The Personal Income Tax Law, in modified conformity with federal income tax law, excludes from the gross income of distributions to a beneficiary of, or and earnings by a contributor to, a qualified tuition program, which includes a Golden State Scholarshare College Savings Trust, distributions or earnings under that program, as specified. if specified conditions are met.

This bill, for taxable years beginning on or after January 1, 2023, and before January 1, 2028, would allow under that law a deduction against gross income in the amount equal to the monetary contribution made by a qualified taxpayer, as defined, to the California qualified tuition program established pursuant to the Golden State Scholarshare Trust Act. Act, not to exceed $5,000 per beneficiary per taxable year. The bill would require, with exceptions, in the case of any distribution in excess of qualified higher education expenses, as defined, that the aggregate amount of the deduction allowed that reduced the qualified taxpayers gross income in any taxable year be added to the gross income of the qualified taxpayer in the taxable year of the distribution, as provided.

This bill would take effect immediately as a tax levy.

Existing law authorizes an individual to contribute amounts in excess of the individuals personal income tax liability for the support of specified funds, including the State Parks Protection Fund. Existing law requires, for each taxable year beginning on or after January 1, 2012, the Franchise Tax Board to revise the individual taxpayer return form to allow a taxpayer to designate an amount in excess of tax liability to be deposited to the State Parks Protection Fund. Existing law entitles a taxpayer making a contribution to receive a single state parks day use annual pass from the Department of Parks and Recreation if the price of the pass, as determined by the department, is less than or equal to the amount of the taxpayers contribution. Existing law allows a deduction for any contribution amount in excess of the price of the pass received, if any.

This bill would make a nonsubstantive change to these provisions.

Date of Hearing: May 1, 2023

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

ABPCA Bill Id:AB 1589 (

Author:Connolly) – As Amended Ver:April 11, 2023

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: deduction: California qualified tuition program

SUMMARY: Allows, under the Personal Income Tax (PIT) Law, an "above-the-line" deduction from gross income for "qualified taxpayers" that make contributions to California's qualified tuition program (QTP), as specified. Specifically, this bill:

1. Allows, for taxable years beginning on or after January 1, 2023, and before January 1, 2028, under the PIT Law, a deduction equal to the "monetary contribution" made by a "qualified taxpayer" during the taxable year to one or more accounts established pursuant to the Golden State Scholarshare Trust Act on behalf of a beneficiary, not to exceed $5,000 per beneficiary per taxable year.
2. Defines a "monetary contribution" as a cash contribution, pursuant to federal law, to the California QTP, but excluding cash contributions to the California QTP with respect to either of the following:
   1. Amounts transferred to a California QTP from a QTP that is not a California QTP; and,
   2. Amounts transferred from the credit of one beneficiary under the California QTP to the credit of another beneficiary under the California QTP.
3. Defines a "qualified taxpayer" as an individual, or a married couple if filing a joint return, who, on behalf of a beneficiary, contributes money to a California QTP for which the individual, or a spouse in the case of a married couple filing a joint return, is the account owner, and whose adjusted gross income (AGI) does not exceed the following:
   1. $150,000 for taxpayers who file as head of household, a surviving spouse, or a married couple filing a joint return; and,
   2. $75,000 for single filers.
4. Defines "California qualified tuition program" as a QTP, as defined in Internal Revenue Code (IRC) Section 529, and as established pursuant to the Golden State Scholarshare Trust Act.
5. Defines "qualified higher education expenses" by cross-references to federal law.
6. Requires, with an exception, in the case of any distribution in excess of qualified higher education expenses, the aggregate amount of the deduction allowed that reduced the qualified taxpayer's gross income in any taxable year to be added to the gross income of the qualified taxpayer in the taxable year of the distribution.
7. Provides that amounts allowed as a deduction shall not be treated as an investment in the contract in applying IRC Section 72.
8. Finds and declares the following for the purposes of satisfying the requirements of Revenue and Taxation Code (R&TC) Section 41:
   1. The specific goals, purposes, and objectives of the deduction are to provide additional incentives to those who would not qualify for state benefits, such as medical, to save for college by allowing a deduction on their taxes to allow them to qualify for social programs, as applicable, and to prepare their child for college;
   2. To measure whether this bill achieves its intended purpose, the performance indicator is the number of taxpayers whom both took the deduction and qualified for a program they did not qualify for previously; and,
9. Requires the Franchise Tax Board (FTB), by July 1, 2024 and annually thereafter, to prepare a report on the number of taxpayers whom both made a deduction and qualified for a program they did not qualify for previously.
10. Repeals the provisions of this bill on December 1, 2028.
11. Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW provides tax-exempt status to QTPs. Contributions to a QTP must be made in cash. The Section 529 Plan does not impose a specific dollar limit on the amount of contributions, account balances, or prepaid tuition benefits relating to a qualified tuition account; however, the program is required to have adequate safeguards to prevent contributions in excess of amounts necessary to provide for the beneficiary's qualified higher education expenses. Contributions are not tax-deductible for federal income tax purposes, but amounts earned in the account accumulate on a tax-free basis. Distributions from a QTP are excludable from federal tax if used for the beneficiary's qualified higher education expenses. If a distribution from a QTP exceeds the qualified higher education expenses incurred for the beneficiary, the portion of the excess that is treated as earnings is generally subject to income tax and an additional 10% tax. Amounts in a QTP may be rolled over to another QTP for the same beneficiary or for a member of the family of that beneficiary. (IRC Section 529.)

