The Personal Income Tax Law allows various credits against the taxes imposed by that law.

This bill, upon appropriation of specified funds by the Legislature, for each taxable year beginning on or after January 1, 2018, and before January 1, 2023, would allow a credit under the Personal Income Tax Law in an amount equal to the fees and other expenses paid or incurred during the taxable year, as does not exceed $2,000, for the enrollment of a full-time community college student for whom the credit was not claimed in any prior taxable year, as specified. The bill would also allow a payment in excess of that credit amount upon appropriation by the Legislature. The bill would require a taxpayer claiming the credit to submit with his or her return a copy of the students transcript evidencing completion of an academic year of full-time enrollment in a California community college. The bill would make related findings and declarations regarding the specific goals, purposes, and objectives, performance indicators, and data collection requirements for the credit.

Existing law imposes various taxes, including a tax at a specified rate on the gross premiums of an insurer, as defined, administered in part by the State Board of Equalization. Existing law provides that, if the board determines that any tax, interest, or penalty has been paid more than once or has been erroneously or illegally collected or computed, the board shall set forth that fact in its records of the board, certify the amount of the taxes, interest, or penalties collected in excess of what was legally due, and from whom they were collected or by whom paid and certify the excess to the Controller for credit or refund.

This bill would make a nonsubstantive change to that provision.

Date of Hearing: May 10, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 647

Author:(Reyes) – As Amended Ver:May 2, 2017

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

SUMMARY:

This bill provides a refundable Personal Income Tax (PIT) credit for community college expenses. Specifically, this bill:

1. Allows, for taxable years 2018 through 2023, a PIT credit worth up to $2,000 for qualified community college expenses for a full-time community college student who did not claim the credit in the prior year.
2. Provides a refund to a taxpayer for any credit amount that exceeds the tax liability, but only if the Legislature appropriates funds for that purpose.
3. States that the credit will become operative on the effective date of any budget measure that appropriates funds to the Franchise Tax Board (FTB) for administration of the credit.

FISCAL EFFECT:

1. Significant GF cost pressures in excess of $150,000 for FTB’s administration of the proposed credits. These costs only materialize if FTB receives a budget appropriation to administer the provisions of this bill, as required.
2. Additional General Fund (GF) cost pressures of $550 million in 2017-18, $550 million in 2018-19, and $270 million in 2019-20. These cost pressures reflect the potential GF revenue loss if the proposed deduction becomes operative once FTB receives an appropriation to administer it.

COMMENTS:

1. Purpose. AB 647 aims reduce costs for students attending a California community college, and to incentivize students to pursue full-time enrollment.
2. Fiscal implications of tax expenditures. Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. These features of tax law are 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). One ongoing concern about tax expenditures is the lack of control over revenue losses, since the number of taxpayers taking advantage of any given tax expenditure can vary each year. This bill enacts a new tax expenditure program, in the form of a refundable PIT credit, to help community college students afford their education.

A recent policy committee amendment that makes this new proposed PIT credit operative on years when the FTB receives an appropriation to administer it is a step in the right direction for controlling its year-to-year costs, but significant cost pressures remain. As amended, this bill creates the expectation that a credit will be available for community college exposes and puts in place the conditions for that credit to be made available. Moreover, the nature of PIT tax expenditures means that once the credit is made operative by funding the administrative costs, the revenue loss associated with that credit can no longer be managed or capped for that year.

1. Recent legislation. AB 1441 (Beall) and AB 1079 (Beall), both of the 2011-12 Legislative Session, would have created a credit for qualified costs paid or incurred at specified institutions of higher education. Those bills died in the Assembly Committee on Revenue and Taxation.

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

Date of Hearing: April 17, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 647 (

Author:Reyes) – As Amended Ver:March 21, 2017

Majority vote. Fiscal committee.

SUBJECT: Personal income taxes: credit: full-time community college students

SUMMARY: Provides a tax credit, under the Personal Income Tax (PIT) Law for “qualified community college expenses” paid or incurred during the taxable year. Specifically, this bill:

1. Defines “qualified community college expenses” as fees and other expenses paid or incurred for the enrollment or attendance of a “qualified full-time community college student” in a California community college.
2. Limits the credit to $2,000 per “qualified full-time community college student.”
3. Requires a taxpayer to submit a copy of the transcript of the “qualified full-time community college student” evidencing completion of an academic year of full-time enrollment in a California community college.
4. Defines a “qualified full-time community college student” as an individual for whom both of the following apply:
   1. The individual completed an academic year of full-time enrollment in a California community college that concluded during the taxable year; and,
   2. The individual has not been considered a qualified full-time community college student for the purposes of the credit for any prior taxable year.
5. Defines a “qualified taxpayer” as a taxpayer who is a qualified full-time community college student or who has a dependent who is a qualified full-time community college student.
6. Provides that if the credit amount exceeds the tax liability for the taxable year, the excess shall be credited against other amounts due, if any, and the balance, if any, shall, upon appropriation by the Legislature, be paid to the qualified taxpayer.
7. Provides the following in compliance with Revenue and Taxation Code Section 41:
   1. The specific goals, purposes, and objectives of the tax credit are to reduce costs for students attending California community colleges, incentivize community college students to pursue full-time enrollment, and increase transfers of community college students to the California State University or the University of California.
   2. The performance indicators for the tax credit are decreasing costs of students attending community colleges, increases in the ratio of full-time community college students to part-time community college students, and increases in the rate of transfer of community college students to the California State University or the University of California.
   3. The specific data to be used to determine whether the tax credit is meeting the goals described in subdivision (a) are the average per-student cost of attending a community college, the ratio of full-time community college students to part-time community college students, and the rate of transfer of community college students to the California State University or the University of California for each calendar year. The baseline measurements are those specific data for the 2017 calendar year. The Legislative Analyst’s Office shall collect and remit the data to the Legislature.

