(1)The Personal Income Tax Law allows, by way of conformity with deductions allowed under federal income tax law, various deductions in computing the income that is subject to the taxes imposed by the Personal Income Tax Law, including a deduction against gross income for interest paid on qualified education loans not to exceed a specified limit. $2,500, reduced, as specified, based on modified adjusted gross income, as defined.

This bill, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, would remove the limit increase the limitation on the deduction described above, as specified. above to $5,000.

(2)Existing law requires any bill authorizing a new tax expenditure to contain, among other things, specific goals that the tax expenditure will achieve, detailed performance indicators, and data collection requirements.

This bill would include additional information required for any bill authorizing a new tax expenditure.

(3)This bill would take effect immediately as a tax levy.

Existing sales and use tax laws impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. The Sales and Use Tax Law defines in this state for purposes of those taxes.

This bill would make nonsubstantive changes to those provisions.

Date of Hearing: May 15, 2024

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

ABPCA Bill Id:AB 2312

Author:(Wallis) – As Amended Ver:May 7, 2024

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

SUMMARY:

This bill increases, from $2,500 to $5,000, the limitation on the above-the-line deduction, under the Personal Income Tax (PIT) Law, for interest paid on a student loan.

Specifically, this bill:

1. Increases, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, from $2,500 to $5,000, the limitation on the above-the-line deduction allowed for interest paid on a qualified education loan.
2. Declares the goals and performance metrics of the increased deduction and requires, beginning June 30, 2026, the Franchise Tax Board (FTB) to submit an annual report to the Legislature detailing specified deduction data.

FISCAL EFFECT:

1. General Fund (GF) revenue loss of approximately $11 million in fiscal year (FY) 2024-25, $7.3 million in FY 2025-26, and $7.5 million in FY 2026-27. By decreasing PIT revenue, this bill also likely decreases Proposition 98 GF spending by approximately 40% of the GF revenue loss (the exact amount depends on the specific amount of the annual Proposition 98 guarantee).
2. Costs of an unknown, but potentially absorbable, amount to FTB to update existing tax forms and information systems and provide the report.

According to the Legislative Analyst’s Office, the GF faces a structural deficit in the tens of billions of dollars over the next several fiscal years.

COMMENTS:

1. Purpose. The author notes that student debt exacerbates California’s affordability crisis by “burdening individuals with substantial financial obligations even after completing their education.” By enabling students to deduct an increased amount of interest on their student loans, the author intends this bill to “support Californians in navigating the challenges posed by the affordability crisis and pave the way for a brighter economic future.”
2. Support and Opposition. This bill is supported by associations representing dentists and realtors and the Howard Jarvis Taxpayers Association, which argues, “Lessening the tax consequences will allow borrowers to establish their financial footing more quickly and, hopefully, escape debt.”

This bill is opposed by the California Tax Reform Association, which argues this bill will “disproportionately benefit” higher income individuals “regardless of what type of degree they held, whether they went to a public or private university, and whether they work in a specialized or public service field.”

1. Background.

Deduction Value Increases with Income. A below-the-line deduction is only available to a taxpayer that itemizes deductions. In contrast, an above-the-line deduction may be claimed by a taxpayer regardless of whether the taxpayer itemizes their deductions or takes the standard deduction. Since it is generally more valuable for a lower-income taxpayer to take the standard deduction than to itemize deductions, an above-the-line deduction benefits a broader range of income brackets. Regardless, a deduction of any type is generally more valuable to wealthier taxpayers, as the value of a deduction varies with the marginal tax rate (or tax bracket) of the taxpayer. For example, when a taxpayer in the 30% tax bracket deducts $100 of student loan interest, their tax liability is reduced by $30, but a taxpayer in the 10% bracket taking the same $100 deduction reduces their tax liability by only $10.

Existing Federal and State Tax Deduction for Student Loan Debt. Existing federal and state laws allow an above-the-line PIT deduction for certain expenses when calculating adjusted gross income (AGI), including interest on education loans. The student loan interest deduction is limited to $2,500 and phases out as AGI increases. This bill allows a taxpayer to deduct a greater amount of student loan interest from AGI by increasing the $2,500 cap for state PIT deductions to $5,000. As noted in the Assembly Revenue and Taxation Committee’s analysis of this bill, “this bill would bring California further out of conformity with federal law, thereby increasing the complexity of state tax return preparation and potentially causing confusing among taxpyaers.”

1. Prior Legislation. AB 704 (Mayes), of the 2021-22 Legislative Session, would have eliminated the cap on the deduction for interest paid on a student loan. AB 704 was held on this committee’s suspense file.

Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081

Date of Hearing: April 29, 2024

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

ABPCA Bill Id:AB 2312 (

Author:Wallis) – As Amended Ver:March 18, 2024

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: deduction: qualified education loans

SUMMARY: Removes the $2,500 limitation on the above-the-line deduction for interest paid on "higher education expenses." Specifically, this bill:

1. Removes, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, the $2,500 limitation on amounts deducted above the line for interest paid on related to a qualified education loan.
2. Replaces references to "qualified higher education expense," with "higher education expenses," and provides that a "higher education expense" is a "qualified higher education expense," as defined in federal law, excluding any tuition expenses in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.
3. Finds and declares, for the purposes of complying with Revenue and Taxation Code (R&TC) Section 41, that the specific goal of this bill is to reduce the burden on taxpayers who are paying off student loan debt by allowing those taxpayers to deduct all of the interest paid on qualified education loans during the taxable year. The Legislature may use the following performance metrics to measure whether this bill is meeting its stated goal:
   1. The total number of taxpayers claiming the deduction allowed by this bill;
   2. The average dollar value of amounts deducted pursuant to this bill; and,
   3. A review of the income levels of all the individual taxpayers claiming the deduction allowed by this bill.
4. Requires the Franchise Tax Board (FTB) to submit a report to the Legislature on the above data to the extent they are available no later than December 1, 2025, and treats this report as an exception to the prohibition on sharing identifying taxpayer information.
5. Provides that this bill shall remain in effect until December 1, 2029, and is repealed as of that date.
6. Takes immediate effect as a tax levy.

EXISTING LAW deducts, for the purposes of calculating adjusted gross income under state and federal law, interest paid on a "qualified education loan". A "qualified education loan" is defined as any indebtedness to pay for certain expenses related to attending specified educational institutions, also referred to as "qualified higher education expenses." This deduction is ratably phased out for taxpayers with modified adjusted gross income above certain amounts, is prohibited for any amount deducted under any other provisions of law, and is limited to a maximum of $2,500 in paid interest. (Internal Revenue Code (IRC) Section 221 and R&TC Section 17201.) Under federal law, a "qualified higher education expense" includes expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. (IRC Section 529(c)(7).)

FISCAL EFFECT: The FTB, in its analysis of this bill, estimates a revenue loss of $15 million in fiscal year (FY) 2024-25, $9.6 million in the 2025-26 FY, and $9.7 million in the 2026-27 FY.

COMMENTS:

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

California is currently facing an affordability crisis, with many residents struggling to make ends meet due to high living costs. Student debt exacerbates this issue, burdening individuals with substantial financial obligations even after completing their education. To alleviate this strain, providing financial relief and removing the cap on the above-the-line deductions enabling students to deduct the full amount of interest on their loans can offer much-needed assistance. By implementing such measures, we can support Californians in navigating the challenges posed by the affordability crisis and pave the way for a brighter economic future.

1. The California Dental Association, writing in support of this bill, states, in part:

For the Class of 2023, the average dental graduate student debt is $296,500 and specialists accrue even more debt. Interest on large student debt amounts create a large repayment burden, which impedes on newly graduated dentists' ability to open their own practice, by a home, or save for retirement.

1. The California Tax Reform Association, writing in opposition to this bill, notes, in part:

In eliminating the deduction limit for interest paid on education loans, higher income individuals who make enough revenue to itemize their taxes will disproportionately benefit over their lower-income counterparts, whose incomes are too low to do so. In addition, elimination of this cap would benefit these higher income earners regardless of what type of degree they held, whether they went to a public or private university, and whether they work in a specialized or public service field.

