BILL ANALYSIS                                                                                                                                                                                                    






                                                                      AB 43


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          Date of Hearing:  May 18, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 43  
          Mark Stone - As Amended February 12, 2015


          


          Majority vote.  Fiscal committee.  Tax levy.


          SUBJECT:  Personal income taxes: credit: earned income.


          SUMMARY:  Provides a credit, in modified conformity to the  
          federal Earned Income Tax Credit (EITC), as specified, for  
          taxable years beginning on or after January 1, 2016, and  
          provides that, in those years in which an appropriation is made  
          by the Legislature, the credit would be refundable.   
          Specifically, this bill:  


          1)Provides, under the Personal Income Tax (PIT) Law, for taxable  
            years beginning on or after January 1, 2016, a credit in an  
            amount determined in accordance with the federal EITC, as  











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            follows:


             a)   A credit equal to 35% of the federal earned income tax  
               amount for an eligible individual who has at least one  
               qualifying child less than five years of age;


             b)   A credit equal to 60% of the federal earned income tax  
               amount for an eligible individual who does not have a  
               qualifying child; and,


             c)   A credit equal to 15% of the federal earned income tax  
               amount for an eligible individual that has a child more  
               than five years of age.


          2)Provides that if the amount allowable as a credit under this  
            section exceeds the tax liability computed under this part for  
            the taxable year, the excess shall be credited against other  
            amounts due and the balance shall be refunded to the qualified  
            taxpayer upon appropriation of the Legislature.


          3)Provides that amounts refunded to a taxpayer shall not be  
            included in income subject to tax.


          4)Provides that, notwithstanding any other state law, and to the  
            extent permitted by federal law, amounts refunded shall be  
            treated the same as the federal credit for purposes of  
            determining eligibility for benefits under the Welfare and  
            Institutions Code Section 1000 et seq.  


          5)Provides that this credit is allowed notwithstanding Revenue  
            and Taxation Code (R&TC) Section 41.












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          6)Makes findings and declarations.


          7)Takes effect immediately as a tax levy.


          EXISTING LAW allows eligible individuals a refundable EITC.  A  
          refundable credit allows for the excess of the credit over the  
          taxpayer's tax liability to be refunded to the taxpayer. As the  
          name implies, the credit is based on a percentage of the  
          taxpayer's earned income, and is phased out as income increases.  
           The percentage varies depending on whether the taxpayer has  
          qualifying children.  Married individuals are eligible for only  
          one credit on their combined earned income and must file a joint  
          return to claim the credit.


          EXISTING STATE LAW:  


          1)Allows various tax credits designed to provide tax relief for  
            taxpayers who incur certain expenses or to influence behavior,  
            including business practices.   

          2)Provides that individuals with income below a certain  
            threshold are not required to file a return because the  
            standard deduction and personal exemption credit eliminate any  
            tax liability.  For 2011, these thresholds are $15,152 in  
            gross income or $12,122 in adjusted gross income (AGI) for  
            single taxpayers and $30,305 in gross income or $24,244 in AGI  
            for married individuals filing jointly.  These thresholds are  
            increased based on the number of dependents claimed and are  
            increased annually for inflation.  

          3)Does not allow an EITC.

          FISCAL EFFECT:  Assuming no appropriation is made by the  
          Legislature, the Franchise Tax Board (FTB) estimates General  











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          Fund revenue loss of $38 million in fiscal year (FY) 2015-16,  
          $190 million in FY 2016-17, and $200 million in FY 2018-19.  If  
          an appropriation is made by the Legislature, the FTB estimates  
          General Fund revenue loss of $380 million in FY 2015-16, 1.9  
          billion in FY 2016-17, and $2 billion in FY 2017-18.


          COMMENTS:  


          1)Author's Statement  :  The author has provided the following  
            statement in support of this bill:


               AB 43 addresses the lack of income gains for working  
               Californians in the Post-Great Recession economic recovery  
               while simultaneously providing a much-needed economic  
               stimulus in the most economically distressed communities.  
               This bill establishes a refundable California Earned Income  
               Tax Credit (EITC) for working low- and middle-class  
               families.