EXISTING FEDERAL LAW:

1. Allows a tax credit, called the Lifetime Learning Credit, of up to $2,000 for qualified educational expenses, which include tuition and certain related expenses required for enrollment in a course at an eligible educational institution. The course must either be part of a post-secondary degree program or taken by the student to acquire or improve job skills. This tax credit is phased out if the taxpayer's modified adjusted gross income (AGI) is between $55,000 and $65,000 ($111,000 and $131,000 for taxpayers filing a joint return).
2. Allows a tax credit, called the American Opportunity Credit, of up to $2,000 for the first $2,000 of qualified tuition and related expenses, and a 25% credit for the next $2,000 of qualifying expenses, for a total tax credit of $2,500 each year per student. Up to 40% of the tax credit is refundable. This tax credit is phased out if the taxpayer's modified AGI is between $80,000 and $90,000 ($160,000 and $180,000 for taxpayers filing a joint return). This credit is limited to an eligible student's first four years of postsecondary education.
3. Allows, in lieu of the Lifetime Learning Credit or the American Opportunity Credit, a qualified individual taxpayer to claim a deduction in computing AGI for qualified education expenses, not to exceed $4,000.
4. Provides tax-exempt status to qualified tuition programs under Internal Revenue Code (IRC) Section 529. Qualified tuition programs are programs established and maintained by a state (or by an eligible education institution) under which a person may purchase tuition credit or make cash contributions to meet the qualified higher education expenses of a designated beneficiary. Contributions to a qualified tuition program cannot exceed the amount necessary to provide for the beneficiary's qualified higher education expenses. Distributions to a beneficiary are excluded from income. However, contributions made to a qualified tuition program are not deductible.

EXISTING STATE LAW:

1. Does not conform to the federal Lifetime Learning Credit law, nor does it provide for a comparable tax credit.
2. Does not conform to the American Opportunity Credit, nor does it provide for a comparable tax credit.
3. Provides its own IRC Section 529 qualified tuition program, known as the Golden State Scholarshare Trust (ScholarShare). ScholarShare enables taxpayers to save for college by putting money in tax-advantaged investments. After-tax contributions allow earnings to grow tax-deferred, and disbursements, when used for tuition and other qualified expenses, are federal and state tax-free. Distributions in excess of qualified higher education expenses incurred for the beneficiary, the portion of the excess that is treated as earnings generally is subject to income tax and an additional 2.5% tax for state purposes. The total amount of contributions to a 529 plan on behalf of a beneficiary to $371,000. Accounts that have reached the limit may continue to accrue earnings.

FISCAL EFFECT: The Franchise Tax Board estimates annual General Fund (GF) revenue losses of $550 million in fiscal year (FY) 2017-18, $550 million in FY 2018-19, and $270 million in FY 2019-20.

COMMENTS:

1. The author has provided the following statement in support of this bill:
2. 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, United States 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 of them (in the form of forgone revenues). This bill would enact a new tax expenditure program in the form of a tax credit for qualified community college expenses incurred by a qualified taxpayer.
   2. Tax Expenditure vs. 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. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining 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, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. As such, the Committee may wish to add a five-year sunset.
   3. Not everyone gets a credit: This bill provides a tax credit to either a full-time community college student or a person who can claim a full-time community college student as a dependent (i.e., a parent). Despite this bill’s attempt to lower the cost of attending a community college, not all students work and not all students file tax returns, which means not everyone will be able to take advantage of the credit. Recognizing that many students are unable to take advantage of this credit, this bill allows a parent to claim the credit on behalf of their child. Unfortunately, many parents may not have sufficient tax liability to fully utilize the tax credit. A recent study by the Institute for College Access and Success showed that 61% of community college students reported having family income of less than $30,000 per year^[1]. According to the Tax Policy Center, families in the lowest quintile (families making upwards of around $22,000 per year) have a negative average income tax rate due to refundable tax credits such as the earned income tax credit and the child tax credit^[2]. As such, this credit may have little impact on a large portion of the very group of people it intends to help until an appropriation is made in the budget to make this credit refundable. Even then, individuals have to file tax returns and claim the credit before receiving a benefit. To ensure that everyone is able to take advantage of this expenditure, it may be better to simply appropriate the funds directly to the Community College System.
   4. Funding for Community Colleges: In the most recent budget proposal, Governor Brown wants to freeze community college fees and allocate an additional one-time funding of $150 million to develop guided pathway programs that better help students complete degrees on time. Eloy Oakley, chancellor of the California Community Colleges, had a positive reaction to this year’s proposed budget, stating that the proposal was “good news for community college students” and that the extra funding would be used to design programs “aimed at improving student outcomes and fulfilling the promise of a quality college credential for more Californians.”

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

1. On the Verge: Cost and Tradeoffs Facing Community College Students, TICAS, April, 2016. ↑

2. Key Elements of the U.S. Tax System, How does the federal tax system affect low-income households?, Tax Policy Center. ↑