Date of Hearing: June 24, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

SBPCA Bill Id:SB 477

Author:(Wieckowski) – As Amended Ver:June 17, 2019

FOR TESTIMONY ONLY

Majority vote. Tax levy. Fiscal committee.

SENATE VOTE: 36-1

SUBJECT: Personal income taxes: credit: deduction: qualified education loan

SUMMARY: Allows a credit under the Personal Income Tax (PIT) Law in an amount equal to the interest paid by the taxpayer during the taxable year on a qualified education loan. Specifically, this bill:

1. Allows a credit, for taxable years beginning on or after January 1, 2020, and before January 1, 2025, in an amount equal to the interest paid by the taxpayer during the taxable year on a qualified education loan. However, provides, for taxable years beginning on or after January 1, 2020, and before January 1, 2025, that the amount of the credit allowed pursuant to this bill shall be $0 unless specified in any bill providing for an appropriation related to the Budget Act. In situations where the credit amount is $0, a deduction shall be allowed, as provided.
2. Limits the credit to $2,000 in the case of spouses filing a joint return or $1,000 for other individuals.
3. Defines "dependent" in the same manner as defined by Internal Revenue Code (IRC) Section 152, determined without regard to IRC Sections 152(b)(1), 152(b)(2), and 152(d)(1)(B).
4. Defines "qualified education loan" as indebtedness incurred by the taxpayer solely to pay for higher education expenses that are incurred on behalf of the taxpayer or the taxpayer's spouse or dependent, who is the taxpayer's spouse or dependent at the time the indebtedness is incurred. A "qualified education loan" includes indebtedness used to refinance indebtedness that qualified as a qualified education loan.
5. Provides that a "qualified education loan" does not include the following:
   1. Indebtedness owed to a person who is related; or,
   2. Indebtedness owed to a person by reason of a loan under a qualified employer plan.
6. Provides that adjusted gross income (AGI) shall not exceed the following:
   1. $200,000 for spouses filing a joint return; or,
   2. $100,000 for other individuals.
7. Provides that this credit shall remain in effect until December 1, 2025, and as of that date is repealed.
8. Provides that for taxable years beginning on or after January 1, 2020, and before January 1, 2025, IRC Section 221, relating to interest on education loans, shall not apply except as provided.
9. Provides that IRC Section 221, relating to interest on education loans, shall apply for any taxable year beginning on or after January 1, 2020, and before January 1, 2025, for which the amount of credit is $0.
10. Provides that for taxable years beginning on or after January 1, 2025, IRC Section 221, relating to interest on education loans, shall apply.
11. Provides that these provisions shall not affect the allowance of a deduction for interest on education loans for other taxpayers.
12. Provides that for the purposes of complying with Revenue and Taxation Code (R&TC) Section 41, the Legislature finds and declares as follows:
    1. The specific goals, purposes, and objectives of this bill are to:
       1. Compensate taxpayers for the significant increases in tuition at higher educational institutions;
       2. Stimulate consumer spending and economic growth by providing more disposable income to reinvest in the economy;
       3. Aid in reducing the likelihood of student loan defaults, which have a major adverse impact on graduates' credit scores and therefore even broader implications for consumers; and,
       4. Incentivize college graduates to stay in California and to continue to be an integral part of the state's workforce, in turn increasing tax revenues and payments to California's public assistance programs, insurance system, and economy.
    2. To measure whether this credit achieves its intended purpose, the Franchise Tax Board (FTB) shall prepare a written report on the following:
       1. The number of taxpayers claiming the credit;
       2. The average credit amount on tax returns claiming the credit; and,
       3. The FTB shall provide the written report to the Senate Committee on Budget and Fiscal Review, the Assembly Committee on Budget, the Senate and Assembly Committees on Appropriations, the Senate Committee on Governance and Finance, and the Assembly Committee on Revenue and Taxation.
13. Takes effect immediately as a tax levy.

