Date of Hearing: April 24, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 152

Author:(Voepel) – As Amended Ver:March 5, 2019

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

SUMMARY:

This bill allows, from tax years 2019 through 2023, an employee to exclude from gross income up to $5,250 of the principal or interest on a qualified education loan paid by an employer on the employee’s behalf.

FISCAL EFFECT:

1. Annual GF revenue loss in the range of $30 million to $40 million beginning in 2019-20.
2. Likely minor and absorbable administrative costs for the Franchise Tax Board (FTB) to implement the proposed gross income exclusion.
3. Unknown cost pressures to measure the effectiveness of this bill. AB 152 contains intent language stating that its effectiveness will be measured by the decrease in student loan defaults and increase in timely repayment of student loans.

COMMENTS:

1. Background and purpose. Current law excludes from a taxpayer’s gross income an employer’s payments for tuition, fees, books, supplies and equipment, as part of the employer’s educational assistance program. These payments, by being part of an employee’s compensation package, would otherwise be counted as taxable income absent this exclusion. Current law caps the exclusion at $5,250. The author notes that California law does not exempt from taxation any student loan repayments made as part of an employee compensation package.

Under AB 152, employers would be able to contribute up to $10,500 as part of an educational assistance program, which includes the $5,250 in tuition, fees, books and other items allowed under current law, and $5,250 in student loan payments. According to the author, this will work to relive some of the financial burden associated with pursuing higher education.

1. Recent Legislation. AB 2478 (Voepel), of the 2017-18 Legislative Session, which was substantively similar to this bill, was held on this committee’s Suspense File.

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

Date of Hearing: April 8, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 152 (

Author:Voepel) – As Amended Ver:March 5, 2019

FOR VOTE ONLY

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: gross income: exclusion: student loan assistance

SUMMARY: Allows an employee to exclude from gross income amounts paid by an employer on the employee's behalf toward the principal or interest on a qualified education loan. Specifically, this bill:

1. Allows, on or after January 1, 2019 and before January 1, 2024, an employee to exclude from gross income amounts paid by an employer on the employee's behalf, not to exceed $5,250 per calendar year, toward the principal or interest on a qualified education loan. The exclusion may not exceed an aggregate amount of $10,500 per calendar year per employee.
2. Allows graduate level work, including law, business, medical, or other advanced academic or professional degrees, to be included within the definition of "educational assistance."
3. Specifies that "principal or interest on any qualified education loan" has the same meaning as provided for under Internal Revenue Code (IRC) Section 221.
4. Defines "employee" as an employee who is paid wages subject to withholding under the Unemployment Insurance Code.
5. States legislative intent to comply with Revenue and Taxation Code (R&TC) Section 41.
6. Takes effect immediately as tax levy.

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.
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.
3. Excludes from a taxpayer's gross income payments received by the taxpayer from his/her employer, up to $5,250, for tuition, fees, books, supplies, and equipment under the employer's educational assistance program.
4. Allows a deduction in computing adjusted gross income for interest paid during the taxable year on a qualified education loan. The amount of the student loan interest deduction begins at $2,500 and reduces gradually as the taxpayer's modified adjusted gross income increases.

EXISTING STATE LAW:

1. Provides various tax credits designed to provide tax relief for taxpayers who incur certain expenses or to influence taxpayers' behavior.
   
2. Conforms, in general, to the exclusion of up to $5,250 of employer-provided educational assistance benefits from an employee's gross income.

FISCAL EFFECT: The Franchise Tax Board estimates General Fund (GF) revenue losses of $38 million in fiscal year (FY) 2019-20, $31 million in FY 2020-21, and $37 million in 2021-22.

COMMENTS:

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

California law does not exempt any Student Loan Repayment plans provided as part of an employee compensation package. When employers contribute to student loan debt payments for an employee, the employee must pay taxes on the payments as if they were wages. The national student debt continues to rise, making it difficult for young professionals to build their lives after college. According to The Hill, the newest generation of college graduates is saddled with six times more debt than their parents when the wages have only increased by 1.6 percent over the past 25 years. AB 152 works to relieve some of the financial burden associated with pursuing higher education.

