BILL ANALYSIS
AB 1078
Page 1
Date of Hearing: April 10, 2007
ASSEMBLY COMMITTEE ON HUMAN SERVICES
Jim Beall Jr., Chair
AB 1078 (Lieber) - As Amended: April 9, 2007
SUBJECT : Earned income tax credit; CalWORKs
SUMMARY : Requires the Department of Social Services (DSS) to
develop guidelines to maximize the ability of CalWORKs
participants in welfare-to-work activities to qualify for the
federal earned income tax credit. Specifically, this bill :
1)Sets forth Legislative intent to maximize the ability of
CalWORKs recipients in specified welfare-to-work activities to
benefit from the federal Earned Income Tax Credit (EITC), and
to educate and empower CalWORKs recipients to use their
credits to build their assets and savings.
2)Requires DSS to develop guidelines no later than December 1,
2008, for counties to adopt to carry out the intent of the
section and present options to the Governor and Legislature
for legislation necessary to carry out its intent, and
3)Requires DSS to consultant and convene at least one meeting of
subject matter experts, including representatives of specified
legislative committees and organizations, in developing the
guidelines.
EXISTING FEDERAL LAW
1)Establishes the EITC, a refundable credit payable to low-wage
workers as a specified percentage of earnings within a
designated range.
2)Provides for the allocation of Temporary Assistance for Needy
Families (TANF) block grant funds to eligible states to assist
needy families and promote job preparation, work and the
formation of two-parent families.
EXISTING STATE LAW:
1)Establishes the California Work Opportunity and Responsibility
to Kids (CalWORKs) program to provide cash assistance and
other services and benefits to qualified low-income families
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with children.
2)Requires, with certain exceptions, that an individual
participate in work activities in order to remain eligible for
CalWORKs benefits.
3)Requires adult recipients of CalWORKs, unless exempt, to
participate in a total of 32 hours (35 hours for two-parent
families when neither parent is exempt) per week of approved
welfare-to-work activities from a range of allowable work,
training, education, mental health, substance treatment and
domestic violence prevention activities.
4)Provides that of the 32 or 35 weekly hours, 20 hours must be
in defined "core" work activities, consisting of employment,
on-the-job training, work experience, community service and,
for up to 12 months, vocational training and education.
5)Excludes EITC payments as income in determining CalWORKs
eligibility and benefits, and excludes for 12 months funds
derived from the EITC for purposes of the $2,000 asset limit,
consistent with federal food stamp rules.
FISCAL EFFECT : Unknown
COMMENTS : This bill seeks to maximize the ability of CalWORKs
families who engage in specified welfare-to-work activities to
maximize their federal EITC by characterizing their benefit
payments as earnings under the definition used by the Internal
Revenue Service.
The EITC is a tax benefit for working people who earn low or
moderate incomes. It is a refundable credit which can be paid
to households who do not have a net tax liability. To claim it,
an individual must file either a Form 1040 or 1040A along with
an attached EITC Schedule. Credit amounts vary up to a defined
maximum depending upon the number of dependents and the amount
of wages earned in a year.
For 2007, workers raising one child in their home with
2006 earnings of less than $32,001 (or $34,001 for married
workers) can get an EITC up to $2,747.
Workers raising more than one child with an income of
less than $36,348 (or $38,348 for married workers) in 2006
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can receive an EITC of up to $4,536.
Workers not raising children with income below $12,120
(or $14,120 for married workers) can receive an EITC of up
to $412.
The credit equals 40% of a worker's wages up to a specified
plateau, at which point it equals the maximum depending upon the
household's marital status and number of children. It remains
at the maximum until it begins to decline at approximately
$15,000 in annual earnings. At approximately $15,000 in income,
the benefit begins to decline, until earnings reach the $32,000
- $36,000 level, when it phases out completely.
In tax year 2005, nearly 2.4 million Californians claimed and
received the EITC, for a total dollar value of nearly $4.4
billion. An estimated $1 billion in EITC funds is unclaimed by
eligible California households who do not apply for the credit.
The author cites an article by UCLA law professor Kirk Stark in
support of the proposal. Stark, "Should California Adopt an
Earned Income Tax Credit?" It argues for a "targeted wage
supplement as an alternative to a California EITC," and urges
that the state could "structure a PIP [EITC
"phase-in-population"] wage supplement within existing state
welfare programs," citing community service activities within
CalWORKs. As noted below, prior legislation has sought to
create such an option, known as for wage-based subsidized
employment.
