 for a taxpayer who is a head of household; and
• $12,700 for a taxpayer who is married filing jointly or a surviving spouse.

The state standard deduction amounts for the 2017 taxable year are as follows:

• $4,236 for a taxpayer who is single or married filing separately; and
• $8,472 for a taxpayer who is married filing jointly, a head of household, or a surviving spouse.

A taxpayer can further reduce taxable income by claiming itemized deductions when they exceed the standard deduction. The most common itemized deductions include the mortgage interest deduction and the charitable contributions deduction. Certain itemized deductions — such as unreimbursed employee business expenses like union dues — are considered Miscellaneous Itemized Deductions, which allows taxpayers to deduct expenses that exceed two percent of the taxpayer’s adjusted gross income (AGI).

Taxpayers add together all their itemized deductions, compare this total to the standard deduction, and then generally claim the larger deduction to decrease their overall tax liability.

HR 1. On December 22^nd, 2017, President Trump signed HR 1, which enacted fundamental changes to the federal income tax. One of these changes includes suspending the deduction for Miscellaneous Itemized Deductions subject to the two percent floor. In other words, labor or union dues are not deductible for federal tax purposes for taxable years beginning on or after January 1^st, 2018.

Janus v. AFSCME. On June 27^th, 2018, the Supreme Court ruled in Janus v. AFSCME, 585 U.S._ (2018) that the State of Illinois’s collection of agency fees from nonconsenting public-sector employees violated the First Amendment. As a result, unions cannot compel employees to pay agency fees without the employees’ consent. With this decision, public-sector employees around the country will no longer have to pay fees or dues to their unions, even if those unions collectively bargain on behalf of those employees, likely impacting union membership and revenues nationwide.

Currently, labor or union dues are considered unreimbursed employee business expenses. Thus they are a Miscellaneous Itemized Deduction for state tax purposes. The author wants to help taxpayers who elect to pay union dues by making labor or union dues an above the line deduction.

Proposed Law

Assembly Bill 2977 allows taxpayers an above the line deduction for amounts paid or incurred during the taxable year for member dues to a labor organization. To qualify as a “labor organization”, the organization must be a tax exempt entity under state law.

The deduction is available for taxable years starting on or after January 1^st, 2018, and before January 1^st, 2023. These same expenses cannot also be classified as unreimbursed employee business expenses and then deducted as an itemized deduction on the taxpayer’s state tax return.

State Revenue Impact

According to the Franchise Tax Board (FTB), AB 2577 results in revenue losses of $220 million in 2018-19, $150 million in 2019-20, and $160 million in 2020-21.

Comments

1. Purpose of the bill. According to the author, “Existing state law allowing for the deduction of membership dues disproportionately benefits workers who [choose] to itemize their deductions – generally speaking, very high-income earners. A front-end deduction will ensure that all workers, regardless of their respective income brackets, receive the benefit of deducting this reimbursable employment cost.”

2. Revenue loss. Existing law provides various credits, deductions, exclusions, and exemptions for certain taxpayers. Since these items are enacted to accomplish some governmental purpose and have a cost — in the form of foregone revenues — state law refers to them as "tax expenditures." This bill would create a new tax expenditure which costs the state $220 million. As a result, the state has less funding to pay for important public services, such as education and public safety, and will have to reduce spending or increase taxes to match the foregone revenue. The Committee may wish to consider weather AB 2577 is worth the spending cuts and/or tax increases.

3. Audience. Based on data from the Bureau of Labor Statistics and the California Labor Federation, the FTB estimates that roughly 2.9 million taxpayers will pay member dues to labor organizations in California in 2018. The FTB's fiscal estimate further assumes that labor organization members will pay an average of $800 per year in member dues.

4. Above the line v. itemized deductions. Currently, state law allows taxpayers to deduct labor or union dues as a Miscellaneous Itemized Deduction on their state tax return. However, not all taxpayers can take advantage of this deduction because not all taxpayers itemize their deductions. Taxpayers are allowed either to take the standard deduction or to itemize their deductions. They cannot do both. Typically, most taxpayers take the standard deduction. In 2014, California taxpayers claimed just under $60 billion in state standard deductions, of which 98 percent were claimed by taxpayers with an adjusted gross income of $150,000 or less.^[1] By creating an above the line deduction for member dues to labor organizations, AB 2577 allows all taxpayers—not just those who itemize their deductions—to receive a tax benefit.

Assembly Actions

Assembly Revenue and Taxation 8-0
Assembly Appropriations 13-3
Assembly Floor 64-11

Support and Opposition

(8/2/18)

Support: California Conference of Machinists; California Conference Board of the Amalgamated Transit Union; California Society of Industrial Medicine and Surgery; Engineers and Scientists of California, IFPTE Local 20, AFL-CIO; International Longshore & Warehouse Union; Los Angeles County Professional Peace Officers Association; Organization of SMUD Employees; Professional and Technical Engineer, IFPTE Local 21, AFL-CIO; San Diego County Court Employees Association; UNITE-HERE, AFL-CIO; United Public Employees; CSU Employees Union; Peace Officers Research Association of California; California Teamsters Public Affairs Council; and Utility Workers of America.

