BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1786 HEARING: 8/16/12
AUTHOR: Mansoor FISCAL: Yes
VERSION: 8/13/12 TAX LEVY: Yes
CONSULTANT: Grinnell
INCOME EXCLUSION FOR OLYMPIC ATHLETES
Excludes from income the value of any prize or award won in
the Olympic Games.
Background and Existing Law
Generally, federal and state tax law provide that "income"
includes all income from any source, such as wages,
dividends, or capital gains, unless specifically excluded,
such as employer's health insurance contributions, and
insurance payments. California typically conforms to
federal law for exclusions to gross income for ease of
administration: in 2010, the state conformed to federal law
to exclude the American Recovery and Reinvestment Tax Act
of 2009 grants for renewable energy from gross income, and
specified discharges of qualified principal residence
indebtedness (SB 401, Wolk, 2010). Income includes all
gifts and prizes unless specifically excluded, such as
employee achievement awards, and any gift or prize donated
to charity. California also expressly excludes from income
some items that are includible as income in federal tax,
such as lottery winnings, unemployment insurance, and a
portion of social security benefits. Last year, the
Legislature excluded disaster relief payments made to
victims of the San Bruno gas pipeline explosion (AB 50,
Hill, 2011).
Proposed Law
Assembly Bill 1786 excludes from income the value of any
prize or award won by the taxpayer in athletic competition
in the Olympic Games. The measure applies to prizes and
awards received on or after January 1, 2012.
AB 1786 - 8/13/12 -- Page 2
State Revenue Impact
According to the Franchise Tax Board (FTB), AB 1786 results
in revenue losses of $9.6 million in 2012-13, $6.3 million
in 2013-14, and $6.4 million in 2014-15.
Comments
1. Purpose of the bill . According to the author, "The
Bipartisan Olympic Coalition, which includes Senators Lou
Correa (D-Santa Ana) and Ron Calderon (D-Montebello) and
Assemblymembers Curt Hagman (R-Chino Hills), Alan Mansoor
(R-Costa Mesa), and Chris Norby (R-Fullerton), has
introduced AB 1786 to recognize the substantial
achievements of those Californians who have earned the
title "Olympic Champion." It does so by exempting the value
of the medals and the honoraria that comes with them from
state taxation: $25,000 for gold; $15,000 for silver; and
$10,000 for bronze. The United States is one of only three
nations who do not commit taxpayer funding to Olympic
training. The Coalition joins President Obama in his
support of our Olympic champion volunteers and seeks to do
its part to honor the accomplishments of those Olympians
who reside in California. Californians represent almost
one-quarter of the all American Olympians, almost two times
the state's share of the national population. The results
of the 2012 London games also indicate that California has
a disproportionate share of the nation's gold medalists.
Given the personal sacrifice this state's sons and
daughters have made to represent our country, this bill
will help to fortify California's enduring legacy of
personal and collective achievement on the Olympic stage."
2. Fit or fat ? While tax experts often disagree, they do
universally state that tax bases should be broad, and tax
rates should be low. Broad bases ensure that taxpayers
don't have the incentive to classify income as tax-exempt
or subject to lower tax rates, such as the controversy
regarding the taxation of hedge fund manager compensation
as interest instead of income. All else equal, broader
bases allow for lower rates, which generally lessen the
discouragement caused by taxes to earn income, own
property, or purchase taxable goods. Policymakers must
AB 1786 - 8/13/12 -- Page 3
either raise tax rates that apply to others or cut public
services to account for lower revenue that result from
reduced tax bases. While AB 1786 seeks to reward
California taxpayers who bring glory to themselves and the
United States by winning medals in the Olympic Games, the
measure is the exact opposite of sound tax policy. The
Committee may wish to consider whether running afoul of
good tax policy is worth the bill's kind gesture.
3. What about me ? The Olympic Games are one of the
world's most enduring and popular traditions, and seek to
bring together representatives from all countries across
the globe in athletic competition. However, global
associations of all form and fashion hold competitions
every year to recognize the best among them, and award
fully taxable prizes: Nobel Prizes are awarded to
individuals in recognition of scientific and cultural
contributions to the world, the American Academy of Motion
Pictures Arts and Sciences recognizes excellence in
filmmaking by bestowing Academy Awards, and the Annual Air
Guitar World Championships determine the world's best at
playing air guitar (with the motto ""wars would end and all
the bad things would go away if everyone just played air
guitar.") These awards are won by dedicated, talented
individuals who work hard to become the best; however, AB
1786 excludes only prizes won by Olympic Athletes from tax.
Why should one set of successful competitors be excluded
from tax when others have to pay? The Committee may wish
to consider what policy rationale to apply when
distinguishing tax-free winnings from taxable ones.
4. Reverse Nonconformity . California law does not
automatically conform to changes to federal tax law, except
under specified circumstances. Instead, the Legislature
must affirmatively conform to federal changes. Generally,
when the federal government changes its tax laws,
California catches up by enacting its own legislation the
following year to reduce differences between the two codes,
thereby easing the tax preparation burden on taxpayers, tax
preparers, and the Franchise Tax Board. While legislation
is pending in Congress to provide a similar benefit, AB
1789 seeks to exclude prizes and awards won in the Olympic
Games from income before Congress has acted, upsetting the
usual timing for conformity items, and potentially
confusing affected taxpayers by requiring them to include
their prizes and awards for federal purposes but excluding
AB 1786 - 8/13/12 -- Page 4
them for state tax purposes. The Committee may wish to
consider deferring action on AB 1789 until and unless
Congress acts, after which it can conform to the federal
change before return filing deadlines next year.
5. Going for gold . AB 1786 states that income shall not
include "the value of any prize or award won by the
taxpayer in the athletic competition in the Olympic Games."
As such, the measure does not expressly preclude payments
made by advertisers to athletes in connection their success
in the Olympic Games that aren't medals. For example,
International Hot Dog Corporation could include as part of
an advertising campaign its commitment to give each gold
medal winner 100 packages of hot dogs to show its
commitment to the success of American Olympic athletes.
Normally, once received, the hot dogs would be taxable
income to the athlete. Advertisers could structure
endorsement contracts in different ways due the income tax
exclusion for the athlete. Bills in Congress differ based
on this issue: some limit the exclusion solely to prizes
and awards from the United States Olympic Committee (USOC),
while others are identical to AB 1786 and appear to allow
the exclusion for any kind of compensation made from any
party to successful athletes. Should the measure be
narrowed, FTB estimated the measure will result in a much
lower revenue loss. The Committee may wish to consider
amending AB 1786 to limit the exclusion solely to income
from awards and prizes from the USOC.
Assembly Actions
Not relevant to this version of the bill.
Support and Opposition (8/13/12)
Support : None received.
Opposition : None received.