EXISTING LAW:

1. 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. Educational assistance does not include: a) tools or supplies retained by the employee after completion of the instruction; b) meals, lodging or transportation; or, c) courses involving sports, games, or hobbies.
2. Allows an above-the-line deduction for interest due and paid on qualified education loans up to a maximum of $2,500. The deduction is subject to gradual phase-outs for individuals with modified AGI of $50,000 or more ($100,000 for joint filers), with complete phase-outs for individual with modified AGI of $65,000 or more ($130,000 for joint filers). (R&TC Section 17204.)

FISCAL EFFECT: The FTB estimates a General Fund revenue loss of $600 million in fiscal year (FY) 2019-20, $1.1 billion in FY 2020-21, and $1.1 billion in FY 2021-22.

COMMENTS:

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

SB 477 would assist in alleviating the burden of student loan debt for California's college-educated residents by providing them a tax credit equal to the loan interest paid during the year. Student loan debt is a financial burden that is unprecedented in our history and represents a major drag on our economy. This debt is disproportionately borne by women, who hold nearly two-thirds of the outstanding student debt in the U.S., students from low-income families, students of color, and first-generation college students. These mortgage-sized loans have caused a generation to postpone traditional life milestones like buying a home, getting married, starting a family, and saving for retirement. SB 477 recognizes the costs Californians have incurred in pursuing higher education and provides some small relief.

1. Committee Staff Comments:
   1. What does this bill do? This bill creates a nonrefundable tax credit for interest paid on student loans for taxable years beginning on or after January 1, 2020, and before
      January 1, 2025. The credit is only available in years in which a bill provides for an appropriation related to the Budget Act. When an appropriation is made, the credit replaces the state's existing student loan interest deduction. If an appropriation for this credit is not made, the credit amount shall be $0 and the above-the-line deduction pursuant to IRC Section 221 continues to apply. The credit is capped at $1,000 for single filers ($2,000 for joint filers), and is limited to individuals with an AGI of less than $100,000 ($200,000 for joint filers). This bill provides a larger interest subsidy, both in terms of the benefit received by an individual and by making it available to higher income earners, than existing law.
   2. Above-the-line deduction: 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 are generally not phased out or subject to a floor like many itemized deductions. Furthermore, the deduction 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.
   3. The value of a tax deduction vs a credit: A deduction is generally more valuable to high-income taxpayers as 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. Thus, assuming the same level of deductions, high-income taxpayers, presumably with a greater ability to pay taxes, receive a greater tax benefit from a deduction than a lower income taxpayer. Unlike deductions, which reduce the amount of earnings subject to tax, credits are applied after taxable income is calculated. Tax credits reduce—dollar for dollar—the amount of taxes owed, which means taxpayers receive the same benefit irrespective of their income and income tax bracket.
   4. Annual appropriation: Existing tax law provides various credits, deductions, exclusions, and exemptions for taxpayers. Although this bill contains both an AGI limitation and an overall credit limitation, General Fund revenue losses may fluctuate dramatically, which means the government could potentially have less funding to pay for important public services such as education and public safety. As a result, the state will have to reduce spending or increase taxes to match the foregone revenue. To address this concern, this bill provides that the credit will only be available in years in which a bill provides for an appropriation related to the Budget Act. Requiring that a budget appropriation be made before the credit becomes available allows the Legislature to better control the revenue loss in any given year, which includes the ability to modify AGI limitations or the credit cap.
   5. Out of Conformity: In general, state conformity with federal law promotes greater simplicity and eases the burden of administering complex tax law. This bill creates a difference between federal and state tax treatment when a taxpayer pays interest on a student loan. Under federal tax law, certain taxpayers would receive a deduction for interest on their student loans. However, under the provisions of this bill, specified taxpayers who pay interest on their student loans would receive a credit. To the extent many taxpayers use software to file their tax returns, the additional administrative burden may be negligible for most individuals. However, the annual budget appropriation required to make this credit available may confuse taxpayer since the credit may be available in one year but not in others.
   6. 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 credit for the interest paid on a qualifying student loan.
   7. 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 that all new tax expenditure^[1] proposals 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. 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^[2]. This bill, as currently drafted, complies with R&TC Section 41 and contains an appropriate five-year sunset.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

