BILL ANALYSIS                                                                                                                                                                                                    



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          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        |
          |Committee:   |                               |     |             |
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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  |
          |                    |              |              |              |
          |                    |              |              |              |
          |                    |FEDERAL       |              |              |
          |                    |              |              |              |
          |                    |              |              |              |
          |--------------------+--------------+--------------+--------------|
          |No dependents       |496           |298           |214           |
          |                    |              |              |              |
          |                    |              |              |              |
          |                    |8,110         |8,110         |3,290         |
          |                    |              |              |              |
          |                    |              |              |              |
          |                    |14,590        |14,590        |6,580         |
          |                    |              |              |              |
          |                    |              |              |              |
          |                    |              |              |              |
          |                    |              |              |              |
          |                    |              |              |              |
          |--------------------+--------------+--------------+--------------|
          |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        |
          |                    |              |              |              |
          |                    |              |              |              |
          |                    |              |              |              |
          |                    |              |              |              |
          |                    |              |              |              |
          |--------------------+--------------+--------------+--------------|
          |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