EXISTING STATE LAW:

1. Conforms, with modifications, to IRC Section 529 as of the January 1, 2015 date, as it relates to tax-exempt QTPs. California modifies the additional 10% tax on excess distributions to be an additional tax of 2.5% for state purposes. Similar to federal law, state law provides that contributions made to a QTP are not deductible. (R&TC Sections 17140, 17140.3)
2. Conforms, for taxable years beginning on or after January 1, 2019, to certain provisions of the Tax Cuts and Jobs Act (TCJA) relating to ABLE accounts. The TCJA increases the limit on contributions made by the designated beneficiary to ABLE accounts up to the federal poverty level and allows 529 plan accounts to rollover to ABLE accounts without penalty. (R&TC Section 17140.4.)
3. Requires any bill authorizing a new tax deduction to contain all of the following:
   1. Specific goals, purposes, and objectives that the tax deduction will achieve;
   2. Detailed performance indicators for the Legislature to use when measuring whether the tax deduction meets the goals, purposes, and objectives stated in the bill; and,
   3. Data collection requirements to enable the Legislature to determine whether the tax deduction is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the deduction is in effect, for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data. (R&TC Section 41.)

FISCAL EFFECT: The FTB estimates General Fund revenue losses of $6.6 million in fiscal year (FY) 2023-24, $4.7 million in FY 2024-25, and $5.2 million in FY 2025-26.

COMMENTS:

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

Many Californians struggle with the cost of higher education. 529 College savings plans are one vital avenue that parents have to prepare for the increasingly burdensome cost of higher education. These plans have often been inaccessible to low- and middle-income parents who are more worried about their current financial situation and can't afford the luxury of long-term planning. We must ensure that California parents are incentivized to make plans for their children's future.

1. The Securities Industry and Financial Markets Association (SIFMA), writing in their oppose unless amended letter, note in part:

While SIFMA applauds Assembly Member Connolly and this Committee for looking at ways to encourage residents to save for college, we strongly believe that California residents would substantially benefit from an amendment which would enable them to claim the deduction if they contributed to the California plan or to any other qualified 529 plan.

1. Committee Staff Comments:
   1. ScholarShare 529 vs other 529 college savings plans: QTPs are sponsored by states, state agencies, or educational institutions and take one of two forms: prepaid tuition plans or education savings plans. All 50 states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan. Prepaid tuition plans allow savers to purchase units or credits at participating colleges and universities for future tuition and mandatory fees at current prices. Education savings plans are typically more flexible – they usually do not have residency requirements, offer different kinds of investment options, and can generally be used at any college or university for tuition, mandatory fees, and room and board.^[1]

QTPs can be established directly by individuals ("direct-sold") or through licensed financial advisors ("advisor-sold"). Direct-sold 529 plans typically have lower fees and fewer investment options compared to actively managed plans. Advisor-sold 529 plans managed by a broker or financial advisor are still offered through a state-sponsored QTP. ScholarShare 529 is California's direct-sold education savings plan.

