California AB 2148 - Poor Tax Policy

On Monday April 12, 2010, the California Assembly Revenue & Taxation Committee is scheduled to discuss 18 bills. Among them is AB 2148 which "would allow a deduction for the value of medical services contributed free of charge by a physician to a local community clinic, not to exceed specified amounts."

The deduction would be limited to the lesser of: "(A) The value of any contribution that exceeds a rate of fifty dollars ($50) per hour for any medical services rendered. (B) One thousand five hundred dollars ($1,500) per taxable year."

Problems:

• Design of an income tax. Federal income tax law, which California mostly copies, denies a deduction for the value of donated services (per Treasury Regulation §1.170A-1(g)). Federal law does allow the donor to deduct costs of expenses incurred, such as mileage and supplies, but not the value of the services. The likely reason is that the donor has no basis in the services. That is, he has not included the value of the work in his income. If someone were allowed to deduct the value of donated services, they should also include that value in their income. It would mostly be a wash (except that payroll or self-employment taxes would be owed on the labor income). The current system is simpler in that there is no need to have to value the donated services.
• Potential for abuse: While AB 2148 calls for a maximum deduction, it is still too easy to just claim the maximum. That is sort of the hidden message in that maximum. Also, what hours count? What about the time getting ready? Travel time?
• Complexity: Franchise Tax Board guidance would likely call for some type of documentation or reporting for the hours donated. This requires special recordkeeping by the doctor which would only be needed for tax purposes.
• Where would it end? AB 2148 would open the door for others asking for similar treatment. For example, many accountants donate time to help people prepare tax returns and to help non-profit organizations. Many attorneys do a lot of pro bono work. Many people donate time to many causes which could otherwise have been used to generate income. The law is better left as it is and it has been working well for decades.
• Non-conformity: The federal government is unlikely to ever adopt such a rule so the doctors would have an adjustment to their California return.

California has many tax problems. Decades of not allowing people who donate their services to get a deduction for it (or have to report their value as income) has worked well and time should not be spent to start changing this rule. Time would be better spent on:

• Broadening the sales tax base to bring it into the 21st century and lower the rate.
• Starting to reduce the pyramiding in the sales tax (AB 1812 and AB 2280 also on the agenda for April 12 would be a good start, but needs to be phased in along with base broadening). The analysis accompanying AB 2280 notes that only California, South Dakota and Wyoming require businesses to pay tax on manufacturing equipment. This means: Why would any manufacturer locate in California and pay an almost 10% surcharge on its equipment (the sales tax) when it won't be subject to that extra cost in almost every other state?!
• Phasing out and eliminating unnecessary, poorly targeted, unfair tax preferences in the personal income tax, such as the deduction for mortgage interest on a second home and on debt greater than $500,000.

For more on California tax problems and possible solutions - please see my reports on this topic - here, which cover the suggestions above and a few more.