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

1. A "tax expenditure measure" is defined as legislation meeting either of the following criteria: (1) the measure proposes to extend, expand, or enact a credit, deduction, exclusion, exemption, or other tax preference (i.e., a tax expenditure program); or, (2) the measure proposes to eliminate or reduce one or more tax rates. ↑

2. 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. ↑

 THIRD READING  

Bill No: SB 477

Author: Wieckowski (D)

Amended: 5/17/19

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 5/1/19

AYES: McGuire, Beall, Hertzberg, Hurtado, Nielsen, Wiener

NO VOTE RECORDED: Moorlach

SENATE APPROPRIATIONS COMMITTEE: 6-0, 5/16/19

AYES: Portantino, Bates, Bradford, Hill, Jones, Wieckowski

SUBJECT: Personal income taxes: credit: deduction: qualified education loan

SOURCE: Conference of California Bar Associations

DIGEST:

This bill eliminates the deduction for interest paid on student loans, instead creating a tax credit for interest paid on student loans.

ANALYSIS:

Existing law:

1. Allows various tax credits under existing Gross Premiums Tax, the Personal Income Tax (PIT) Law, and the Corporation Tax (CT) Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
2. Allows a deduction for interest paid on student loans, capped at $2,500.
3. Allows taxpayers who are filing as single, head of household, or qualifying widow(er) with Adjusted Gross Income (AGI) of $60,000 or less to take the full deduction.
4. Allows taxpayers who are married filing jointly with AGI of $120,000 or less to take the full deduction.

This bill:

1. Suspends the deduction for interest paid on student loans for taxable years 2019 through 2023.
2. Creates a new tax credit for interest paid on student loans for taxable years 2019 through 2023.
3. Allows taxpayers filing jointly with an AGI of $200,000 or less, and all other taxpayers with an AGI of $100,000 or less, to claim the new tax credit.
4. Limits the amount of credit a taxpayer can claim to $2,000 for taxpayers filing jointly and $1,000 for all other taxpayers.
5. Sets the new tax credit amount at $0, unless otherwise specified in a bill providing for appropriations related to the Budget Act. If no bill related to the Budget Act specifies appropriations, then the deduction is allowed.

Background

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 for members of the armed service. These are known as “above the line” deductions. Unlike itemized 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 can take above the line deductions regardless of the taxpayer claiming either the standard deduction or the itemized deduction. Unlike deductions, which reduce the amount of earnings subject to tax, credits are applied after taxable income is calculated. Tax credits reduce—dollar for dollar—the amount of taxes owed.

Student Loan Interest Deduction. Existing federal law allows taxpayers an above the line deduction for interest paid on student loans. The maximum amount a taxpayer can deduct is $2,500 annually, and the deduction is not allowed to a taxpayer who is claimed as a dependent on another taxpayer's return. For the 2018 taxable year, taxpayers are eligible for the full amount of the deduction if their modified AGI is as follows:

• Less than $65,000 for taxpayers filing as single, head of household, or qualifying widow(er); and
• Less than $135,000 for taxpayers who are married filing jointly.

To qualify, a taxpayer must have a qualified education loan, which is generally defined as any indebtedness incurred to pay for the qualified higher education expenses of either the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent(s). The indebtedness could be incurred to pay for either post-secondary educational institutions or certain vocational schools. Qualified higher education expenses generally include tuition, fees, as well as room and board.

State law generally conforms to federal law regarding the student loan interest deduction. However, for the 2018 taxable year, taxpayers are eligible for the full deduction if their modified AGI is as follows:

• Less than $60,000 for taxpayers filing as single, head of household, or qualifying widow(er); and
• Less than $120,000 for taxpayers who are married filing jointly.

