BILL ANALYSIS Ó
AB 43
Page 1
Date of Hearing: May 27, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
43 (Mark Stone) - As Amended May 20, 2015
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|Policy |Revenue and Taxation |Vote:|6 - 3 |
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Urgency: Yes State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill creates a state earned income tax credit (EITC), under
the personal income tax law, in modified conformity with the
federal credit, for taxable years beginning on or after January
1, 2016, and before January 1, 2021, and provides that, in those
years in which an appropriation is made by the Legislature, the
credit will be refundable. The bill establishes the following
credit amounts:
1)35% of the federal EITC amount for taxpayers who have at least
one qualifying child less than 5 years of age;
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2)60% of the federal EITC amount for taxpayers without a
qualifying child; and
3)15% of the federal EITC amount for taxpayers who have a child
5 years of age or older.
The bill specifies that amounts refunded under the credit are
not included in income subject to tax, and notwithstanding any
other state law, amounts refunded will be treated the same as
federal EITC amounts for purposes of determining public benefits
eligibility.
FISCAL EFFECT:
1)Potentially significant GF costs to Franchise Tax Board (FTB)
to administer the changes to forms and systems.
2)Estimated GF revenue decreases of $380 million, $1.9 billion,
and $2.0 billion in FY 2015-16, FY 2016-17, and FY 2017-18,
respectively, assuming appropriation is made by the
Legislature to provide a refundable credit. Estimated GF
revenue decreases of $38 million, $190 million, and $200
million for those fiscal years, respectively, if no
appropriation is made to provide a refundable credit.
COMMENTS:
1)Purpose. According to the author, the EITC addresses stagnant
income for working Californians in the post-recession economic
recovery while simultaneously providing stimulus in the most
economically distressed communities. The EITC is a refundable
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tax credit targeted at low-income working households, designed
to reduce poverty and reward work. The author asserts the
federal EITC is an effective anti-poverty tool, and without
it, child poverty would be as much as 25% higher. According
to the California Budget Project, the federal EITC results in
improved health and education outcomes for children that
translate into higher incomes in adulthood.
2)EITC Basics. The EITC is a tax credit for low-income
individuals and families designed to augment incomes and
provide an incentive for people to work more and earn higher
wages. When the credit exceeds the amount of taxes owed, it
results in a cash refund to claimants, eliminating all tax and
increasing realized income. As a taxpayer's income increases,
the EITC increases up to a maximum benefit level, and then
phases out. The amount of federal credit depends on the
number of children in the taxpayer's household, with
significantly more credit available for taxpayers with one or
more children.
By providing a tax credit based on earned income, the EITC
encourages people to enter the workforce and rewards
additional work by providing a larger credit as worker's wages
increase. For example, a single taxpayer with two children
earning $7,500 in 2014 is eligible for a $3,000 federal
credit. However, if that taxpayer earned twice that amount,
the credit increases to $5,460. Proponents believe the
federal EITC has raised labor force participation rates among
single mothers by at least 7%, and accounted for as much as
75% of all employment gains for single mothers with one child
between 1991 and 2000.
In addition to income and labor force participation gains,
supporters claim the federal EITC has been associated with
better academic performance among low-income children, higher
completion rates among high school and college students, and
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significant offset income for inherently regressive state and
local taxes such as sales and use tax.
3)Individual Help, Collective Stimulus. Supporters argue the
federal EITC helped elevate 1.3 million people above the
federal poverty line in California from 2010 to 2012, and note
25 other states have established their own EITC to augment the
impact of the federal program. According to a 2010 analysis
from the Congressional Budget Office, the most effective
stimulus programs are those that encourage additional
consumption and demand for goods. Programs that target lower
income households with fewer assets tend to have an immediate,
significant impact on consumer spending. Supporters believe
each dollar distributed to EITC claimants generates between
$1.50-2.00 in additional, local economic activity through
increased purchasing power.