               The federal EITC is a refundable tax credit targeted at  
               low- to middle-income working households that reduces  
               poverty and rewards work. Researchers cite the federal EITC  
               as among the most effective tools for reducing poverty  
               across the nation. Without it, child poverty is estimated  
               to be 25% higher. As the California Budget Project points  
               out, for children, the federal EITC results in improved  
               health and education outcomes that translate into higher  
               incomes in adulthood.


               From 2010 to 2012, the federal EITC pulled 1.3 million  
               people (629,000 children) above the federal poverty line  
               within California. Twenty five states have already  
               established their own EITC to magnify the impact of the  
               federal EITC, although California has not done so.











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               Studies focused on state EITCs adopted in other states have  
               estimated that each additional dollar received by a tax  
               filer can generate a further $1.50-2.00 in local economic  
               activity. The impact of the increased purchasing power in  
               communities benefited by federal and state EITC dollars is  
               undeniable.


               In its analysis of policy options for economic and  
               employment growth during 2010, the Congressional Budget  
               Office highlights that the best options to foment growth  
               are those that assist households by spurring demand for  
               goods and services. Therefore, the type of tax credit  
               provided by AB 43, which targets lower income households  
               with fewer assets, would have a larger impact on consumer  
               spending, in comparison with tax cuts aimed at higher  
               income households.


           2)Arguments in Support  :  According to the California Tax Reform  
            Association, "[p]revious research has shown that the EITC  
            encourages employment among single parents who have accessed  
            CalWORKS and also among the broader low- and moderate-income  
            population.  According to an improved way of measuring poverty  
            that incorporates taxes paid and tax credits received, the  
            EITC meant the difference between living in poverty and not  
            living in poverty for 600,000 adults and 560,000 children in  
            California in 2011."


           3)Arguments in Opposition  :  The California Taxpayers Association  
            states that "[a] September 2014 report by the U.S. Treasury's  
            Inspector General for Tax Administration says that the IRS  
            estimates that 24 percent of all EITC payments made in the  
            2013-14 fiscal year were paid in error - equating to $14.5  
            billion that was paid in error.  The problems associated with  
            refundable credits are exacerbated when the [FTB] determines  











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            that a refund is fraudulent after the refund has been made,  
            making it difficult for the state to recover these refunds.   
            And, if identity theft is involved, taxpayers must suffer  
            through the pain and expense of recovering their identities,  
            which sometimes can take years." 


           4)What is a "tax expenditure"  ?  Existing law provides various  
            credits, deductions, exclusions, and exemptions for particular  
            taxpayer groups.  In the late 1960s, United States Treasury  
            officials began arguing that these features of the tax law  
            should be referred to as "expenditures," since they are  
            generally enacted to accomplish some governmental purpose and  
            there is a determinable cost associated with each (in the form  
            of foregone revenues).  This bill enact a new tax expenditure  
            in the form of a state EITC.


           5)How is a tax expenditure different from a direct expenditure  ?   
            As the Department of Finance notes in its annual Tax  
            Expenditure Report, there are several key differences between  
            tax expenditures and direct expenditures.  First, tax  
            expenditures are reviewed less frequently than direct  
            expenditures once they are put in place.  This can offer  
            taxpayers greater certainty, but it can also result in tax  
            expenditures remaining a part of the tax code without  
            demonstrating any public benefit.  Second, there is generally  
            no control over the amount of revenue losses associated with  
            any given tax expenditure.  Finally, it should also be noted  
            that, once enacted, it generally takes a two-thirds vote to  
            rescind an existing tax expenditure absent a sunset date.   
            This effectively results in a "one-way ratchet" whereby tax  
            expenditures can be conferred by majority vote, but cannot be  
            rescinded, irrespective of their efficacy, without a  
            supermajority vote.  This bill provides a credit, in modified  
            conformity to the federal EITC but does not contain a sunset  
            date.  Because it takes a supermajority vote to rescind a tax  
            expenditure, the Committee may wish to add a five year sunset.