Opposition: National Right to Work Committee.

-- END --

1. Taylor, Mac. “Volatility of California' Personal Income Tax Structure.” Legislative Analyst's Office, Sept. 2017, www.lao.ca.gov/reports/2017/3703/volatility-Cal-PIT-structure-092817.pdf. ↑

ASSEMBLY THIRD READING

ATR Bill Id:AB 2577

Author:(Gray)

As Amended Ver:April 9, 2018

Majority vote

SUMMARY: Allows an above-the-line deduction equal to the amount paid or incurred during the taxable year by a taxpayer for member dues to a labor organization exempt from taxes under Revenue and Taxation Code Section 23701(a). Specifically, this bill:

1. Provides that this deduction shall be allowed in determining adjusted gross income (AGI) under the Personal Income Tax (PIT) Law.
2. Allows the deduction for each taxable year beginning on or after January 1, 2018, and before January 1, 2023.
3. Provides that any amount allowed as a deduction under this bill shall not be allowed as an itemized deduction.
4. Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW suspends, for taxable years beginning on or after January 1, 2018, and before January 1, 2026, the deduction for miscellaneous itemized deductions subject to the 2% floor. (Public Law 115-97.)

EXISTING STATE LAW:

1. Allows, in modified conformity with federal law, various deductions from gross income in computing AGI under the PIT Law. These include deductions for payments to individual retirement accounts, and interest on educational loans.
2. Allows individuals to deduct certain expenses, such as charitable contributions, as itemized deductions.
3. Allows an itemized deduction for unreimbursed employee expenses that exceed 2% of AGI.

FISCAL EFFECT: According to the Assembly Appropriations Committee, annual General Fund revenue loss of $250 million in 2018-19, $170 million in 2019-20, and $180 million in 2020-21.

COMMENTS:

1. The author has provided the following statement in support of this bill:

Existing state law allowing for the deduction of membership dues disproportionately benefits workers who [choose] to itemize their deductions – generally speaking, very high-income earners. A front-end deduction will ensure that all workers, regardless of their respective income brackets, receive the benefit of deducting this reimbursable employment cost.

1. Committee Staff Comments
   1. General background: The taxation of an individual's income begins with the concept of "gross income", which is generally defined, with exceptions, as all income from whatever source derived. (Internal Revenue Code (IRC) Section 61; Revenue and Taxation Code (R&TC) Section 17071.) A taxpayer's AGI, in turn, is calculated by subtracting from gross income certain above-the-line deductions or "adjustments". (IRC Section 62; R&TC Section 17072.) Among other things, above-the-line deductions are available for specified retirement savings contributions, and interest payments on educational loans. A taxpayer's AGI, in turn, is used as the starting point for computing certain tax benefits that are limited by income.

Once an individual calculates AGI, he or she may claim certain "itemized" deductions specifically authorized by law to determine taxable income. Alternatively, the taxpayer can simplify the process by claiming a standard deduction based on filing status.

In California, certain itemized deductions of an individual are treated as "miscellaneous itemized deductions", and are only permitted to the extent that their total exceeds 2% of the individual's AGI. California currently allows a miscellaneous itemized deduction, subject to the 2% floor, for union dues and fees.

As noted above, however, existing federal law has suspended, for taxable years beginning on or after January 1, 2018, and before January 1, 2026, the deduction for miscellaneous itemized deductions subject to the 2% floor. (Public Law 115-97.)

• 1. The arguments on both sides: Proponents might argue that allowing union dues to be deducted "above-the-line" would reduce the tax burden faced by lower and middle-income taxpayers who are more likely to pay union dues and less likely, in turn, to itemize their deductions.

Opponents, however, might consider an above-the-line deduction for union dues to constitute a state subsidy of union activity. In addition, critics might point out that providing an above-the-line deduction for such expenses takes California's tax code even further out of conformity with federal law, which arguably increases the complexity of both compliance and administration.

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0003136

Date of Hearing: April 18, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 2577

Author:(Gray) – As Amended Ver:April 9, 2018

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill creates an “above-the-line” Personal Income Tax (PIT) Law deduction, for taxable years starting in 2018 through 2022, for member dues to a labor organization. These same expenses cannot also be deducted as an itemized deduction.

FISCAL EFFECT:

Annual General Fund revenue loss of $250 million in 2018-19, $170 million in 2019-20, and $180 million in 2020-21.

