BILL ANALYSIS Ó
AB 43
Page A
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 |
| | |Hernández, Mullin, | |
| | |Quirk | |
| | | | |
|----------------+------+--------------------+----------------------|
|Appropriations |12-0 |Gomez, Bonta, | |
| | |Calderon, Daly, | |
| | |Eggman, | |
| | | | |
| | | | |
| | |Eduardo Garcia, | |
| | |Gordon, Holden, | |
| | |Quirk, Rendon, | |
| | |Weber, Wood | |
| | | | |
| | | | |
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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
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<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
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<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
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<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
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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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