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           6)What is an EITC  ?  The EITC is a federal tax credit for low- to  
            moderate-income individuals and families.  Congress originally  
            approved the tax credit legislation in 1975, in part to offset  
            the burden of Social Security taxes and to provide an  
            incentive to work.  When EITC exceeds the amount of taxes  
            owed, it results in a tax refund to those who claim and  
            qualify for the credit.  In order for a taxpayer to qualify  
            for the credit, an individual's AGI in the 2015 taxable year,  
            must be less than $47,747 ($53,267 filing jointly) with three  
            or more qualifying children; $44,454 ($49,974 filing jointly)  
            with two qualifying children; $39,131 ($44,651 filing jointly)  
            with one qualifying child; or $14,820 ($20,330 filing jointly)  
            without a qualifying child.  The current maximum credit for  
            taxpayers with three or more qualifying children is $6,242;  
            and for taxpayers with two qualifying children, the maximum is  
            $5,548.  For taxpayers with one qualifying child, the maximum  
            credit amount is $3,359, and for taxpayers with no qualifying  
            children, the maximum amount is currently $503.  


           7)Encouraging Workforce Participation  :   Increasing the number  
            of individuals who enter the job market reduces the  
            unemployment rate and generally improves economic conditions.   
            According to the California Budget Project, the EITC  
            encourages and rewards additional work by providing a larger  
            credit as workers' earnings increase.  As an example, a single  
            mother with two children earning $7,500 in 2014 is eligible  
            for a $3,000 credit; but if she earns twice as much, she will  
            qualify for the maximum credit of $5,460.  As such, she  
            receives a larger credit by working more.<1> Several studies  
            have shown that the federal EITC has raised labor force  
            participation rate of single mothers by at least seven  






          ---------------------------


          <1> California Budget Project, a state EITC: making california's  
          tax system work better for Working families, December 2014.












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            percentage points<2>.  Other studies show that the federal  
            EITC causes one out of every ten individuals who would  
            normally be out of the labor force to start working<3>.  Most  
            studies have shown a significant increase in labor force  
            participation of unmarried mothers.  In fact, one study showed  
            that more than 60% of employment gains made by single mothers,  
            when compared to mothers without children, was due to the  
            EITC<4>.  Additionally, a separate study focused on employment  
            among California women who received cash assistance at some  
            point between 1987 and 2000.  The study found that more than  
            three-quarters of the employment gains between 1991 and 2000  
            for women with multiple children relative to those with only  
            one child was attributable to the expansion of the EITC<5>.


           8)Additional Benefits  :  In addition to increasing labor  
            participation, the EITC provides a long list of additional  
            benefits to low-income families.  Specifically, studies have  
            shown that low-income students perform better in school when  
            families' incomes are boosted by the federal EITC.  The EITC  
            may result in increasing completion rates for high school and  
            college.  Other studies have also shown an increase in  
          ---------------------------


          <2> See Jeffrey Grogger, The Effects of Time Limits, the EITC,  
          and Other Policy Changes on Welfare Use, Work, and Income Among  
          Female-Headed Families, Review of Economics and Statistics,  
          2003; and Jeffrey Liebman and Nadda Eissa, Labor Supply Response  
          to the Earned Income Tax Credit, Quarterly Journal of Economics,  
          1996.
          <3> The President's Proposal To Expand the Earned Income Tax  
          Credit, Executive Office of the President and U.S. Treasury  
          Department, March 2014.
          <4> Bruce D. Meyer and Dan T. Rosenbaum, Welfare, the Earned  
          Income Tax Credit, and the Labor Supply of Single Mothers, The  
          Quarterly Journal of Economics (2001).
          <5> V. Joseph Hotz, Charles H. Mullin, and John Karl Scholz,  
          Examining the Effect of the Earned Income Tax Credit on the  
          Labor Market Participation of Families on Welfare, National  
          Bureau of Economic Research Working Paper (December 2005).













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            academic achievement and an increase in college attendance<6>.  
             Additionally, the EITC may help offset the disproportionate  
            cost that low-income families pay on state and local taxes.   
            As provided for by the Institute on Taxation and Economic  
            Policy, the bottom fifth of families (those making less than  
            $13,000 per year), pay, on average, an estimated 10.6% of  
            their income in state and local taxes.  In contrast, the top  
            15% of families pay 7.4% and the top 1% of families pay  
            8.8%<7>.



