BILL ANALYSIS                                                                                                                                                                                                    



          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 --