Student loan debt. In January 2017, the Legislative Analyst’s office released the report, “Creating a Debt Free College Program.” The report noted that, in California, about one-third of full-time freshmen take on student loans, and just over half of students graduating have student loan debt. Low- and middle-income students tend to borrow more to finance their education then their higher-income peers. For example, at a UC campus, just over 50 percent of students from families earning less than $54,000 annually take out student loans, compared to 15 percent of students from families earning over $161,000. The federal government also tracks the percentage of students defaulting within three years, by institution. The average rate of default at California institutions is 10.4 percent—compared to 11.3 percent nationally—and three year student loan default rates tend to be highest at community college campuses and lowest at UC campuses.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, the Franchise Tax Board’s estimates of the revenue impact and administrative costs resulting from the bill have yet to be determined. The amendment changes the revenue loss to a cost pressure.”

SUPPORT: (Verified 5/17/19)

Conference of California Bar Associations (source)

Public Law Center

OPPOSITION: (Verified 5/17/19)

None received

ARGUMENTS IN SUPPORT: According to the author, “SB 477 would assist in alleviating the burden of student loan debt for California’s college-educated residents by providing them a tax credit equal to the loan interest paid during the year. Student loan debt is now the second highest category of household debt in the U.S. with more than 45 million Americans collectively owing $1.5 trillion in student loan debt. California has the largest share of residents, 3.7 million, who are carrying outstanding student loan debt. Student loan debt is a financial burden that is unprecedented in our history and represents a major drag on our economy. This debt is disproportionately born by women, who hold nearly two-thirds of the outstanding student debt in the U.S, students from low-income families, students of color, and first-generation college students. These mortgage-sized loans have caused a generation to postpone traditional life milestones like buying a home, getting married, starting a family, and saving for retirement. SB 477 recognizes the costs Californians have incurred in pursuing higher education and will serve as a strong incentive for them to stay in California at a time when our state is facing a shortfall of 1.1 million college graduates by 2030.”

Prepared by: Marnie Brown / GOV. & F. / (916) 651-4119

5/20/19 11:38:42

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 477 (Wieckowski) - Personal income taxes: credit: deduction: qualified education loan

Bill Summary:

SB 477 would eliminate the deduction for interest paid on student loans, instead creating a tax credit for interest paid on student loans.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on May 16, 2019

Fiscal Impact:

The Franchise Tax Board’s (FTB’s) estimates of the revenue impact and administrative costs resulting from the bill have yet to be determined. The amendment changes the revenue loss to a cost pressure.

Committee Amendments:

Make the credit operative only in years specified in a trailer bill.

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 477 (Wieckowski) - Personal income taxes: credit: deduction: qualified education loan

Bill Summary:

SB 477 would eliminate the deduction for interest paid on student loans, instead creating a tax credit for interest paid on student loans.

Fiscal Impact:

The Franchise Tax Board’s (FTB’s) estimates of the revenue impact and administrative costs resulting from the bill have yet to be determined.

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 total $65 billion annually.

Both federal and state laws allow for the deduction of certain expenses from gross income when calculating adjusted gross income (AGI). These are known as “above the line” deductions. Unlike itemized 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 can take above the line deductions regardless of the taxpayer claiming either the standard deduction or the itemized deduction. Unlike deductions, which reduce the amount of earnings subject to tax, credits are applied after taxable income is calculated. Tax credits reduce, on a dollar for dollar basis, the amount of taxes owed.

Current federal law allows taxpayers an above the line deduction for interest paid on student loans. The maximum amount a taxpayer can deduct is $2,500 annually, and the deduction is not allowed to a taxpayer who is claimed as a dependent on another taxpayer's return. For taxable year 2018, taxpayers are eligible for the full amount of the deduction if their modified AGI is as follows: (1) less than $65,000 for taxpayers filing as single, head of household, or qualifying widow(er), and (2) less than $135,000 for taxpayers who are married filing jointly. To qualify, a taxpayer must have a qualified education loan, which is generally defined as any indebtedness incurred to pay for the qualified higher education expenses of either the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent(s). Qualified higher education expenses generally include tuition, fees, as well as room and board.

