June 17, 2024

California Republicans want the state to end a tax on health savings plans – Orange County Program

Members of California’s Republican Congress are calling for the state to kill its tax on health savings accounts.

Led by Rep. Michelle Steel, R-Seal Beach, six Republican members of the California congressional delegation, including Rep. Young Kim, sent a letter to Gov. Gavin Newsom this week, urging him to end the state tax on health savings accounts.

Called HSAs, these accounts allow someone to set aside money on a pre-tax basis to pay for qualified medical expenses.

California and New Jersey are the only two US states that have taxed these plans. When Congress established HSAs as part of 2003 Medicare Modernization Act, most states automatically conform to the federal tax code, which defines HSAs as tax-exempt accounts. Over the years, most states have fallen in line with exempting HSAs except for California and New Jersey.

“These harmful taxes are affecting hard-working Americans most who are trying to offset health care costs or plan for future medical expenses,” the letter reads.

The governor’s office has received the letter and is reviewing it, said spokesman Brandon Richards. He declined to comment further.

Steel said she has heard from constituents who are “suffering under Sacramento’s heavy taxes.” According to TurboTax tax preparation software, California has the highest number personal income tax rate in the country.

“I think this is to give them relief because health care costs are going up,” said Steel, who represents the 45th congressional district. “Millions of Californians are in terrible medical debt and this will help, at least a little bit.”

Under the federal tax code, HSAs offer three tax advantages: pre-tax contributions, tax-free growth and tax-free spending.

But because the state does not recognize HSAs as tax-exempt accounts, for state income tax purposes, a California taxpayer who contributed to an HSA is required to increase their state-adjusted gross income by an amount equal to the amount of the taxpayer’s HSA deduction on their federal tax return, the interest earned on the HSA and the contributions made by the taxpayer’s employer,” the letter reads.

For example, if an individual taxpayer had $55,000 in federal adjusted gross income, earned $1,000 in interest and received $1,000 in employer contributions to their HSA, their state adjusted gross income would increase to $57,000.

“With this taxation in place, there are serious concerns that Californians may not be able to seek access to care, health care outcomes will deteriorate and the patient and taxpayer will be more expensive in the long run,” the lawmakers said in the letter.

Efforts have been made in the California Legislature to align the state’s tax code regarding HSAs with the federal tax code. Recently, a bill from Sen. Kelly Seyarto, R- Murrieta, “for income-eligible taxpayers to claim a tax deduction equal to the amount the taxpayer contributes to an HSA.”

“As health care costs continue to rise in the current inflationary environment, it is imperative that we provide Californians with affordability and flexibility options that fit their unique circumstances,” said Seyarto.

230 Senate Bill it did not emerge from the Senate but was granted reconsideration, meaning Seyarto could bring it back before the committee next year. He has not yet decided whether he will resurrect in 2024, said spokesman Hildur Sam.

Other attempts similar to Seyarto’s failed to make it through the legislative process, including by former Assemblyman Steven Choi — a Republican who represented an area that included Villa Park, Orange, North Tustin and Lake Forest — in 2021.

According to the estimate by the California Franchise Tax Board, if the state tax code for HSAs were to be nearly aligned with the federal tax code, California would lose $110 million in revenue in fiscal year 2022-23, $80 million in 23-24 and $85 million in 24-25. The state faces a budget deficit of nearly $32 billion.

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