Date of Hearing: April 8, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 1258 (

Author:Salas) – As Amended Ver:March 25, 2019

FOR TESTIMONY ONLY

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: exclusion: servicemembers

SUMMARY: Excludes from the Personal Income Tax (PIT) Law any income from any source a servicemember receives while on active duty in this state and, upon honorable discharge, for an additional time period equal to the length of active duty service anywhere. Specifically, this bill:

1. Allows, on or after January 1, 2020, a servicemember in active duty in this state to exclude from gross income any income from any source.
2. Allows, on or after January 1, 2020, any honorably discharged servicemember to exclude from gross income any income from any source for an "applicable time period."
3. Applies to servicemembers in the United States Armed Forces, in the reserve components of the United States Armed Forces, or in the National Guard.
4. Defines "applicable time period" as the period of time beginning on the date a servicemember is honorably discharged and ends after a period of time equal to that of the servicemember's cumulative days of active duty service prior to the honorable discharge.
5. Requires the Secretary of Veterans Affairs to confirm the applicable time period.
6. Permits the Department of Veterans Affairs to adopt regulations related to confirming the applicable time period.
7. Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW:

1. Defines "gross income" as all income from whatever source derived, except as otherwise provided. (Internal Revenue Code (IRC) Section 61.) Gross income specifically includes compensation for services, business income, gains from property, interest, rents, royalties, dividends, and pensions.
2. Excludes from gross income compensation received for active service as a member below the grade of commissioned officer in the Armed Forces for any month during any part of which the member:
   1. Served in a combat zone, as defined; or,
   2. Was hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone, as specified. (IRC Section 112(a).)
3. Excludes from gross income amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country, as specified. (IRC Section 104(a)(4).)
4. Excludes from gross income any "qualified military benefit". (IRC Section 134(a).) A "qualified military benefit" is defined as any allowance or in-kind benefit that:
   1. Is received by any member or former member of the uniformed services of the United States or any dependent of the member by reason of the member's status or service; and,
   2. Was excludable from gross income on September 9, 1986, under any provision of law, regulation, or administrative practice in effect on such date, as provided. (IRC Section 134(b).)

EXISTING STATE LAW:

1. Provides that IRC Section 61, relating to the definition of gross income, shall apply, except as specified. (Revenue and Taxation Code (R&TC) Section 17071.)
2. Provides various exclusions from gross income in determining tax liability under the PIT Law. (R&TC Section 17131 et seq.)
3. Excludes from gross income specified death benefits received by the surviving spouse or designated beneficiary of any member of the California National Guard, State Military Reserve, or Naval Militia who dies or is killed in the performance of duty, as specified. (R&TC Section 17132.4.)
4. Defines the term "Armed Forces of the United States" to include all regular and reserve components of the uniformed services which are subject to the jurisdiction of the Secretary of Defense, the Secretary of the Army, the Secretary of the Navy, or the Secretary of the Air Force, and the Coast Guard. The members of these forces include commissioned officers and personnel below the grade of commissioned officers. (R&TC Section 17022.)

FISCAL EFFECT: Pending

COMMENTS:

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

Throughout California, issues of homelessness, poverty, hunger, and mental health continue to disproportionately affect our veteran population. While there are a variety of factors that can push individuals into homelessness, cost remains a prevalent factor. California is routinely ranked as one of the most expensive places to live in the entire country. In fact, according to the US Census Bureau, 800,000 veterans left California between 2000 and 2016. With the issues of homelessness and mental health so prevalent amongst California veterans, it is vital that the state offer assistance to any individual who has served honorably on behalf of their country. This bill would exempt all income received by service members while on active duty in the state and all income for their cumulative time of active-duty after being discharged. This tax exemption is well deserved by members of our armed forces who have dedicated themselves to service to their country. In addition, it will help service members who may be struggling financially and will serve as an incentive for veterans to remain in California after they have been discharged honorably on behalf of their country.

1. Supporters of this bill state that:

According to the Department of Defense, there are 159,332 active duty service members residing in California, not including the National Guards and the reserves.

California is privileged to be home to 1.7 million veterans; however, issues of homelessness and mental health continue to disproportionately affect veterans throughout the nation.

In 2018, California accounted for nearly 30 percent of all veterans experiencing homelessness in the United States and half of all unsheltered veterans. While the state has made tremendous progress in helping our veterans and reducing the homeless population, there are still many active and former service members who are struggling to make ends meet.

1. Committee Staff Comments:
   1. What income is being excluded from tax? Gross income includes income from wages, business activities, interest, dividends, pensions, rents, royalties, and gains from property. Thus, all these income sources would be excluded for California personal income tax purposes for active and former servicemembers.
   2. Exceptionally generous benefit: This bill excludes all the above sources of income from state income tax during the period of active duty service in California and for a limited period after honorable discharge from service. This bill excludes this income without a maximum cap and without regard to need, making California an attractive state to live for any honorably discharged servicemember regardless of whether they were a prior California resident. Additionally, it would make California an attractive state for any active duty servicemember with substantial income from non-service related sources.
   3. A potential precedent: While cognizant of the personal and professional sacrifices made by servicemembers in the military, Committee staff notes that this bill would favor one group of taxpayers over another, thereby establishing a precedent for excluding income received by other taxpayers the state wishes to recognize (e.g., police, firefighters).
   4. Out of conformity: This bill would allow an exclusion from gross income for income for which federal law has no counterpart, thus bringing state law out of conformity. Generally, the federal government does not exclude a servicemember's income, whether during or after their period of service, from income taxation. State conformity with federal law promotes greater simplicity and eases the administration of complex tax laws.
   5. California previously offered a limited income exclusion and tax credit: For taxable years beginning December 22, 1972 through January 1, 1986, California law provided taxpayers an annual $1,000 income exclusion for compensation received during active duty in the Armed Forces or State Military Reserve. State law also provided taxpayers an exclusion of up to $500 per month for any compensation received during active duty in the National Guard in connection with an emergency. Additionally, an income exclusion applied to pensions or retirement pay received by an individual for his or her service in the Armed Forces, the State Military Reserve, or the National Guard. (See former R&TC Section 17146.)