CalWORKs "earnings" eligible for EITC
CalWORKs participants engaged in welfare-to-work activities in
which they are compensated for labor may qualify for the EITC.
Those in unsubsidized employment clearly are entitled to the
credit, but other activities might also generate "earnings" as
defined by the Internal Revenue Service so as to allow the
CalWORKs adult to receive the credit. These issues have been
raised especially as to work experience, subsidized employment
and community service, in which the welfare payment itself is
provided in exchange for the recipient's labor.
In the late 1990's, the Internal Revenue Service addressed
questions about eligibility for the EITC by recipients who are
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in work activities funded by the federal Temporary Assistance
for Needy Families (TANF) block grant.
In 1999, the IRS determined that a TANF work activity in which a
participant engaged as part of their welfare-to-work
requirements and as a condition of receipt of their monthly
grant does not result in "earnings" for EITC purposes if:
(1) the payments for the work activity are made by the
state or local welfare agency;
(2) the benefits are based upon need and funded under
the state's TANF program (CalWORKs in California); and
(3) the payment is determined by the applicable welfare
law, and the hours of activity are limited by the size of
the welfare payment (i.e., a participant may not work more
hours than the quotient of the welfare grant divided by the
minimum wage)
In July 2002, the IRS Chief Counsel issued an advisory holding
concluding that payments made under a Massachusetts property tax
abatement program, in which low-income seniors received benefits
when they volunteered to provide municipal services, qualified
as earned income for purposes of the EITC,
In 1999 and 2000, Assemblywoman Aroner introduced legislation to
create a subsidized employment program for CalWORKs
participants, know also as "grant-based on-the-job (OJT)
training," in an attempt to improve employment prospects,
increase family income in part by qualifying families for the
EITC. AB 1039 of 1999, authorizing wage-based subsidized
employment demonstration projects in five counties, was vetoed.
AB 1233 (Aroner), Chapter 933, Statutes of 2000 was more
modest, clarifying rules relating to grant-based on-the-job
training (WIC 11322.61) to allow counties to operate a program
using the welfare grant as a wage subsidy.
Community Jobs Program in San Francisco.
The author cites San Francisco as a model program in which
CalWORKs is used to enhance the ability of families to qualify
for the EITC. Pursuant to AB 1233 the City and County operates
a grant-based OJT program, known as its Community Jobs Program.
According to the Deputy Director of the Economic Support and
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Self-Sufficiency Division of the City and County's Human
Services Agency, the program serves 35-40 participants who earn
the city's minimum wage of $9.14 per hour for 25 hours of work
per week. Other welfare-to-work time is spent in training and
related activities. The ordinary CalWORKs "earned income
disregard" (excluding the first $225 plus 50% of remaining
wages) does not apply to the grant-based wage subsidy, and the
Federal Insurance Contributions Act (FICA) social security tax
is deducted from the recipient's payment. The program lasts six
to nine months. A full year's wages would amount to $11,882,
qualifying a worker for the maximum EITC payment of $4,536. San
Francisco uses its own general funds, not state or federal
CalWORKs dollars, for the wages paid to participants. It is not
know that any other county has used the authority available
under AB 1233 to operate a CalWORKs grant-based wage subsidy
program.
Suggested amendment
The ability of counties to "assure" that welfare-to-work
activities generate payments qualifying for the EITC may
overstate their capacity. Instead, counties can be encouraged
to structure activities so as to maximize the likelihood that
payments meet the IRS definition of earnings.
Amend Section 11322.5(a)(1):
To accomplish this goal, it is the intent of the Legislature
that counties have the ability to assure that structure payments
made to recipients who are engaged in welfare-to-work activities
pursuant to subdivisions (a) to (j), inclusive of Section
11322.6 to maximize the likelihood that payments to recipients
meet the definition of "earned income" in Section 32(c)(2) of
the Internal Revenue Code.
DOUBLE REFERRAL . This bill has been double-referred. Should
this bill pass out of this committee, it will be referred to the
Assembly Committee on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees
California State Association of Counties
County Welfare Directors Association
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Western Center on Law & Poverty
Opposition
None on file.
Analysis Prepared by : Casey McKeever / HUM. S. / (916)
319-2089