BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M.Hertzberg, Chair
2015 - 2016 Regular
------------------------------------------------------------------
|Bill No: |AB 43 |Hearing |7/8/15 |
| | |Date: | |
|----------+---------------------------------+-----------+---------|
|Author: |Mark Stone |Tax Levy: |No |
|----------+---------------------------------+-----------+---------|
|Version: |6/1/15 |Fiscal: |Yes |
------------------------------------------------------------------
-----------------------------------------------------------------
|Consultant|Bouaziz |
|: | |
-----------------------------------------------------------------
PERSONAL INCOME TAXES: CREDIT: EARNED INCOME
Allows a refundable earned income tax credit, upon appropriation
of the Legislature.
Background and Existing Law
Federal law allows eligible individuals a refundable earned
income tax credit (EITC), which allows the taxpayer to obtain a
refund for the excess of the credit over the taxpayer's
liability. As the name implies, the credit is based on a
percentage of the taxpayer's earned income, and phases 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.
Federal law specifies that if the federal EITC is denied, and
the Internal Revenue Service (IRS) determined that the
taxpayer's error was due to reckless or intentional disregard of
EITC rules, the EITC would be denied for the next two years. If
the error was due to fraud, the denial period would be ten
years.
On June 23, 2015, Governor Brown signed SB 80 (Committee on
Budget and Fiscal Review), which established a state EITC. The
California EITC is identical to the Governor's EITC proposal
AB 43 (Mark Stone) 6/1/15 Page 2
of ?
included in the May Revise. The state EITC is a refundable
credit, available to individuals earning less than $6,580, and
households with children earning less than $13,870. The state
credit is computed by multiplying the state credit amount (The
state credit amount is determined by multiplying W2 wage
earnings by the appropriate percentage. The appropriate
percentage is determined by the total W2 wages and the number of
children an individual has) by the state adjustment factor. The
state adjustment factor is 0%, unless otherwise specified in the
annual Budget Act. The state EITC is available to taxpayers
beginning January 1, 2015, and for taxable year 2015, the EITC
adjustment factor in the Budget Act is 85%. The state EITC
excludes self-employment income.
Proposed Law
Assembly Bill 43 allows a refundable earned income tax credit,
upon appropriation of the Legislature. In a year when an
appropriation is not made by the Legislature, the credit becomes
nonrefundable. The credit is computed by multiplying the federal
credit amount due by the state credit percentage. The state
credit percentage is 0%, unless the Legislature provides a
percentage in a bill related to the budget.
The bill identifies three categories of taxpayers:
An individual who has at least one qualifying child
under five years of age.
An individual who does not have a qualifying child.
An individual who does not meet the above requirements.
AB 43 provides that amounts refunded to a taxpayer shall not be
included in income subject to tax, and, 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.
The bill makes legislative findings and declarations.
AB 43 takes effect immediately as a tax levy, and applies to
taxable years beginning on or after January 1, 2016, and before
AB 43 (Mark Stone) 6/1/15 Page 3
of ?
January 1, 2021.
State Revenue Impact
If the Legislature makes an appropriation in accordance with the
5/20/15 version of AB 43, the Franchise Tax Board (FTB)
estimates an approximate annual revenue loss of $2 billion.
Comments
1. Purpose of the bill. According to the author, "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
framework for a refundable California Earned Income Tax Credit
(EITC) for working low- and middle-class families. AB 43 places
an emphasis on three cohorts of filers: (1) households with at
least one child under five, (2) childless households, and (3)
the remainder of Federally eligible households. Overall, this
policy compliments, magnifies, and extends the impact and reach
of the current state EITC.
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. 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
AB 43 (Mark Stone) 6/1/15 Page 4
of ?
aimed at higher income households. By putting forward the
framework established in AB 43, we provide a flexible policy
frame that allows us to have the best economic impact to the
neediest households in our most depressed communities."
2. Why now? It is unclear why this bill is necessary, given a
state EITC was enacted less than one month ago. Although AB 43
does not take effect until January 1, 2016, that only allows for
one year of implementation time for the current EITC, which is
not enough time to show the effectiveness the state EITC has on
combating poverty in California.
