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.