          Furthermore, according to the California Budget Project,  
            implementing a state EITC could further reduce economic  
            hardship by boosting workers' wages and strengthen  
            California's social safety net.  Specifically, the EITC can  
            make it easier for families to transition out of the  
            California Work Opportunity and Responsibility to Kids  
            (CalWORKS) program, which provides cash assistance for  
            struggling families.  The threshold at which families lose  
            eligibility for CalWORKS is low.  As such, a parent could  
            conceivably lose CalWORKS eligibility and still be below the  
            poverty line.  Providing a state EITC could provide the  
            additional income necessary to lift that family out of  
            poverty.
           9)Individuals with Children Receive larger Benefit  :  In 2014, a  
            single individual with an AGI of less than $14,500 and no  
            children would qualify for a maximum of $496.  In contrast, a  
            single parent with an AGI of less than $46,997 and three  
            children would qualify for a maximum of $6,143.  The federal  
            EITC clearly favors working families over individuals without  
          ---------------------------


          <6> Gordon B. Dahl and Lance Lochner, The Impact of Family  
          Income on Child Achievement: Evidence From the Earned Income Tax  
          Credit, American Economic Review (2012); and Raj Chetty, John N.  
          Friedman, and Jonah Rockoff, New Evidence on the Long-Term  
          Impacts of Tax Credits, Statistics of Income Paper Series  
          (November 2011)
          <7> California Budget Project, A STATE EITC, citing the analysis  
          conducted by Institute on Taxation and Economic Policy.








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            children.  This bill, however, disproportionately provides a  
            much larger credit percentage to individuals without children.  
             Specifically, this bill provides a credit equal to 60% of the  
            federal earned income tax amount for an eligible individual  
            who does not have a qualifying child, and only a credit equal  
            to 15% of the federal amount for an eligible individual with a  
            child five years or older.  On its face, the credit percentage  
            for individuals without children is larger but the amount  
            received is much lower.  As stated above, the maximum amount  
            an individual without children can qualify for is $496.   
            Receiving a state credit equal to 60% of the maximum federal  
            amount is $298, giving the California tax filer a total of  
            $794.  A parent with three children can qualify for a maximum  
            of $6,143 under the federal EITC.  Assuming all of the  
            children are over the age of five, the qualifying parent can  
            receive $921, giving the tax payer a total of $7,064.  If just  
            one of the children is less than five years of age, the parent  
            can qualifying for a state EITC of $2,150, or a total of  
            $8,293.


           10)The President's Proposal  :  Under federal law, an "eligible  
            individual" is defined as an individual who either:  (a) has a  
            qualifying child for the taxable year; or, (b)) is between 25  
            and 65 years of age, is not claimed as a dependent by other  
            taxpayers and whose principal residence for more than six  
            months in the taxable year was located in the United States.   
            (IRC Section 32).  As noted above, the federal EITC has been  
            shown to increase the number of individuals who participate in  
            the job market.  However, because the EITC is not available to  
            individuals under the age of 25, it provides little assistance  
            to childless individuals at or near the poverty line and a  
            smaller incentive to enter the workforce.  President Obama  
            recently proposed expanding the federal EITC by doubling the  
            maximum credit amount available to childless individuals to  
            $1,000, increasing the phase-out income limit to $18,000 and  














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            reducing the age from 25 to 21<8>.  Because EITC has been  
            shown to increase workforce participation rates among single  
            mothers, it stands to reason that expanding the EITC program  
            for younger, childless individuals would have similar impact.


            The California Budget Project has also suggested increasing  
            the amount of credit available to childless workers.  Men  
            working in low-wage jobs would likely account for the largest  
            share of childless workers.  This group of individuals has  
            seen substantial erosion in earnings over the last few decades  
            but the group is also less likely to qualify for government  
            assistance than those with children.  Providing a larger  
            credit to childless workers, as this bill does, can provide an  
            economic boost to those who are often excluded from many of  
            the social services programs.


