BILL ANALYSIS Ó
AB 43
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 43
Mark Stone - As Amended February 12, 2015
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Personal income taxes: credit: earned income.
SUMMARY: Provides a credit, in modified conformity to the
federal Earned Income Tax Credit (EITC), as specified, for
taxable years beginning on or after January 1, 2016, 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, a credit in an
amount determined in accordance with the federal EITC, as
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follows:
a) A credit equal to 35% of the federal earned income tax
amount for an eligible individual who has at least one
qualifying child less than five years of age;
b) A credit equal to 60% of the federal earned income tax
amount for an eligible individual who does not have a
qualifying child; and,
c) A credit equal to 15% of the federal earned income tax
amount for 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
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 this credit is allowed notwithstanding Revenue
and Taxation Code (R&TC) Section 41.
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6)Makes findings and declarations.
7)Takes effect immediately as a tax levy.
EXISTING LAW allows eligible individuals a refundable EITC. A
refundable credit allows for the excess of the credit over the
taxpayer's tax liability to be refunded to the taxpayer. As the
name implies, the credit is based on a percentage of the
taxpayer's earned income, and is phased 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.
EXISTING STATE LAW:
1)Allows various tax credits designed to provide tax relief for
taxpayers who incur certain expenses or to influence behavior,
including business practices.
2)Provides that individuals with income below a certain
threshold are not required to file a return because the
standard deduction and personal exemption credit eliminate any
tax liability. For 2011, these thresholds are $15,152 in
gross income or $12,122 in adjusted gross income (AGI) for
single taxpayers and $30,305 in gross income or $24,244 in AGI
for married individuals filing jointly. These thresholds are
increased based on the number of dependents claimed and are
increased annually for inflation.
3)Does not allow an EITC.
FISCAL EFFECT: Assuming no appropriation is made by the
Legislature, the Franchise Tax Board (FTB) estimates General
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Fund revenue loss of $38 million in fiscal year (FY) 2015-16,
$190 million in FY 2016-17, and $200 million in FY 2018-19. If
an appropriation is made by the Legislature, the FTB estimates
General Fund revenue loss of $380 million in FY 2015-16, 1.9
billion in FY 2016-17, and $2 billion in FY 2017-18.
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 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.
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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.
2)Arguments in Support : According to the California Tax Reform
Association, "[p]revious research has shown that the EITC
encourages employment among single parents who have accessed
CalWORKS and also among the broader low- and moderate-income
population. According to an improved way of measuring poverty
that incorporates taxes paid and tax credits received, the
EITC meant the difference between living in poverty and not
living in poverty for 600,000 adults and 560,000 children in
California in 2011."
3)Arguments in Opposition : The California Taxpayers Association
states that "[a] September 2014 report by the U.S. Treasury's
Inspector General for Tax Administration says that the IRS
estimates that 24 percent of all EITC payments made in the
2013-14 fiscal year were paid in error - equating to $14.5
billion that was paid in error. The problems associated with
refundable credits are exacerbated when the [FTB] determines
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that a refund is fraudulent after the refund has been made,
making it difficult for the state to recover these refunds.
And, if identity theft is involved, taxpayers must suffer
through the pain and expense of recovering their identities,
which sometimes can take years."
4)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 enact a new tax expenditure
in the form of a state EITC.
5)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. This bill provides a credit, in modified
conformity to the federal EITC but does not contain a sunset
date. Because it takes a supermajority vote to rescind a tax
expenditure, the Committee may wish to add a five year sunset.
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6)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 AGI in the 2015 taxable year,
must be less than $47,747 ($53,267 filing jointly) with 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.
7)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
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<1> California Budget Project, a state EITC: making california's
tax system work better for Working families, December 2014.
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percentage points<2>. Other studies show that the federal
EITC causes one out of every ten individuals who would
normally be out of the labor force to start working<3>. Most
studies have shown a significant increase in labor force
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>.
8)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
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<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.
<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).
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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 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.
9)Individuals with Children Receive larger Benefit : In 2014, a
single individual with an AGI of less than $14,500 and no
children would qualify for a maximum of $496. In contrast, a
single parent with an AGI of less than $46,997 and three
children would qualify for a maximum of $6,143. The federal
EITC clearly favors working families over individuals without
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<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)
<7> California Budget Project, A STATE EITC, citing the analysis
conducted by Institute on Taxation and Economic Policy.
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children. This bill, however, disproportionately provides a
much larger credit percentage to individuals without children.
Specifically, this bill provides a credit equal to 60% of the
federal earned income tax amount for an eligible individual
who does not have a qualifying child, and only a credit equal
to 15% of the federal amount for an eligible individual with a
child five years or older. On its face, the credit percentage
for individuals without children is larger but the amount
received is much lower. As stated above, the maximum amount
an individual without children can qualify for is $496.
Receiving a state credit equal to 60% of the maximum federal
amount is $298, giving the California tax filer a total of
$794. A parent with three children can qualify for a maximum
of $6,143 under the federal EITC. Assuming all of the
children are over the age of five, the qualifying parent can
receive $921, giving the tax payer a total of $7,064. If just
one of the children is less than five years of age, the parent
can qualifying for a state EITC of $2,150, or a total of
$8,293.
10)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.
(IRC 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
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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.
11)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 2,000,000
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.
12)Performance Measurement Standards : Existing law requires any
bill introduced on or after January 1, 2015 that authorizes a
new credit under either the PIT Law or the CT Law to provide
performance measurement standards. According to legislative
findings and declarations, tax preferences represent a major
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<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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exercise of government power, but face less oversight than the
spending side of the budget. As a way of ensuring
transparency and accountability when investing public dollars
through tax credit programs, the Legislature decided to apply
performance measurement standards as a way of reviewing tax
credits with the same level of scrutiny as spending programs.
This bill was introduced on December 1, 2014 and is,
therefore, not required to abide by the standards under RTC
Section 41. Irrespective of Section 41's application, this
bill provides that the provisions of R&TC Section 41 shall not
apply to this credit. Providing clear metrics and data
collection may provide valuable information on the
effectiveness of a state EITC. The Committee may wish to
consider the appropriateness of this Section 41 exemption.
REGISTERED SUPPORT / OPPOSITION:
Support
United Way of California (Sponsor)
Alameda County Board of Supervisors (Co-Sponsor)
Allen Temple Baptist Church
Alliance for African Assistance
American Federation of State, County and Municipal Employees
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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 Food Policy Advocates
California Partnership
California Reinvestment Coalition
California Tax Reform Association
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Catholic Charities of Santa Clara County
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
EARN
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FIRST 5 of Monterey County
FIRST 5 of Santa Clara 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
National Association of Social Workers
Northeast Community Federal Credit Union
Older Women's League Sacramento Capitol
Policy Link
Puente
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Samaritan House
San Francisco Community Empowerment Center
San Jose Silicon Valley Chamber of Commerce
San Mateo County Central Labor Council
San Cruz County Children's Network
Santa Clara County Board of Supervisors
Solano Children's Alliance
Somos Mayfair
St. Joseph's Family Center
Step Up Silicon Valley
United Way of Fresno County
United Way of Monterey County
United Way of Orange County
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United Way of San Diego County
United Way of Santa Barbara County
United Way of Bay Area
United Way of Santa Cruz County
United Way of Silicon Valley
United Way of Stanislaus County
United Way of Wine Country
Western Center on Law & Poverty
Women's Building
1 individual
Opposition
California Taxpayers Association
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Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098