• 1. What would this bill do? In addition to the existing tax-free growth benefit, this bill would allow an "above-the-line" deduction for contributions made to a California QTP established under the Golden State Scholarshare Trust Act.^[2] An "above-the-line" deduction allows a qualified taxpayer to take the deduction to reduce their AGI regardless of the taxpayer claiming either the standard or the itemized deduction. ScholarShare is California's state-sponsored 529 QTP and is administered by the ScholarShare Investment Board, which is chaired by the State Treasurer. (Education Code Section 69980 et seq.)
  2. Who would potentially benefit from this bill? This bill would benefit taxpayers whose income does not exceed the AGI limits prescribed by this bill and who want to save for qualified education expenses on behalf of someone else, such as a child or other relative. Indirectly, vendors that the ScholarShare Investment Board hires to manage its accounts, assets, and funds could benefit from any marginal revenue they could receive per additional dollar of investment or account opened as a result of this bill.
  3. ScholarShare's Successful 2021 Business Results: On March 23, 2022, the Scholarshare Investment Board received its Q4 2021 Marketing results from its private vendor.^[3] Despite the author's contention that California lacks sufficient tax incentives, the ScholarShare program for the 2021 year saw that new accounts were up 7% over the 2020 level, and contributions were up 23% over the 2020 year level.

Source: ScholarShare Investment Board. (2022).

The results could imply that the board received a relatively positive return on its $10 million annual marketing budget. However, the results could also imply that taxpayers were not discouraged from opening an account or making contributions with the existing tax incentives.

• 1. Deductions tend to benefit higher-income households: 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 taxes for 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.

This Committee's analysis of a prior version of this bill raised that irrespective of tax incentives, it may be challenging to encourage families to save for college when they have little or no disposable income. Even with limiting this deduction to certain taxpayers whose AGI does not exceed certain amounts, this bill may not benefit lower income taxpayers as much as higher income taxpayers.^[4]

• 1. An incentive or a reward? Typically, tax expenditures are provided prospectively as a matter of legislative grace to encourage taxpayers to behave in ways they might not absent a financial incentive. This expenditure, in turn, is intended to encourage taxpayers to save for higher education and begins providing this deduction for taxable years beginning on January 1, 2023. Tax expenditures with retroactive application, however, cannot incentivize past behavior that has already occurred. If this is contrary to the author's intent, the bill should be amended to remove the retroactive application and provide the deduction prospectively.
  2. Double tax benefit: Under existing law, taxpayers contributing to a 529 plan receive the tax benefit of having their earnings on their contributions grow tax-free if they spend the earned amount on qualified educational expenses, a "back-end" tax break. This bill would also provide a "front-end" tax break by allowing taxpayers to receive an immediate tax benefit in the form of deductions equal to their contribution. This Committee may wish to consider the merits of providing a double tax benefit for a single act or transaction.
  3. Removes federal conformity: While this bill may make California's tax law more similar to other states, it would also make California's tax law more different from the federal tax law. Currently, federal tax law does not provide the deduction allowed in this bill. California's conformity with federal tax law is more important than its conformity with other states' tax laws because California's tax law is dependent on federal tax law. California's taxpayers must account for the differences between federal and state tax laws to file their tax returns accurately.
  4. Committee's tax expenditure policy: This bill complies with R&TC Section 41 because it outlines 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 have an appropriate sunset provision to be eligible for a vote. Sunsets are required because eliminating a tax expenditure generally requires a two-thirds vote. According to this policy, an "appropriate sunset provision" means five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" means ten years. This bill, as currently drafted, complies with the Committee's policy on sunset dates.

• 1. Prior legislation:
     1. SB 1374 (Borgeas), of the 2021-22 Legislative Session, was substantially similar to this bill and was vetoed. The Governor's veto message stated in part: "While I appreciate the intent to incentivize Californians to save for higher education expenses, ScholarShare already has significant tax advantages. An additional tax deduction would largely benefit higher-income families that have tax liability and enough disposable income to contribute."
     2. AB 211 (Calderon), of the 2019-20 Legislative Session, was substantially similar to this bill and was vetoed. The Governor's veto message stated in part: "While I appreciate the Legislature's intent, a careful balancing of the benefits of the proposed tax deduction in relation to the revenue losses, approximately $13 million, would be better addressed through the annual budget process."
     3. SB 1218 (Gaines), of the 2017-18 Legislative Session, would have allowed an itemized deduction for contributions to a QTP. SB 1218 was held on the Senate Committee on Appropriations' Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Oppose Unless Amended