           11)The Governor's Proposal  :  The Governor's May revise of the  
            State budget included the first ever state EITC.  Under the  
            Governor's proposal, the EITC would be refundable and would  
            focus on the state's lowest income individuals.  Specifically,  
            the state EITC would be available to households with income  
            less than $6,580 if there are no dependents or less than  
            $13,870 if there are three or more dependents.  The credit is  
            estimated to benefit 825,000 families and 2,000,000  
            individuals, with an average household credit of $460 and a  
            maximum credit of $2,653.  The EITC would be available for tax  
            returns filed for wages earned in 2015. 


           12)Performance Measurement Standards  :  Existing law requires any  
            bill introduced on or after January 1, 2015 that authorizes a  
            new credit under either the PIT Law or the CT Law to provide  
            performance measurement standards.  According to legislative  
            findings and declarations, tax preferences represent a major  

          ---------------------------


          <8> The President's Proposal to Expand the Earned Income Tax  
          Credit, Executive Office of the President and U.S. Treasury  
          Department, March 2014.








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            exercise of government power, but face less oversight than the  
            spending side of the budget.  As a way of ensuring  
            transparency and accountability when investing public dollars  
            through tax credit programs, the Legislature decided to apply  
            performance measurement standards as a way of reviewing tax  
            credits with the same level of scrutiny as spending programs.   
            This bill was introduced on December 1, 2014 and is,  
            therefore, not required to abide by the standards under RTC  
            Section 41.  Irrespective of Section 41's application, this  
            bill provides that the provisions of R&TC Section 41 shall not  
            apply to this credit.  Providing clear metrics and data  
            collection may provide valuable information on the  
            effectiveness of a state EITC.  The Committee may wish to  
            consider the appropriateness of this Section 41 exemption.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          United Way of California (Sponsor)


          Alameda County Board of Supervisors (Co-Sponsor)


          Allen Temple Baptist Church


          Alliance for African Assistance


          American Federation of State, County and Municipal Employees













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          Amigos de Guadalupe Center for Justice & Empowerment


          Arrowhead United Way


          Asian Americans Advancing Justice


          Brighter Beginnings


          California Alternative Payment Program Association 


          California Association of Food Banks


          California Association of Nonprofits


          California Catholic Conference of Bishops


          California Communities United Institute


          California Food Policy Advocates


          California Partnership 


          California Reinvestment Coalition


          California Tax Reform Association 













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          Catholic Charities of Santa Clara County


          Children's Defense Fund


          Children's Partnership


          Community Child Care Council of Alameda County


          Consumer Action


          Contra Costa AFL-CIO Labor Council


          Contra Costa County Board of Supervisors


          Contra Costa's Family Economic Security Partnership


          Cooperative Center Federal Credit Union


          Council of California Goodwill Industries 


          Council of Philippine American Organizations of San Diego


          County of Santa Cruz Board of Supervisors


          EARN













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          FIRST 5 of Monterey County


          FIRST 5 of Santa Clara County


          Housing California


          Jewish Family Services of Silicon Valley


          Jewish Federation of Silicon Valley


          Law Foundation of Silicon Valley


          Legal Aid Association of California


          Monterey County Board of Supervisors 


          National Association of Social Workers


          Northeast Community Federal Credit Union


          Older Women's League Sacramento Capitol 


          Policy Link


          Puente













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          Samaritan House


          San Francisco Community Empowerment Center


          San Jose Silicon Valley Chamber of Commerce


          San Mateo County Central Labor Council


          San Cruz County Children's Network


          Santa Clara County Board of Supervisors


          Solano Children's Alliance


          Somos Mayfair


          St. Joseph's Family Center


          Step Up Silicon Valley


          United Way of Fresno County


          United Way of Monterey County


          United Way of Orange County













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          United Way of San Diego County


          United Way of Santa Barbara County


          United Way of Bay Area


          United Way of Santa Cruz County


          United Way of Silicon Valley


          United Way of Stanislaus County


          United Way of Wine Country


          Western Center on Law & Poverty


          Women's Building


          1 individual




          Opposition


          California Taxpayers Association














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          Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)  
          319-2098