3. A Note on Fraud. Although the federal EITC lifts families
and individuals out of poverty, the refundable credit is highly
susceptible to fraud. The Treasury Inspector General for Tax
Administration estimates that improper EITC claims total over
$10 billion a year. The payments paid out improperly for 2012
were at least 21-25% of all payments, according to the latest
report from the IRS inspector general. SB 80 accounts for this
by limiting the state EITC to wage income.
4. Another way? As stated in AB 43's legislative findings, the
federal EITC is a proven antipoverty measure, but there are
other programs we can invest in to help working families. The
state can invest in increasing TANF grants, increase CalWORKs
childcare, and increase funding for food stamps, to name a few.
5. Let's get clear. AB 43 lays out the framework for a
California EITC, but leaves out many critical details needed to
implement the credit. For example, the credit is refundable
upon appropriation of the legislature, thus if there is no
appropriation in the first two years, but an appropriation in
the third, can individuals who would have received a refund
amend their last two returns? Would individuals who are
amending returns be entitled to payment first or would FTB
prioritize individuals filing original returns? The simple
solution would be to amend the bill to include a continuous
appropriation; however this would likely result in the bill
requiring a 2/3 vote for passage. The Committee may wish to
consider amending the bill to clarify the mechanics of who is
eligible for a refund when an appropriation is made by the
Legislature.
AB 43 (Mark Stone) 6/1/15 Page 5
of ?
6. Related legislation. Originally, SB 38 (Liu) created a
refundable EITC equal to 15 or 100 percent of the federal EITC.
The bill was amended in the Senate Appropriations Committee, and
now creates a refundable EITC identical to the current state
EITC. The bill is in the Assembly Revenue and Taxation
Committee. SB 152 (Vidak) creates a refundable EITC equal to 15
percent of the federal EITC. SB 152 was held on the Senate
Appropriations Committee's suspense file. The Committee
approved both bills on April 29, 2015.
Assembly Revenue and Taxation 6-3
Assembly Appropriations 12-0
Assembly Floor 69-3
Support and
Opposition (6/17/15)
Support : 9 to 5 California; Alameda County Board of
Supervisors; Allen Temple Baptist Church; Alliance for African
Assistance; Alliance of Californians for Community Empowerment;
American Association of University Women; American Federation of
State, County and Municipal Employees; 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 Employer Law Center; California Equity
Leaders Network; California Food Policy Advocates; California
Partnership; California Reinvestment Coalition; California Tax
Reform Association; California Women's Law Center; California
Work and Family Coalition; Career Ladders Project; Catholic
Charities of Santa Clara County; Center for Popular Democracy;
Child Care Law Center; 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; County Welfare Directors Association;
Courage Campaign; EARN; Equal Rights Advocates; Family Economic
Security Partnership; First 5 of Monterey County; First 5 of
AB 43 (Mark Stone) 6/1/15 Page 6
of ?
Santa Clara County; First 5 Santa Cruz 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 ; Mujeres Unidas y Activas; Napa County Board of
Supervisors; National Association of Social Workers, California
Chapter; National Council of Jewish Women; National Domestic
Workers Alliance; Next Generation; Northeast Community Federal
Credit Union; Older Women's League Sacramento Capitol; Parent
Voices; Policy Link; Puente; Raising California Together;
Samaritan House; San Francisco Community Empowerment Center; San
Jose Silicon Valley Chamber of Commerce; San Mateo County
Central Labor Council; Santa Cruz County Board of Supervisors;
Santa Cruz County Children's Network; Santa Clara County Board
of Supervisors; Solano Children's Alliance; Somos Mayfair; St.
Joseph's Family Center; Stronger California Advocates Network;
Step Up Silicon Valley; Traders Women Inc.; Ultra Violet; United
Way of Arrowhead; United Way of California; United Way of Fresno
County; United Way of Monterey County; United Way of Orange
County; United Way of San Diego County; United Way of Santa
Barbara County; United Way of Santa Cruz County; United Way of
Silicon Valley; United Way of Stanislaus County; United Way of
the Bay Area; United Way of Wine Country; Ventura County Board
of Supervisors; Western Center on Law & Poverty; Women's
Building; 1 individual.
Opposition : California Taxpayers Association
-- END --