State law generally conforms to federal law regarding the student loan interest deduction. However, for taxable year 2018, taxpayers are eligible for the full deduction if their modified AGI is as follows: (1) less than $60,000 for taxpayers filing as single, head of household, or qualifying widow(er), and (2) less than $120,000 for taxpayers who are married filing jointly.

In January 2017, the Legislative Analyst’s Office noted that about one-third of full-time California freshmen take on student loans, and just over half of students graduating have student loan debt. Low- and middle-income students tend to borrow more to finance their education then their higher-income peers. For example, at a UC campus, just over 50 percent of students from families earning less than $54,000 annually take out student loans, compared to 15 percent of students from families earning over $161,000. The federal government also tracks the percentage of students defaulting within three years, by institution. The average rate of default at California institutions is 10.4 percent—compared to 11.3 percent nationally—and three year student loan default rates tend to be highest at community college campuses and lowest at UC campuses. Federal Reserve Bank of New York research data indicate that Californians had an estimated $141 million in student loan debt at the end of 2018.

Proposed Law:

This bill would, for taxable years 2019 through 2023, replace the State’s existing tax deduction for student loan interest payments with a state tax credit. The credit allowed cannot exceed $2,000 for joint return tax filers and $1,000 for other individuals. To be eligible for the credit, the AGI for joint filing taxpayers shall not exceed $200,000 and for individual tax filers the AGI shall not exceed $100,000. After the credit's sunset, the deduction would automatically be reinstated.

Staff Comments:

As noted above, FTB has yet to complete its revenue estimate for the bill. The General Fund revenue loss would minimally be in the hundreds of thousands of dollars annually.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Personal income taxes: credit: deduction: qualified education loan

Eliminates the deduction for interest paid on student loans, instead creating a tax credit for interest paid on student loans.

Background

Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives either to compensate taxpayers for incurring certain expenses, such as child adoption, 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 annually to publish a list of tax expenditures, currently totaling around $65.2 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 for members of the armed service, as well as certain ordinary and necessary trade and business expenses. These are known as “above the line” deductions. Unlike itemized 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 can take above the line deductions regardless of the taxpayer claiming either the standard deduction or the itemized deduction.

Unlike deductions, which reduce the amount of earnings subject to tax, credits are applied after taxable income is calculated. Tax credits reduce—dollar for dollar—the amount of taxes owed.

Student Loan Interest Deduction. Existing federal law allows taxpayers an above the line deduction for interest paid on student loans. The maximum amount a taxpayer can deduct is $2,500 annually, and the deduction is not allowed to a taxpayer who is claimed as a dependent on another taxpayer's return. For the 2018 taxable year, taxpayers are eligible for the full amount of the deduction if their modified AGI is as follows:

• Less than $65,000 for taxpayers filing as single, head of household, or qualifying widow(er); and
• Less than $135,000 for taxpayers who are married filing jointly.

To qualify, a taxpayer must have a qualified education loan, which is generally defined as any indebtedness incurred to pay for the qualified higher education expenses of either the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent(s). The indebtedness could be incurred to pay for either post-secondary educational institutions or certain vocational schools. Qualified higher education expenses generally include tuition, fees, as well as room and board.

State law generally conforms to federal law regarding the student loan interest deduction. However, for the 2018 taxable year, taxpayers are eligible for the full deduction if their modified AGI is as follows:

• Less than $60,000 for taxpayers filing as single, head of household, or qualifying widow(er); and
• Less than $120,000 for taxpayers who are married filing jointly.

Student loan debt. In January 2017, the Legislative Analyst’s office released the report, “Creating a Debt Free College Program.” The report noted that, in California, about one-third of full-time freshmen take on student loans, and just over half of students graduating have student loan debt. Low- and middle-income students tend to borrow more to finance their education then their higher-income peers. For example, at a UC campus, just over 50 percent of students from families earning less than $54,000 annually take out student loans, compared to 15 percent of students from families earning over $161,000. The federal government also tracks the percentage of students defaulting within three years, by institution. The average rate of default at California institutions is 10.4 percent—compared to 11.3 percent nationally—and three year student loan default rates tend to be highest at community college campuses and lowest at UC campuses.