1. Committee Staff Comments:
   1. Deductions: There are two types of deductions, above the line and below the line. Above-the-line deductions may be claimed regardless of whether a taxpayer chooses to itemize their deductions. Below-the-line deductions may only be applied if a taxpayer itemizes their deductions. Thus, above-the-line deductions are generally available to a broader set of income categories, as wealthier taxpayers tend to itemize their deductions. Despite this, deductions of any type are generally more valuable to wealthier taxpayers, as the deducted income tends to be taxed at a higher rate than lower-income taxpayers, regardless of whether a taxpayer chooses to take the standard deduction, or chooses to itemize their deductions.
   2. Student loan interest deduction: Current federal and state law allow an above-the-line deduction for interest paid related to a loan used to pay for qualified higher education expenses. Thus, a taxpayer does not need to itemize their deductions in order to benefit from the student loan interest deduction.
   3. This bill: This bill would remove the $2,500 limitation on deductible interest paid to service a qualified education loan. Additionally, this bill would prohibit the deduction for amounts of interest paid on a qualified education loan that is used to pay for tuition expenses in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. Thus, as currently drafted, this bill would bring California further out of conformity with federal law, thereby increasing the complexity of state tax return preparation and potentially causing confusion among taxpayers.
   4. 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 removes the limitation on the deductible amount of interest paid for a qualified education loan, thereby expanding a tax expenditure.
   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. AB 263 (Burke), Chapter 743, Statutes of 2019, extended the requirements in R&TC Section 41 to all tax expenditure measures under the Personal Income Tax Law, the Corporation Tax Law, and the Sales and Use Tax Law introduced on or after January 1, 2020. 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. Sunsets are required because eliminating a tax expenditure generally requires a two-thirds vote. These requirements must be satisfied before a bill can receive a vote in this Committee. This bill complies with R&TC Section 41, and includes an appropriate five-year sunset.
   6. FTB considerations: The FTB, in its analysis of this bill, notes the following considerations:
      1. Implementation: This bill requires the FTB to prepare a report on the performance of this bill's provisions on or before December 1, 2025. If the author's intent is to review a report that contains complete information for the 2024 taxable year, the author and Committee may wish to delay the due date to May 2026 at the earliest; and,
      2. Technical: For consistency of terminology, and to limit taxpayer confusion, on Page 2, Line 4, the author and committee may wish to consider replacing "221(a)" with "221." Additionally, IRC Section 529(e)(3) defines a "qualified higher education expense." For clarity, on Page 2, Lines 11 and 12, the author and Committee may wish to delete the phrase "the expenses of attendance at an institution of higher education, as provided" and replace with "qualified higher education expenses, as defined." Finally, California does not conform to IRC Section 529(c)(7) as this provision was enacted after California's general conformity to the IRC as of January 1, 2015. For clarity, the author and Committee may wish to delete the sentence contained on Page 2, Lines 14 through 17.
   7. Previous legislation: AB 704 (Mayes), of the 2021-22 Legislative Session, would have eliminated the maximum limit on the deduction for interest paid by the taxpayer during the taxable year on a qualified education loan, among other provisions. AB 704 was held on the Assembly Appropriations Committee's Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Realtors

California Dental Association

Howard Jarvis Taxpayers Association

Opposition

California Tax Reform Association

Analysis Prepared by: Harrison Bowlby / REV. & TAX. / (916) 319-2098

Date of Hearing: April 8, 2024

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

ABPCA Bill Id:AB 2312 (

Author:Wallis) – As Amended Ver:March 18, 2024

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: deduction: qualified education loans

SUMMARY: Removes the $2,500 limitation on the above-the-line deduction for interest paid on "higher education expenses." Specifically, this bill:

1. Removes, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, the $2,500 limitation on amounts deducted above the line for interest paid on related to a qualified education loan.
2. Replaces references to "qualified higher education expense," with "higher education expenses," and provides that a "higher education expense" is a "qualified higher education expense," as defined in federal law, excluding any tuition expenses in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.
3. Finds and declares, for the purposes of complying with Revenue and Taxation Code (R&TC) Section 41, that the specific goal of this bill is to reduce the burden on taxpayers who are paying off student loan debt by allowing those taxpayers to deduct all of the interest paid on qualified education loans during the taxable year. The Legislature may use the following performance metrics to measure whether this bill is meeting its stated goal:
   1. The total number of taxpayers claiming the deduction allowed by this bill;
   2. The average dollar value of amounts deducted pursuant to this bill; and,
   3. A review of the income levels of all the individual taxpayers claiming the deduction allowed by this bill.
4. Requires the Franchise Tax Board (FTB) to submit a report to the Legislature on the above data to the extent they are available no later than December 1, 2025, and treats this report as an exception to the prohibition on sharing identifying taxpayer information.
5. Provides that this bill shall remain in effect until December 1, 2029, and is repealed as of that date.
6. Takes immediate effect as a tax levy.

EXISTING LAW deducts, for the purposes of calculating adjusted gross income under state and federal law, interest paid on a "qualified education loan". A "qualified education loan" is defined as any indebtedness to pay for certain expenses related to attending specified educational institutions, also referred to as "qualified higher education expenses." This deduction is ratably phased out for taxpayers with modified adjusted gross income above certain amounts, is prohibited for any amount deducted under any other provisions of law, and is limited to a maximum of $2,500 in paid interest. (Internal Revenue Code (IRC) Section 221 and R&TC Section 17201.) Under federal law, a "qualified higher education expense" includes expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. (IRC Section 529(c)(7).)