1. Supporters state that the "[Society for Human Resource Management] believes that a comprehensive and flexible benefits package is an essential tool in recruiting and retaining talented employees. As chair of the Coalition to Preserve Employer Provided Education Assistance, which brings together a broad cross-section of more than 80 organizations representing employers, labor and higher education, SHRM is committed to preserving employer provided education assistance." Furthermore, "While providing tax-free educational assistance is an important tool for employers to attract, maintain and build a skilled workforce, it is important that this benefit now be expanded to include student loan repayment. This debt often precludes workers from contributing to personal savings and more importantly, retirement savings plans. According to a 2016 Lending Tree study, 40 percent of Millennials say they have not saved anything for retirement. Considering that Millennials graduate with an average of $37,172 in student loan debt, having an employer that provides a student loan repayment benefit can not only help to mitigate this challenge, but also assist employers as they recruit and retain top talent."
2. Committee Staff Comments:
   1. Changing how people get paid: This bill would exclude from gross income amounts paid by an employer on their employee's behalf toward the principal or interest on a qualified education loan. The exclusion is limited to $5,250 per calendar year. The total aggregate cap on the program is $10,500 per employee. Theoretically, employers already pay for an employee's student loans to the extent that the employee's salary is currently being used to satisfy student loan obligations. Excluding student loan payments from gross income could effectively provide an employee with a raise equal to taxes owed on those payments. If the provisions of this bill were to be enacted, employees would be encouraged to have their employers make student loan payments on their behalf even if the employee's salary was reduced by an equal amount because those payments would not be subject to state income tax. Of course, those at a higher tax bracket will see a larger benefit than those at a lower tax bracket, and employees who effectively pay no taxes in California will likely see no benefit. Although this bill does nothing to help address the rising cost of higher education, it may help alleviate the burden faced by many that have graduated with large sums of debt.
   2. Retroactive application: This bill, if enacted, may provide a retroactive gross income exclusion beginning on or after January 1, 2019. As a general rule, tax expenditures are typically implemented so as to encourage new behavior deemed necessary for the public good. To the extent this bill is retroactive, this bill may potentially be providing a windfall for behavior that occurred irrespective of the goals of this bill. The Committee may wish to amend the bill so that the provisions take effect on or after January 1, 2020, and before January 1, 2025.
   3. How is a tax expenditure different from a direct expenditure? As the Department of Finance notes in its Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, once they are put in place, tax expenditures are reviewed less frequently than direct expenditures. Although this creates greater certainty for taxpayers regarding the applicable tax laws (because the tax expenditure will remain on the books for longer periods of time), it may also result in arbitrary tax expenditures that do not serve a public benefit. Second, there is generally no control over the amount of revenue loss 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 bill contains a five-year sunset as required by the Committee's tax expenditure policy.
   4. Out of Conformity: As noted above, California conforms, with certain modifications, to the exclusion of up to $5,250 of employer-provided educational assistance benefits from an employee's gross income. By amending R&TC Section 17151 to add principal and interest on a qualified education loan that is paid by an employer, this bill takes California further out of conformity. Moving California out of conformity may cause confusion since it amends a code section that mirrors federal law, and could inadvertently cause individuals to wrongly assume that the federal government also provides the exclusion.
   5. 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 Committee has recently adopted a new policy requiring all new tax expenditures, not just tax credits, comply with the requirements of R&TC Section 41. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. According to this Committee's tax expenditure policy, a tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. This bill states that the goal of the gross income exclusion is to address the student loan debt crisis. To this end, the success of the program shall be measured by a decrease in student loan debt defaults and an increase student loan payments that are made on time.

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. According to the new policy, an "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean 10 years. This bill, as currently drafted, contains a five-year sunset.

REGISTERED SUPPORT / OPPOSITION:

Support

Society for Human Resource Management

Opposition

None on file

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

Date of Hearing: March 4, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 152 (

Author:Voepel) – As Introduced Ver:January 7, 2019

FOR TESTIMONY ONLY

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: gross income: exclusion: student loan assistance

SUMMARY: Allows an employee to exclude from gross income amounts paid by an employer on the employee's behalf toward the principal or interest on a qualified education loan. Specifically, this bill:

1. Allows, on or after January 1, 2019 and before January 1, 2024, an employee to exclude from gross income amounts paid by an employer on the employee's behalf, not to exceed $5,250 per calendar year, toward the principal or interest on a qualified education loan. The exclusion may not exceed an aggregate amount of $10,500 per calendar year.
2. Allows graduate level work, including law, business, medical, or other advanced academic or professional degrees, to be included within the definition of "educational assistance."
3. Specifies that "principal or interest on any qualified education loan" has the same meaning as provided for under Internal Revenue Code (IRC) Section 221.
4. Defines "employee" as an employee who is paid wages subject to withholding under the Unemployment Insurance Code.
5. Takes effect immediately as tax levy.

