BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 38|
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THIRD READING
Bill No: SB 38
Author: Liu (D)
Amended: 6/2/15
Vote: 27
SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 4/29/15
AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Pavley
NO VOTE RECORDED: Moorlach
SENATE APPROPRIATIONS COMMITTEE: 5-2, 5/28/15
AYES: Lara, Beall, Hill, Leyva, Mendoza
NOES: Bates, Nielsen
SUBJECT: Personal income tax: credit: earned income: tax
preparer education
SOURCE: Author
DIGEST: This bill creates a refundable Earned Income Tax Credit
(EITC).
ANALYSIS:
Existing law:
1)Provides various tax credits designed to provide tax relief
for tax-payers who incur certain expenses or to influence
behavior, including business practices.
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2)Does not require individuals with income below a certain
threshold to not file a return, when the standard deduction
and personal exemption credit eliminate any tax liability.
This bill:
1)Provides a refundable tax credit, and unless otherwise
specified in the annual Budget Act, the credit adjustment
factor is zero percent.
2)Applies to taxable years for which resources are authorized in
the annual Budget Act for the Franchise Tax Board (FTB) to
oversee and audit returns.
3)Provides that the credit and phase out percentages shall be
determined as follows:
7.65% for individuals with no qualifying children,
34% for individuals with one qualifying child,
40% for individuals with two or more qualifying
children, and
45% for individuals with three or more qualifying
children.
1)Provides that the earned income and phase out shall be
determined as follows:
$3,290 for individuals with no qualifying children,
$4,940 for individuals with one qualifying child, and
$6,935 for individuals with two or more qualifying
children.
1)Limits investment income, from interests and dividends, to no
more than $3,400.
2)Limits eligibility to wage earners.
3)Applies to taxable years beginning on or after January 1,
2015.
Background
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Tax credits differ from other tax expenditures in that they
directly reduce income tax liability, as opposed to indirectly
by reducing taxable income. For instance, a $1 credit reduces
tax liability by $1, whereas a tax deduction of $1will reduce
taxable income by $1, but reduces tax liability by the marginal
tax rate. For example, an additional $1 of deduction for a
taxpayer in the 10 percent tax bracket reduces tax liability by
10 cents, while a taxpayer in the 39.6 percent tax bracket
reduces tax liability by 39.6 cents.
The federal EITC was enacted in 1975. It was originally intended
to be temporary in nature, to mitigate the impact of (1) the
Social Security payroll tax, and (2) rising food and energy
prices. Instead, the EITC was made permanent in 1978. The Tax
Reform Act of 1986 indexed both the maximum earned income and
phase-out income levels to inflation. The EITC differs from most
other tax credits in that it is partially or fully refundable. A
taxpayer with $100 in tax liability and $200 in a refundable tax
credit would receive a tax refund of $100.
The EITC is considered both (1) an anti-poverty program and (2)
an alternative to cash-transfer programs because it incentivizes
work. The EITC is work-oriented in that the amount of the credit
is based on earnings. The amount of the credit (which varies
depending on the number of qualifying children in addition to
earned income) initially rises as earnings increase, then
reaches a plateau, and then falls as earnings increase further.
For example, for a couple with two children in 2014, the credit
is equal to 40 percent (the credit rate) of the first $13,700 in
earnings. The maximum credit of $5,460 is received by taxpayers
with earnings between $13,700 and $23,300. The credit phases out
at a rate of 21.06 percent (that is, it is reduced by 21.06
cents for every additional dollar of earnings) for earnings over
$23,300 and is zero for taxpayers with earnings over $43,950.
The value of the EITC has increased over time. For example, the
maximum credit for a worker with three children has increased
from $400 in 1978 (roughly $1,465 in 2014 dollars) to $6,143 in
2014.
Current state law provides that individuals with income below
specified levels are not required to file a return, as the
standard deduction and personal exemption credit eliminate any
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tax liability. For 2013, these thresholds are $12,838 in
adjusted gross income for single filers, and $25,678 for married
individuals filing jointly. These thresholds are increased
based on the number of dependents claimed and are increased
annually for inflation.
Twenty-five states, the District of Columbia, and two local
jurisdictions (New York City and Montgomery County, Maryland)
currently provide the EITC in varying forms and amounts.
FISCAL EFFECT: Appropriation: Yes Fiscal
Com.:YesLocal: No
According to the Senate Appropriations Committee, the Department
of Finance estimates that this bill will result in an annual
General Fund revenue loss of $380 million beginning in 201516.
Administration costs to FTB have not yet been identified, but
would likely be in the millions of dollars annually (General
Fund).
SUPPORT: (Verified6/2/15)
Alameda County Board of Supervisors
American Academy of Pediatrics, California
American Association of University Women
California Association of Food Banks
California Catholic Conference of Bishops
California Food Policy Advocates
California Hunger Action Coalition
California Partnership
California Reinvestment Coalition
Children's Defense Fund - California
Coalition of California Welfare Rights Organization
Community Action Partnership of Kern
Community Action Partnership of Riverside County
Courage Campaign
Friends Committee on Legislation of California
Lutheran Office of Public Policy - California
National Association of Social Workers, California Chapter
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Pacoima Beautiful
PolicyLink
Ventura County Board of Supervisors
Western Center on Law and Poverty
OPPOSITION: (Verified6/2/15)
California Taxpayers Association
ARGUMENTS IN SUPPORT: According to the author, "The state
EITC will help thousands of low- and middle-income working
Californians and is an excellent complement to the federal tax
credit. The federal EITC lifts 6.6 million Americans, including
3.3 million children, out of poverty each year, making it the
nation's largest and most successful anti-poverty program.
Research shows that the credit does more than reduce poverty and
provide a short-term safety net for low-income working families
The EITC, which benefits between 25 and 30 million low- and
moderate-income families, stimulates the local economy by
increasing their spending power. That is in addition to the
income, employment, educational, and health benefits to children
that can extend into adulthood. Nearly 70% of families living
in poverty in 2013 had at least one working adult. Further,
according to the PPIC [Public Policy Institute of California]
61% of all of our state's impoverished children live in working
families. The state Earned Income Tax Credit will help
struggling families while increasing the take up rate of the
federal EITC, bringing more federal dollars into our state.
With the economy improving this is an ideal time to make an
investment in those that have yet to recover from the Great
Recession. The state EITC is an effective anti-poverty policy
and will help working Californians and our state's children."
ARGUMENTS IN OPPOSITION: Opponents argue that 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,
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according to the latest report from the IRS inspector general.
Prepared by:Myriam Bouaziz / GOV. & F. / (916) 651-4119
6/2/15 21:49:51
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