Securities Industry and Financial Markets Association (SIFMA)

Opposition

None on file

Analysis Prepared by: Wesley Whitaker / REV. & TAX. / (916) 319-2098

1. "An Introduction to 529 Plans" U.S. Securities & Exchange Commission (SEC) Office of Investor Education & Advocacy. May 29, 2018. https://www.sec.gov/about/reports-publications/investor-publications/introduction-529-plans. ↑

2. ScholarShare 529. (n.d.). 529 Tax benefits. https://www.scholarshare529.com/plan/details.shtml#details-10 ↑

3. ScholarShare Investment Board. (2022). Review of marketing performance for ScholarShare 529. https://www.treasurer.ca.gov/scholarshare/meeting/2022/20220323/agenda11.pdf ↑

4. Anguiano, C. (2019). Assembly Committee on Revenue and Taxation Committee analysis of AB 211 (Calderon) – as amended on April 8, 2019. ↑

Date of Hearing: April 10, 2023

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

ABPCA Bill Id:AB 1589 (

Author:Connolly) – As Amended Ver:March 23, 2023

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: deduction: California qualified tuition program

SUMMARY: Allows, under the Personal Income Tax (PIT) Law, an "above-the-line" deduction from gross income for contributions made to California's qualified tuition program (QTP). Specifically, this bill:

1. Allows, for taxable years beginning on or after January 1, 2023, and before January 1, 2028, under the PIT Law, a deduction equal to the "monetary contribution" made by a "qualified taxpayer" during the taxable year to one or more accounts established pursuant to the Golden State Scholarshare Trust Act on behalf of a beneficiary.
2. Defines a "monetary contribution" as a cash contribution, pursuant to federal law, to the California QTP, but excluding cash contributions to the California QTP with respect to either of the following:
   1. Amounts transferred to a California QTP from a QTP that is not a California QTP; and,
   2. Amounts transferred from the credit of one beneficiary under the California QTP to the credit of another beneficiary under the California QTP.
3. Defines "qualified taxpayer" as an individual, or a married couple if filing a joint return, who, on behalf of a beneficiary, contributes money to a California QTP for which the individual, or a spouse in the case of a married couple filing a joint return, is the account owner.
4. Defines "California qualified tuition program" as a QTP, as defined in Internal Revenue Code (IRC) Section 529, and as established pursuant to the Golden State Scholarshare Trust Act.
5. Defines "qualified higher education expenses" by cross-references to federal law.
6. Requires, with an exception, in the case of any distribution in excess of qualified higher education expenses, the aggregate amount of the deduction allowed that reduced the qualified taxpayer's gross income in any taxable year to be added to the gross income of the qualified taxpayer in the taxable year of the distribution.
7. Provides that amounts allowed as a deduction shall not be treated as an investment in the contract in applying IRC Section 72.
8. Repeals the provisions of this bill on December 1, 2028.
9. Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW provides tax-exempt status to QTPs. Contributions to a QTP must be made in cash. The Section 529 Plan does not impose a specific dollar limit on the amount of contributions, account balances, or prepaid tuition benefits relating to a qualified tuition account; however, the program is required to have adequate safeguards to prevent contributions in excess of amounts necessary to provide for the beneficiary's qualified higher education expenses. Contributions are not tax-deductible for federal income tax purposes, but amounts earned in the account accumulate on a tax-free basis. Distributions from a QTP are excludable from federal tax if used for the beneficiary's qualified higher education expenses. If a distribution from a QTP exceeds the qualified higher education expenses incurred for the beneficiary, the portion of the excess that is treated as earnings is generally subject to income tax and an additional 10% tax. Amounts in a QTP may be rolled over to another QTP for the same beneficiary or for a member of the family of that beneficiary. (IRC Section 529.)

EXISTING STATE LAW:

1. Conforms, with modifications, to IRC Section 529 as of the January 1, 2015 date, as it relates to tax-exempt QTPs. California modifies the additional 10% tax on excess distributions to be an additional tax of 2.5% for state purposes. Similar to federal law, state law provides that contributions made to a QTP are not deductible. (R&TC Sections 17140, 17140.3)
2. Conforms, for taxable years beginning on or after January 1, 2019, to certain provisions of the Tax Cuts and Jobs Act (TCJA) relating to ABLE accounts. The TCJA increases the limit on contributions made by the designated beneficiary to ABLE accounts up to the federal poverty level and allows 529 plan accounts to rollover to ABLE accounts without penalty. (R&TC Section 17140.4.)
3. Requires any bill authorizing a new tax deduction to contain all of the following:
   1. Specific goals, purposes, and objectives that the tax deduction will achieve;
   2. Detailed performance indicators for the Legislature to use when measuring whether the tax deduction meets the goals, purposes, and objectives stated in the bill; and,
   3. Data collection requirements to enable the Legislature to determine whether the tax deduction is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the deduction is in effect, for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data. (R&TC Section 41.)