COMMENTS:

1. Purpose. According to author, AB 2577 will make the union dues deduction accessible to more workers. The author points out that because the current deduction is only available to those who itemize, many lower-income taxpayers who pay such dues are unable to deduct those employment expenses from their gross income.
2. Background. Taxpayers can claim a range of deductions, credits, and exclusions to reduce their final tax liability. “Above-the-line deductions” reduce a taxpayer’s gross income to arrive at an adjusted gross income (AGI). Current examples include the student loan interest deduction and the deduction for certain retirement savings contributions. These deductions are available to more taxpayers than “itemized deductions,” a group of deductions typically used by higher-income households. Itemized deductions include the mortgage interest deduction and a group of deductions categorized as “miscellaneous.” Miscellaneous itemized deductions include deductions for employment expenses, such as union dues, and the costs of tax preparation software. Miscellaneous itemized deductions can be claimed only if the total value of them exceed 2% of a taxpayer’s AGI.
3. Federal tax reform. The federal Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, eliminated temporarily the ability for those who itemize to deduct union dues from their gross income. The TCJA suspended, until January 1, 2026, the “miscellaneous itemized deductions” category. Thus, while California itemizers may still deduct union dues from their state income taxes, they may not do so for their federal taxes.
4. Fiscal implications of tax expenditures. Existing law allows for various tax expenditures such as credits, deductions, exclusions, and exemptions for particular taxpayer groups. These features of the tax code can result in significant state costs through foregone tax revenue, and, in many cases, policymakers have little control over the revenue loss that occurs in any given year. As a result, many tax expenditure bills now include provisions designed to give the Legislature more control over costs. Examples of such provisions include placing a sunset date or making a bill’s provisions contingent upon a separate budget appropriation. AB 2577 includes a sunset.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 18, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 2577

Author:(Gray) – As Amended Ver:April 9, 2018

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill creates an “above-the-line” Personal Income Tax (PIT) Law deduction, for taxable years starting in 2018 through 2022, for member dues to a labor organization. These same expenses cannot also be deducted as an itemized deduction.

FISCAL EFFECT:

Annual General Fund revenue loss of $250 million in 2018-19, $170 million in 2019-20, and $180 million in 2020-21.

COMMENTS:

1. Purpose. According to author, AB 2577 will make the union dues deduction accessible to more workers. The author points out that because the current deduction is only available to those who itemize, many lower-income taxpayers who pay such dues are unable to deduct those employment expenses from their gross income.
2. Background. Taxpayers can claim a range of deductions, credits, and exclusions to reduce their final tax liability. “Above-the-line deductions” reduce a taxpayer’s gross income to arrive at an adjusted gross income (AGI). Current examples include the student loan interest deduction and the deduction for certain retirement savings contributions. These deductions are available to more taxpayers than “itemized deductions,” a group of deductions typically used by higher-income households. Itemized deductions include the mortgage interest deduction and a group of deductions categorized as “miscellaneous.” Miscellaneous itemized deductions include deductions for employment expenses, such as union dues, and the costs of tax preparation software. Miscellaneous itemized deductions can be claimed only if the total value of them exceed 2% of a taxpayer’s AGI.
3. Federal tax reform. The federal Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, eliminated temporarily the ability for those who itemize to deduct union dues from their gross income. The TCJA suspended, until January 1, 2026, the “miscellaneous itemized deductions” category. Thus, while California itemizers may still deduct union dues from their state income taxes, they may not do so for their federal taxes.
4. Fiscal implications of tax expenditures. Existing law allows for various tax expenditures such as credits, deductions, exclusions, and exemptions for particular taxpayer groups. These features of the tax code can result in significant state costs through foregone tax revenue, and, in many cases, policymakers have little control over the revenue loss that occurs in any given year. As a result, many tax expenditure bills now include provisions designed to give the Legislature more control over costs. Examples of such provisions include placing a sunset date or making a bill’s provisions contingent upon a separate budget appropriation. AB 2577 does not include a sunset date but does make its provisions contingent upon an appropriation.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 2, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 2577 (

Author:Gray) – As Introduced Ver:February 15, 2018

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: deductions: labor organization dues

SUMMARY: Allows an above-the-line deduction equal to the amount paid or incurred during the taxable year by a taxpayer for member dues to a labor organization exempt from taxes under Revenue and Taxation Code Section 23701a. Specifically, this bill:

1. Provides that this deduction shall be allowed in determining adjusted gross income (AGI) under the Personal Income Tax (PIT) Law.
2. Allows the deduction for each taxable year beginning on or after January 1, 2018.
3. Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW suspends, for taxable years beginning on or after January 1, 2018, and before January 1, 2026, the deduction for miscellaneous itemized deductions subject to the 2% floor. (Public Law 115-97.)