The author wants to help taxpayers who are burdened with student loan debt.

Proposed Law

SB 477 creates a nonrefundable tax credit for interest paid on student loans for taxable years beginning on or after January 1, 2019. The tax credit is applicable for taxable years 2019 through 2023.

To qualify, the taxpayer’s student loan must be a qualified education loan, which is generally any indebtedness incurred to pay for the higher education expenses of either the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent(s). Refinanced student loans also qualify for the tax credit.

SB 477 also eliminates the deduction for interest paid on student loans. When the credit sunsets on January 1, 2024, the deduction is reinstated.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “SB 477 would assist in alleviating the burden of student loan debt for California’s college-educated residents by providing them a tax credit equal to the loan interest paid during the year. Student loan debt is now the second highest category of household debt in the U.S. with more than 45 million Americans collectively owing $1.5 trillion in student loan debt. California has the largest share of residents, 3.7 million, who are carrying outstanding student loan debt. Student loan debt is a financial burden that is unprecedented in our history and represents a major drag on our economy. This debt is disproportionately born by women, who hold nearly two-thirds of the outstanding student debt in the U.S, students from low-income families, students of color, and first-generation college students. These mortgage-sized loans have caused a generation to postpone traditional life milestones like buying a home, getting married, starting a family, and saving for retirement. SB 477 recognizes the costs Californians have incurred in pursuing higher education and will serve as a strong incentive for them to stay in California at a time when our state is facing a shortfall of 1.1 million college graduates by 2030.”

2. Make it Rain. Existing tax law provides various credits, deductions, exclusions, and exemptions for taxpayers. This bill would replace an existing tax expenditure with a new tax expenditure. While the original tax expenditure—the Student Loan Interest Deduction—is capped at $2,500, and limited to taxpayers who have a certain AGI, SB 477’s new tax expenditure is not. Credits are also worth more to taxpayers than deductions. A credit with neither a cap nor an AGI limitation will result in less General Fund revenue. With less General Fund moneys available, the government has less funding to pay for important public services such as education and public safety. As a result, the state will have to reduce spending or increase taxes to match the foregone revenue. The Committee may wish to limit SB 477’s new tax expenditure by adding a cap to the amount of credit each taxpayer can claim, or limiting which taxpayers are eligible for the credit by adding an AGI limitation.

3. Don’t recreate the wheel. Instead of replacing the current Student Loan Interest Deduction with a tax credit, the Committee could choose to expand the current deduction. In 2018, the average college graduate with a bachelor’s degree left school with $28,650 in student debt according to the Forbes report Student Loan Debt Statistics In 2019: A $1.5 Trillion Crisis. Nerdwallet estimates that a taxpayer—who has both $30,000 in student loans and the average interest rate of 5.8 percent—pays $960 in annual student loan interest. Since the state’s current Student Loan Interest Deduction allows taxpayers to deduct up to $2,500 of student loan interest paid, the state’s current deduction limitation seems appropriate. However, California is one of the most expensive states in the U.S. With a higher cost of living, salaries in the state tend to be higher than the national average. However, the state’s current Student Loan Interest Deduction has an AGI threshold that is less than the federal AGI threshold. The Committee may wish to keep the current Student Loan Interest Deduction but increase the AGI threshold to allow more taxpayers to claim the deduction.

4. Conformity. In general, state conformity with federal law promotes greater simplicity and eases the burden of administering complex tax law. SB 477 creates a difference between federal and state tax treatment when a taxpayer pays interest on a student loan. Under federal tax law, certain taxpayers with certain AGIs would receive a deduction of paying interest on their student loans. However, under state law, all taxpayers—no matter their income limit—who pay interest on their student loans would receive a credit under SB 477. The Committee may wish to consider the burden nonconformity has on tax administration, tax preparers, and taxpayers.

Support and Opposition

(4/26/19)

Support: Conference of California Bar Association (sponsor).

Opposition: Unknown.

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