FISCAL EFFECT: The Franchise Tax Board (FTB) estimates General Fund revenue losses of $55 million in fiscal year (FY) 2023-24, $39 million in FY 2024-25, and $43 million in FY 2025-26.

COMMENTS:

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

Many Californians struggle with the cost of higher education. 529 College savings plans are one vital avenue that parents have to prepare for the increasingly burdensome cost of higher education. These plans have often been inaccessible to low- and middle-income parents who are more worried about their current financial situation and can't afford the luxury of long-term planning. We must ensure that California parents are incentivized to make plans for their children's future.

1. The Securities Industry and Financial Markets Association (SIFMA), writing in their oppose unless amended letter, note in part:

While SIFMA applauds Assembly Member Connolly and this Committee for looking at ways to encourage residents to save for college, we strongly believe that California residents would substantially benefit from an amendment which would enable them to claim the deduction if they contributed to the California plan or to any other qualified 529 plan.

1. Committee Staff Comments:
   1. ScholarShare 529 vs other 529 college savings plans: QTPs are sponsored by states, state agencies, or educational institutions and take one of two forms: prepaid tuition plans or education savings plans. All 50 states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan. Prepaid tuition plans allow savers to purchase units or credits at participating colleges and universities for future tuition and mandatory fees at current prices. Education savings plans are typically more flexible – they usually do not have residency requirements, offer different kinds of investment options, and can generally be used at any college or university for tuition, mandatory fees, and room and board.^[1]

QTPs can be established directly by individuals ("direct-sold") or through licensed financial advisors ("advisor-sold"). Direct-sold 529 plans typically have lower fees and fewer investment options compared to actively managed plans. Advisor-sold 529 plans managed by a broker or financial advisor are still offered through a state-sponsored QTP. ScholarShare 529 is California's direct-sold education savings plan.

• 1. What would this bill do? In addition to the existing tax-free growth benefit, this bill would allow an "above-the-line" deduction for contributions made to a California QTP established under the Golden State Scholarshare Trust Act.^[2] An "above-the-line" deduction allows a qualified taxpayer to take the deduction to reduce their adjusted gross income (AGI) regardless of the taxpayer claiming either the standard or the itemized deduction. ScholarShare is California's state-sponsored 529 QTP and is administered by the ScholarShare Investment Board, which is chaired by the State Treasurer. (Education Code Section 69980 et seq.)
  2. Who would potentially benefit from this bill? This bill would benefit taxpayers with a sufficient tax liability and a need to pay for qualified education expenses. Indirectly, vendors that the ScholarShare Investment Board hires to manage its accounts, assets, and funds could benefit from any marginal revenue they could receive per additional dollar of investment or account opened as a result of this bill.
  3. ScholarShare's Successful 2021 Business Results: On March 23, 2022, the Scholarshare Investment Board received its Q4 2021 Marketing results from its private vendor.^[3] Despite the author's contention that California lacks sufficient tax incentives, the ScholarShare program for the 2021 year saw that new accounts were up 7% over the 2020 level, and contributions were up 23% over the 2020 year level.

Source: ScholarShare Investment Board. (2022).

The results could imply that the board received a relatively positive return on its $10 million annual marketing budget. However, the results could also imply that taxpayers were not discouraged from opening an account or making contributions with the existing tax incentives.

• 1. Deductions tend to benefit higher-income households: 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 taxes for 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.

