The Personal Income Tax Law allows various deductions in computing the income that is subject to the taxes imposed by that law including in modified conformity with federal tax law, a deduction for that portion of medical expenses that is more than 7.5% of adjusted gross income. Self-employed individuals are allowed to deduct health insurance premiums for medical expenses incurred by the taxpayer in lieu of the itemized deduction for medical expenses.

This bill, for taxable years beginning on or after January 1, 2017, would allow a deduction from gross income under the Personal Income Tax Law for the amounts paid or incurred by a taxpayer during the taxable year for medical insurance for medical care, as defined, and for transportation for and essential to that medical care, as provided. The bill would not allow as an itemized deduction, the amount allowed as a deduction from gross income as provided.

This bill would take effect immediately as a tax levy.

Date of Hearing: May 8, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 782 (

Author:Acosta) – As Introduced Ver:February 15, 2017

Majority vote. Tax levy. 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, 2017, to deduct their transportation for essential medical care and their medical care insurance premiums in computing their adjusted gross income (AGI). 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 AGI, for the amounts paid during the taxable year for "medical care" insurance premiums and transportation. Medicare Part B supplemental medical insurance and insurance for long-term care services are excluded from the definition of "medical care."
   
3. Provides that any amount included as a deduction from gross income shall not be allowed as an itemized deduction under Internal Revenue Code Section 63.
4. 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 AGI.

1. 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 STATE LAW conforms, as of January 1, 2015, to the federal provisions relating to itemized deductions for unreimbursed medical expenses, with a modification to reduce the AGI threshold from 10% to 7.5%.

FISCAL EFFECT: The Franchise Tax Board estimates General Fund revenue losses of $550 million in fiscal year (FY) 2017-18, $380 million in FY 2018-19, and $400 million in FY 2019-20.

COMMENTS:

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

With 1.2 million Californians currently not receiving health care form their employer, AB 782 seeks to make health insurance more affordable by leveling the playing field for individuals and families who do not receive employer paid health insurance. The bill would provide a deduction for all those who purchase health insurance out of pocket. The bill is intended specifically to make health insurance more affordable for those that are mandated under the ACA to purchase health insurance or face a tax penalty post March 31^st, 2014.

1. Supporters state that many patients come to the emergency department seeking care for health conditions that have significantly deteriorated due to an inability to pay. The tax deductions in this bill would offset the cost of health care and improve access.
2. Opponents argue that this bill would “allow individual taxpayers to make ‘above the line’ deductions from gross income for health care premiums. The proposed deduction does not make health coverage more affordable for low- and moderate-income families; rather, this approach helps wealthier people reduce their tax liability.”
3. Committee Staff Comments:
   1. 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 an above-the-line deduction. The Committee may wish to add a sunset to this above-the-line deduction.
   2. 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 mandated 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. However, many individuals already receive a subsidy to offset the cost of the individual mandate. The federal government provides a Premium Tax Credit (PTC), which is a refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace. The size of the PTC is based on a sliding scale. Taxpayers who have a lower income get a larger credit to help cover the cost of their insurance. A taxpayer can choose to have an estimated credit computed as part of the monthly cost to lower payments or the taxpayer can choose to get all of the benefit of the credit when taxes are filed.
   3. "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 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.
   4. 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 a 10% tax bracket would receive a tax benefit of $10 on a $100 deduction. In contrast, a taxpayer in a 25% tax bracket would 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.

REGISTERED SUPPORT / OPPOSITION:

Support

California Chapter of the American College of Emergency Physicians

Howard Jarvis Taxpayers Association

Opposition

California State Council of the Service Employees International Union

Health Access California

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

Date of Hearing: March 27, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 782 (

Author:Acosta) – As Introduced Ver:February 15, 2017

Majority vote. Tax levy. 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, 2017, to deduct their transportation for essential medical care and their medical care insurance premiums in computing their adjusted gross income (AGI). 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 AGI, for the amounts paid during the taxable year for "medical care" insurance premiums and transportation. Medicare Part B supplemental medical insurance and insurance for long-term care services are excluded from the definition of "medical care."
   
3. Provides that any amount included as a deduction from gross income shall not be allowed as an itemized deduction under Internal Revenue Code Section 63.
4. 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 AGI.

1. 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 STATE LAW conforms, as of January 1, 2015, to the federal provisions relating to itemized deductions for unreimbursed medical expenses, with a modification to reduce the AGI threshold from 10% to 7.5%.

FISCAL EFFECT: The Franchise Tax Board estimates General Fund revenue losses of $550 million in fiscal year (FY) 2017-18, $380 million in FY 2018-19, and $400 million in FY 2019-20.

COMMENTS:

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

With 1.2 million Californians currently not receiving health care form their employer, AB 782 seeks to make health insurance more affordable by leveling the playing field for individuals and families who do not receive employer paid health insurance. The bill would provide a deduction for all those who purchase health insurance out of pocket. The bill is intended specifically to make health insurance more affordable for those that are mandated under the ACA to purchase health insurance or face a tax penalty post March 31^st, 2014.

1. Supporters state that many patients come to the emergency department seeking care for health conditions that have significantly deteriorated due to an inability to pay. The tax deductions in this bill would offset the cost of health care and improve access.
2. Opponents argue that this bill would “allow individual taxpayers to make ‘above the line’ deductions from gross income for health care premiums. The proposed deduction does not make health coverage more affordable for low- and moderate-income families; rather, this approach helps wealthier people reduce their tax liability.”
3. Committee Staff Comments:
   1. 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 an above-the-line deduction. The Committee may wish to add a sunset to this above-the-line deduction.
   2. 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 mandated 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. However, many individuals already receive a subsidy to offset the cost of the individual mandate. The federal government provides a Premium Tax Credit (PTC), which is a refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace. The size of the PTC is based on a sliding scale. Taxpayers who have a lower income get a larger credit to help cover the cost of their insurance. A taxpayer can choose to have an estimated credit computed as part of the monthly cost to lower payments or the taxpayer can choose to get all of the benefit of the credit when taxes are filed.
   3. Too soon? Congressional House Republicans have put forth the American Health Care Act, which, among other things, eliminates the individual mandate established under the ACA. Because the intent of the author is to offset the mandated costs required by the ACA, the Committee may wish to wait until Congress acts on new healthcare reform.
   4. "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 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.
   5. 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 a 10% tax bracket would receive a tax benefit of $10 on a $100 deduction. In contrast, a taxpayer in a 25% tax bracket would 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.

REGISTERED SUPPORT / OPPOSITION:

Support

California Chapter of the American College of Emergency Physicians

Opposition

California State Council of the Service Employees International Union

Health Access California

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