FISCAL EFFECT: The FTB, in its analysis of this bill, estimates a revenue loss of $15 million in fiscal year (FY) 2024-25, $9.6 million in the 2025-26 FY, and $9.7 million in the 2026-27 FY.

COMMENTS:

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

California is currently facing an affordability crisis, with many residents struggling to make ends meet due to high living costs. Student debt exacerbates this issue, burdening individuals with substantial financial obligations even after completing their education. To alleviate this strain, providing financial relief and removing the cap on the above-the-line deductions enabling students to deduct the full amount of interest on their loans can offer much-needed assistance. By implementing such measures, we can support Californians in navigating the challenges posed by the affordability crisis and pave the way for a brighter economic future.

1. The California Tax Reform Association, writing in opposition to this bill, notes, in part:

In eliminating the deduction limit for interest paid on education loans, higher income individuals who make enough revenue to itemize their taxes will disproportionately benefit over their lower-income counterparts, whose incomes are too low to do so. In addition, elimination of this cap would benefit these higher income earners regardless of what type of degree they held, whether they went to a public or private university, and whether they work in a specialized or public service field.

1. Committee Staff Comments:
   1. Deductions: There are two types of deductions, above the line and below the line. Above-the-line deductions may be claimed regardless of whether a taxpayer chooses to itemize their deductions. Below-the-line deductions may only be applied if a taxpayer itemizes their deductions. Thus, above-the-line deductions are generally available to a broader set of income categories, as wealthier taxpayers tend to itemize their deductions. Despite this, deductions of any type are generally more valuable to wealthier taxpayers, as the deducted income tends to be taxed at a higher rate than lower-income taxpayers, regardless of whether a taxpayer chooses to take the standard deduction, or chooses to itemize their deductions.
   2. Student loan interest deduction: Current federal and state law allow an above-the-line deduction for interest paid related to a loan used to pay for qualified higher education expenses. Thus, a taxpayer does not need to itemize their deductions in order to benefit from the student loan interest deduction.
   3. This bill: This bill would remove the $2,500 limitation on deductible interest paid to service a qualified education loan. Additionally, this bill would prohibit the deduction for amounts of interest paid on a qualified education loan that is used to pay for tuition expenses in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. Thus, as currently drafted, this bill would bring California further out of conformity with federal law, thereby increasing the complexity of state tax return preparation and potentially causing confusion among taxpayers.
   4. 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 removes the limitation on the deductible amount of interest paid for a qualified education loan, thereby expanding a tax expenditure.
   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. AB 263 (Burke), Chapter 743, Statutes of 2019, extended the requirements in R&TC Section 41 to all tax expenditure measures under the Personal Income Tax Law, the Corporation Tax Law, and the Sales and Use Tax Law introduced on or after January 1, 2020. 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. Sunsets are required because eliminating a tax expenditure generally requires a two-thirds vote. These requirements must be satisfied before a bill can receive a vote in this Committee. This bill complies with R&TC Section 41, and includes an appropriate five-year sunset.
   6. FTB considerations: The FTB, in its analysis of this bill, notes the following considerations:
      1. Implementation: This bill requires the FTB to prepare a report on the performance of this bill's provisions on or before December 1, 2025. If the author's intent is to review a report that contains complete information for the 2024 taxable year, the author and Committee may wish to delay the due date to May 2026 at the earliest; and,
      2. Technical: For consistency of terminology, and to limit taxpayer confusion, on Page 2, Line 4, the author and committee may wish to consider replacing "221(a)" with "221." Additionally, IRC Section 529(e)(3) defines a "qualified higher education expense." For clarity, on Page 2, Lines 11 and 12, the author and Committee may wish to delete the phrase "the expenses of attendance at an institution of higher education, as provided" and replace with "qualified higher education expenses, as defined." Finally, California does not conform to IRC Section 529(c)(7) as this provision was enacted after California's general conformity to the IRC as of January 1, 2015. For clarity, the author and Committee may wish to delete the sentence contained on Page 2, Lines 14 through 17.
   7. Previous legislation: AB 704 (Mayes), of the 2021-22 Legislative Session, would have eliminated the maximum limit on the deduction for interest paid by the taxpayer during the taxable year on a qualified education loan, among other provisions. AB 704 was held on the Assembly Appropriations Committee's Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

California Tax Reform Association

Analysis Prepared by: Harrison Bowlby / REV. & TAX. / (916) 319-2098