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.
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.
3. Excludes from a taxpayer's gross income payments received by the taxpayer from his/her employer, up to $5,250, for tuition, fees, books, supplies, and equipment under the employer's educational assistance program.
4. Allows a deduction in computing adjusted gross income for interest paid during the taxable year on a qualified education loan. The amount of the student loan interest deduction begins at $2,500 and reduces gradually as the taxpayer's modified adjusted gross income increases.

EXISTING STATE LAW:

1. Provides various tax credits designed to provide tax relief for taxpayers who incur certain expenses or to influence taxpayers' behavior.
   
2. Conforms, in general, to the exclusion of up to $5,250 of employer-provided educational assistance benefits from an employee's gross income.

FISCAL EFFECT: Pending

COMMENTS:

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

California law does not exempt any Student Loan Repayment plans provided as part of an employee compensation package. When employers contribute to student loan debt payments for an employee, the employee must pay taxes on the payments as if they were wages. The national student debt continues to rise, making it difficult for young professionals to build their lives after college. According to The Hill, the newest generation of college graduates is saddled with six times more debt than their parents when the wages have only increased by 1.6 percent over the past 25 years. AB 152 works to relieve some of the financial burden associated with pursuing higher education.

1. Committee Staff Comments:
   1. What does this bill do? This bill would exclude from gross income amounts paid by an employer on their employee's behalf toward the principal or interest on a qualified education loan. The exclusion is limited to $5,250 per calendar year. The total aggregate cap on the program is $10,500. The language, with respect to the two caps, is not very clear. The first cap of $5,250 is linked to the employee's gross income. However, the second cap is not specifically related to the employee's gross income and could be read as a cap on the entire program. The author's office has stated that the $10,500 cap is for both the new exclusion as provided by this bill and the gross income exclusion pursuant to the existing education assistance program.
   2. Changing how people get paid: Theoretically, employers already pay for an employee's student loans to the extent that the employee's salary is currently being used to satisfy student loan obligations. Excluding student loan payments from gross income could effectively provide an employee with a raise equal to taxes owed on those payments. If the provisions of this bill were to be enacted, employees would be encouraged to have their employers make student loan payments on their behalf even if the employee's salary was reduced by an equal amount because those payments would not be subject to state income tax. Of course, those at a higher tax bracket will see a larger benefit than those at a lower tax bracket, and employees who effectively pay no taxes in California will likely see no benefit. Although this bill does nothing to help address the rising cost of higher education, it may help alleviate the burden faced by many that have graduated with large sums of debt.
   3. Retroactive application: This bill, if enacted, may provide a retroactive gross income exclusion beginning on or after January 1, 2019. As a general rule, tax expenditures are typically implemented so as to encourage new behavior deemed necessary for the public good. To the extent this bill is retroactive, this bill may potentially be providing a windfall for behavior that occurred irrespective of the goals of this bill. The Committee may wish to amend the bill so that the provisions take effect on or after January 1, 2020, and before January 1, 2025.
   4. How is a tax expenditure different from a direct expenditure? As the Department of Finance notes in its Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, once they are put in place, tax expenditures are reviewed less frequently than direct expenditures. Although this creates greater certainty for taxpayers regarding the applicable tax laws (because the tax expenditure will remain on the books for longer periods of time), it may also result in arbitrary tax expenditures that do not serve a public benefit. Second, there is generally no control over the amount of revenue loss 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 bill contains a five-year sunset as required by the Committee's tax expenditure policy.
   5. Out of Conformity: As noted above, California conforms, with certain modifications, to the exclusion of up to $5,250 of employer-provided educational assistance benefits from an employee's gross income. By amending Revenue & Taxation Code (R&TC) Section 17151 to add principal and interest on a qualified education loan that is paid by an employer, this bill takes California further out of conformity. Moving California out of conformity may cause confusion since it amends a code section that mirrors federal law, and could inadvertently cause individuals to wrongly assume that the federal government also provides the exclusion.
   6. 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 Committee has recently adopted a new policy requiring all new tax expenditures, not just tax credits, comply with the requirements of R&TC Section 41. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. According to this Committee's tax expenditure policy, a tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. This bill, as currently drafted, does not comply with the Committee's policy.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

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