EXISTING STATE LAW:

1. Allows, in modified conformity with federal law, various deductions from gross income in computing AGI under the PIT Law. These include deductions for payments to individual retirement accounts, alimony payments, and interest on educational loans.
2. Allows individuals to deduct certain expenses, such as charitable contributions, as itemized deductions.
3. Allows an itemized deduction for unreimbursed employee expenses that exceed 2% of AGI.

FISCAL EFFECT: The Franchise Tax Board (FTB) estimates General Fund revenue losses of $250 million in fiscal year (FY) 2018-19, $170 million in FY 2019-20, and $180 million in FY 2020-21.

COMMENTS:

1. The author has provided the following statement in support of this bill:

Existing state law allowing for the deduction of membership dues disproportionately benefits workers who [choose] to itemize their deductions – generally speaking, very high-income earners. A front-end deduction will ensure that all workers, regardless of their respective income brackets, receive the benefit of deducting this reimbursable employment cost.

1. This bill is supported by the California Society of Industrial Medicine and Surgery, which notes the following:

Just as businesses are allowed to deduct reasonable business expenses, workers should also be entitled to deduct the cost of having their interests represented by a union.

1. The FTB has noted the following implementation concern in its analysis of this bill:

This bill would allow taxpayers a deduction of union dues paid in calculating their AGI. Current state law already allows taxpayers to deduct their union dues paid as a miscellaneous itemized deduction (subject to the 2 percent limitation). It is unclear if taxpayers should get both the adjustment to AGI and the miscellaneous itemized deduction. It is recommended the bill be amended to specify the author's intent.

1. Committee Staff Comments
   1. What is a "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). This bill would enact a new tax expenditure program, in the form of an above-the-line deduction for union dues.
   2. How is a tax expenditure different from a direct expenditure? 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. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy or cost, without a supermajority vote.
   3. General background: The taxation of an individual's income begins with the concept of "gross income", which is generally defined, with exceptions, as all income from whatever source derived. (Internal Revenue Code (IRC) Section 61; Revenue and Taxation Code (R&TC) Section 17071.) A taxpayer's AGI, in turn, is calculated by subtracting from gross income certain above-the-line deductions or "adjustments". (IRC Section 62; R&TC Section 17072.) Among other things, above-the-line deductions are available for specified retirement savings contribution, and interest payments on educational loans. A taxpayer's AGI, in turn, is used as the starting point for computing certain tax benefits that are limited by income.

Once an individual calculates AGI, he or she may claim certain "itemized" deductions specifically authorized by law to determine taxable income. Alternatively, the taxpayer can simplify the process by claiming a standard deduction based on filing status.

In California, certain itemized deductions of an individual are treated as "miscellaneous itemized deductions", and are only permitted to the extent that their total exceeds 2% of the individual's AGI. California currently allows a miscellaneous itemized deduction, subject to the 2% floor, for union dues and fees.

As noted above, however, existing federal law has suspended, for taxable years beginning on or after January 1, 2018, and before January 1, 2026, the deduction for miscellaneous itemized deductions subject to the 2% floor. (Public Law 115-97.)

• 1. The arguments on both sides: Proponents might argue that allowing union dues to be deducted "above-the-line" would reduce the tax burden faced by lower and middle-income taxpayers who are more likely to pay union dues and less likely, in turn, to itemize their deductions.

Opponents, however, might consider an above-the-line deduction for union dues to constitute a state subsidy of union activity. In addition, critics might point out that providing an above-the-line deduction for such expenses takes California's tax code even further out of conformity with federal law, which arguably increases the complexity of both compliance and administration.

• 1. Who are we talking about? Based on data from the Bureau of Labor Statistics and the California Labor Federation, the FTB estimates that roughly 2.9 million members will pay member dues to labor organizations in California in 2018. The FTB's fiscal estimate further assumes that labor organization members will pay an average of $800 per year in member dues.
  2. Picking a sunset date: This bill currently allows the deduction for all taxable years beginning on or after January 1, 2018. Absent extraordinary circumstances, this Committee has a longstanding policy favoring the inclusion of a five-year sunset date for new tax expenditure programs to allow for frequent legislative review. To address this concern, the author has agreed to take amendments in Committee providing for a five-year sunset date.
  3. Double dipping: To address the concerns identified by the FTB in its staff analysis, the author has agreed to take amendments precluding taxpayers from taking both an above-the-line deduction and a miscellaneous itemized deduction for the same union dues.

REGISTERED SUPPORT / OPPOSITION:

Support

California Conference of Machinists

California Conference Board of the Amalgamated Transit Union

California Society of Industrial Medicine and Surgery

Engineers and Scientists of California, IFPTE Local 20, AFL-CIO

International Longshore & Warehouse Union

Los Angeles County Professional Peace Officers Association

Organization of SMUD Employees

Professional and Technical Engineer, IFPTE Local 21, AFL-CIO

San Diego County Court Employees Association

UNITE-HERE, AFL-CIO

United Public Employees

Utility Workers of America

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098