This Committee's analysis of a prior version of this bill raised that irrespective of tax incentives, it may be challenging to encourage families to save for college when they have little or no disposable income. Ultimately, this bill may not benefit lower income taxpayers as much as higher income taxpayers.^[4]

• 1. Appropriately targeted? As currently drafted, this bill does not limit the deduction to taxpayers based on their AGI, meaning higher income taxpayers with larger tax liabilities could stand to benefit the most from this deduction. Further, this bill does not limit the amount of the deduction, meaning a taxpayer could deduct the full amount of their qualified expenses. Given the disproportionate benefit this deduction would provide to higher income taxpayers, the Committee may wish to discuss whether limiting the amount of the deduction and limiting the deduction to taxpayers with incomes below certain amounts would better target the bill to individuals who are most burdened by the growing costs of higher education.
  2. An incentive or a reward? Typically, tax expenditures are provided prospectively as a matter of legislative grace to encourage taxpayers to behave in ways they might not absent a financial incentive. This expenditure, in turn, is intended to encourage taxpayers to save for higher education and begins providing this deduction for taxable years beginning on January 1, 2023. Tax expenditures with retroactive application, however, cannot incentivize past behavior that has already occurred. If this is contrary to the author's intent, the bill should be amended to remove the retroactive application and provide the deduction prospectively.
  3. Double tax benefit: Under existing law, taxpayers contributing to a 529 plan receive the tax benefit of having their earnings on their contributions grow tax-free if they spend the earned amount on qualified educational expenses, a "back-end" tax break. This bill would arguably provide a "front-end" tax break by allowing taxpayers to receive an immediate tax benefit in the form of deductions equal to their contribution. This Committee may wish to consider the merits of providing a double tax benefit for a single act or transaction.
  4. Removes federal conformity: While this bill may make California's tax law more similar to other states, it would also make California's tax law more different from the federal tax law. Currently, federal tax law does not provide the deduction allowed in this bill. California's conformity with federal tax law is more important than its conformity with other states' tax laws because California's tax law is dependent on federal tax law. California's taxpayers must account for the differences between federal and state tax laws to file their tax returns accurately.
  5. Committee's tax expenditure policy: This bill, as currently drafted, does not comply with R&TC Section 41 because it does not 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. Therefore, this bill is not eligible for a vote in its current form.

In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals have an appropriate sunset provision to be eligible for a vote. Sunsets are required because eliminating a tax expenditure generally requires a two-thirds vote. According to this policy, an "appropriate sunset provision" means five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" means ten years. This bill, as currently drafted, complies with the Committee's policy on sunset dates.

• 1. Related legislation: AB 1026 (Ta), currently pending hearing by this Committee, would provide a deduction under the PIT Law of an amount equal to the monetary contributions made by a qualified taxpayer to the California ScholarShare program, not to exceed $2,000 per beneficiary for joint filers and $1,000 for individual filers, subject to specified income limitations.
  2. Prior legislation:
     1. SB 1374 (Borgeas), of the 2021-22 Legislative Session, was substantially similar to this bill and was vetoed. The Governor's veto message stated in part: "While I appreciate the intent to incentivize Californians to save for higher education expenses, ScholarShare already has significant tax advantages. An additional tax deduction would largely benefit higher-income families that have tax liability and enough disposable income to contribute."
     2. AB 211 (Calderon), of the 2019-20 Legislative Session, was substantially similar to this bill and was vetoed. The Governor's veto message stated in part: "While I appreciate the Legislature's intent, a careful balancing of the benefits of the proposed tax deduction in relation to the revenue losses, approximately $13 million, would be better addressed through the annual budget process."
     3. SB 1218 (Gaines), of the 2017-18 Legislative Session, would have allowed an itemized deduction for contributions to a QTP. SB 1218 was held on the Senate Committee on Appropriations' Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Oppose Unless Amended

Securities Industry and Financial Markets Association (SIFMA)

Opposition

None on file

Analysis Prepared by: Wesley Whitaker / REV. & TAX. / (916) 319-2098

1. "An Introduction to 529 Plans" U.S. Securities & Exchange Commission (SEC) Office of Investor Education & Advocacy. May 29, 2018. https://www.sec.gov/about/reports-publications/investor-publications/introduction-529-plans. ↑

2. ScholarShare 529. (n.d.). 529 Tax benefits. https://www.scholarshare529.com/plan/details.shtml#details-10 ↑

3. ScholarShare Investment Board. (2022). Review of marketing performance for ScholarShare 529. https://www.treasurer.ca.gov/scholarshare/meeting/2022/20220323/agenda11.pdf ↑

4. Anguiano, C. (2019). Assembly Committee on Revenue and Taxation Committee analysis of AB 211 (Calderon) – as amended on April 8, 2019. ↑