4)Governor's Proposal. The Governor's May Revise included
another version of a state EITC. The Governor's proposal
would also be refundable, but targets the state's lowest
income taxpayers, available only to individuals earning less
than $6,580 and households with children earning less than
$13,870. The Governor's proposal effectively increases the
incentive for very low income taxpayers and unemployed persons
to enter the workforce, but quickly phases out the benefit as
those taxpayers' income increases and they become eligible for
a greater federal EITC. The proposal also excludes
self-employment income in order to minimize potential fraud
(see comment 6 below).
The Legislative Analyst's Office believes the annual costs for
the Governor's EITC proposal are approximately $400 million.
5)Knowing Is Half The Battle. According to the Legislative
Analyst's Office, only 71% of EITC eligible tax filers in
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California even claim the credit, often because they are
unaware they are eligible. This failure results in the annual
loss of hundreds of millions of federal dollars that would
directly help low-income families and provide additional
economic stimulus. AB 43 makes no investment, and the
Governor's plan makes a very modest investment (about
$600,000) in education and outreach to improve EITC claims.
The committee may wish to consider whether additional
investments in education ought to be pursued as a
cost-effective manner to increase EITC claims and capture
additional federal subsidies.
6)EITC Rate Comparison. The chart below highlights the maximum
credit available for various individual taxpayers in each of
the 2014 federal EITC, this bill's EITC, and the Governor's
EITC. For joint filers, the maximum credit amounts do not
change, but are available over a broader range, though far
less than double, the individual income amounts. Note that
the state proposals augment, and do not replace, the federal
EITC, and that the EITC proposed in AB 43 is not incompatible
with the Governor's proposal, but could be adopted alongside
it as each proposal targets different recipients.
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|HOUSEHOLD SIZE |Maximum Credit Amount |
| | |
| | |
| |Maximum income at which maximum credit |
| |available |
| | |
| | |
| |Endpoint of credit phase-out |
| | |
| | |
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|--------------------+--------------+--------------+--------------|
| | |AB 43 |GOV'S BUDGET |
| | | | |
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| |FEDERAL | | |
| | | | |
| | | | |
|--------------------+--------------+--------------+--------------|
|No dependents |496 |298 |214 |
| | | | |
| | | | |
| |8,110 |8,110 |3,290 |
| | | | |
| | | | |
| |14,590 |14,590 |6,580 |
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| | | | |
| | | | |
| | | | |
|--------------------+--------------+--------------+--------------|
|1 dependent | 5 yrs |3,305 | 3,305 |1,157 | 496 |1,428 | 1,428 |
|or older* | | | |
| | | | |
| |17,830 |17,830 |4,940 |
| | | | |
| | | | |
| |38,511 |38,511 |9,880 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
|--------------------+--------------+--------------+--------------|
|2 dependents | 5 |5,460 | 5,460 |1,911 | 819 |2,358 | 2,358 |
|yrs or older* | | | |
| | | | |
| |17,830 |17,830 |6,935 |
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| | | | |
| | | | |
| |43,756 |43,756 |13,870 |
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|--------------------+--------------+--------------+--------------|
|3+ dependents | 5 |6,143 | 6,143 |2,150 | 921 |2,653 | 2,653 |
|yrs or older* | | | |
| | | | |
| |17,830 |17,830 |6,935 |
| | | | |
| | | | |
| |46,997 |46,997 |13,870 |
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|* Distinction for children 5 years of age or older is a feature |
|of AB 43 only. |
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7)High Rate of Fraud. As is often true with refundable credits,
the EITC is susceptible to a high rate of fraudulent claims.
According to a 2014 report by the US Treasury's Inspector
General for Tax Administration, the IRS estimates that 24% of
federal EITC payments during the 2013-14 fiscal year,
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amounting to $14.5 billion, were in error. Often these funds
are not recoverable as the recipient does not typically have
the resources to repay erroneous claims and penalties. Many
fraudulent EITC claims involve identity theft. As a result,
both the IRS and FTB could potentially limit this fraud
through more robust and secure filing processes. Another
common source of fraudulent EITC claims is from self-employed
taxpayers whose income cannot easily be verified or audited.
The Governor's EITC proposal, discussed above, excludes
self-employment income in order to minimize this problem.
Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081