BILL ANALYSIS                                                                                                                                                                                                    ”






                                                                        AB 43


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          ASSEMBLY THIRD READING


          AB  
          43 (Mark Stone, et al.)


          As Amended  June 1, 2015


          Majority vote


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          |Committee       |Votes |Ayes                |Noes                  |
          |                |      |                    |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Revenue &       |6-3   |Ting, Dababneh,     |Brough, Patterson,    |
          |Taxation        |      |Gipson, Roger       |Wagner                |
          |                |      |HernŠndez, Mullin,  |                      |
          |                |      |Quirk               |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Appropriations  |12-0  |Gomez, Bonta,       |                      |
          |                |      |Calderon, Daly,     |                      |
          |                |      |Eggman,             |                      |
          |                |      |                    |                      |
          |                |      |                    |                      |
          |                |      |Eduardo Garcia,     |                      |
          |                |      |Gordon, Holden,     |                      |
          |                |      |Quirk, Rendon,      |                      |
          |                |      |Weber, Wood         |                      |
          |                |      |                    |                      |
          |                |      |                    |                      |
           ------------------------------------------------------------------- 


          SUMMARY:  Provides a credit, in modified conformity to the federal  











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          Earned Income Tax Credit (EITC), as specified, 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 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, and before January  
            1, 2021, a credit equal to the federal EITC multiplied by a  
            percentage set forth in a budget bill for the following class of  
            eligible individuals:


             a)   An eligible individual who has at least one qualifying  
               child less than five years of age;


             b)   An eligible individual who does not have a qualifying  
               child; and,


             c)   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  











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            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 the credit provided by this section shall only be  
            allowed in taxable years in which the Legislature provides for  
            it in a bill related to the budget.


          6)Makes findings and declarations.


          7)Provides that the EITC shall remain in effect only until  
            December 1, 2021, and as of that date is repealed.


          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee, none.


          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  











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               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.


               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.












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          2)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 creates a framework for a tax  
            expenditure in the form of a state EITC.


          3)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.  


          4)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 adjusted gross income (AGI) in the 2015 taxable  
            year, must be less than $47,747 ($53,267 filing jointly) with  











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            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.  


          5)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 percentage points<2>.  Other studies show that  
            the federal EITC causes one out of every 10 individuals who  
            would normally be out of the labor force to start working<3>.   
            Most studies have shown a significant increase in labor force  
          ----------------------------


          <1>


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








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            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>.


          6)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 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  
          ----------------------------

          ----------------------------
          <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).
          <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)










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            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.


          7)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.  (Internal  
            Revenue Code 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  






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


          <7> California Budget Project, A STATE EITC, citing the analysis  
          conducted by Institute on Taxation and Economic Policy.












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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.


          8)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 million 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. 




          Analysis Prepared by:                                               
                          Carlos Anguiano / REV. & TAX. / (916) 319-2098   
          FN: 0000719



          ----------------------------
          <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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