For taxable years beginning on or after January 1, 1987 and before January 1, 1992, a member of the Armed Forces was allowed a credit, rather than an exclusion from gross income, in an amount equal to 4% of the eligible income received by an individual whose adjusted gross income was less than $27,000. Eligible income included salary, wages, bonuses, allowances, pensions, retirement pay, and other compensation received by an individual for his or her services on extended active duty as a member of the Armed Forces, including the California National Guard, or the State Military Reserve. This law remained in effect until its sunset on January 1, 1992. (See former R&TC Section 17053.13.)

• 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).

There are key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures. While this affords taxpayers greater financial predictability, it can also result in tax expenditures remaining a part of the tax code without demonstrating any public benefit. Second, generally there is no control over tax expenditure revenue loss. Finally, absent a sunset provision, tax expenditures can be conferred by a majority vote but can only be rescinded with a supermajority vote. This bill would enact a new tax expenditure program in the form of a gross income exclusion for active duty and honorably discharged servicemembers.

• 1. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. This year, this Committee adopted a new policy, requiring that all new tax expenditure proposals comply with R&TC Section 41 requirements. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators, and data collection provisions so the Legislature can evaluate the tax expenditure's effectiveness. A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. This bill does not comply with this Committee's tax expenditure policy. However, the author has submitted amendments to the Committee to comply with the policy.
  2. Absence of a 10-year sunset date: In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote. Under the policy, this means five years, except for tax expenditure measures providing relief to California veterans, such as this bill, in which case, it means ten years. This bill lacks any sunset provision, which does not comply with the Committee's policy. However, the author has submitted amendments to the Committee to add a ten-year sunset.
  3. Related legislation: AB 427 (Brough) would exempt a tiered percentage of military retirement pay starting at 50% and growing to 100% from gross income. AB 427 is pending hearing by this Committee.
  4. Prior legislation:
     1. SB 924 (Morrell), of the 2017-18 Legislative Session, would have excluded from gross income any servicemember-derived income from National Guard active duty in California. SB 924 was held on the Senate Committee on Appropriations' Suspense File.
     2. AB 2394 (Brough), of the 2017-18 Legislative Session, would have fully excluded military retirement pay from gross income. AB 2394 was held on the Assembly Committee on Appropriations' Suspense File.
     3. AB 528 (Gray), of the 2017-18 Legislative Session, would have excluded from gross income a percentage of qualified retirement pay received by a taxpayer from the federal government for military service performed in the Armed Forces of the United States, the reserve component of the Armed Forces of the United States, or the National Guard if AGI, excluding military retiree pay, did not exceed $50,000. AB 528 was held on the Assembly Committee on Appropriations' Suspense File.
     4. AB 1791 (Lopez), of the 2015-16 Legislative Session, would have excluded from gross income military retirement pay received by a taxpayer and survivor benefits received by a beneficiary of a taxpayer for a period of three taxable years, but only if funds were appropriated for this purpose. AB 1791 was held on the Assembly Committee on Appropriations' Suspense File.
     5. AB 1275 (Gray), of the 2015-16 Legislative Session, would have excluded from gross income military retirement pay received by a taxpayer and survivor benefits received by a beneficiary of a taxpayer, if that taxpayer was a Purple Heart or Medal of Honor recipient. AB 1275 was held on the Assembly Committee on Appropriations' Suspense File.
     6. AB 505 (Melendez), of the 2015-16 Legislative Session, would have excluded from gross income the additional retired pay to military retirees, known as concurrent retirement and disability pay payments (CRDP). AB 505 was held on the Assembly Committee on Appropriations' Suspense File.
     7. AB 321(Chávez), of the 2015-16 Legislative Session, among other things, would have excluded from gross income basic pay received while on active duty in California. AB 321 was held on this Committee's Suspense File.
     8. AB 2329 (Melendez), of the 2013-14 Legislative Session, would have excluded from gross income the additional retired pay to military retirees, known as CRDP. AB 2329 was held on the Assembly Committee on Appropriations' Suspense File.
     9. AB 1077 (Anderson), of the 2009-10 Legislative Session, would have allowed an individual to exclude retirement pay and survivor annuities received as a result of active service in the military from gross income. AB 1077 was held on this Committee's Suspense File.
     10. AB 53 (Klehs), Chapter 1138, Statutes of 1987, repealed the pension and retirement pay exclusions as a result of active duty in the Armed Forces. AB 53 was the state PIT Law conformity bill following the federal Tax Reform Act of 1986 (HR 3838).

REGISTERED SUPPORT / OPPOSITION:

Support

American G.I. Forum of California
American Legion, Department of California
Amvets, Department of California
California Association of County Veterans Service Officers
California State Commanders Veterans Council
Kern River Blue Star Moms
National Guard Association of California
Veterans of Foreign Wars - Wasco Post No. 6742
Vietnam Veterans of America, California State Council

Opposition

None on file

Analysis Prepared by: Rose Marie Kinnee / REV. & TAX. / (916) 319-2098