BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
AB 43 (Mark Stone) - Personal income taxes: credit: earned
income.
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|Version: June 1, 2015 |Policy Vote: GOV. & F. 6 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: August 17, 2015 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: AB 43 would create a second refundable Earned Income
Tax Credit (EITC), equal to an unspecified percentage of the
federal EITC.
Fiscal
Impact:
The Franchise Tax Board (FTB) indicates that, primarily
because the percentage of the bill is currently
unspecified, it is unable to determine the costs to
administer this bill. Because this bill would provide a
refundable credit on a year-to-year basis, and could impact
over three million California taxpayers who claimed the
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federal EITC, many of which have no current California
income tax return filing requirement, the costs would
likely be significant.
The unspecified percentage also precludes FTB from
estimating the revenue loss resulting from the current
version of the bill. As an order of magnitude, however, if
the Legislature makes an appropriation in accordance with
the 5/20/15 version of the bill FTB estimates an
approximate annual revenue loss of $2 billion (General
Fund).
Background: 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 one dollar credit
reduces tax liability by one dollar, whereas a tax deduction of
one dollar will reduce taxable income by one dollar, but reduces
tax liability by the marginal tax rate. For example, an
additional one dollar 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
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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
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.
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.
As part of the 2015-16 budget, the Governor 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 included in the 2015 May Revison; it provides a
refundable tax credit for wage income for households with income
limits of $6,580 (zero dependents) up to $13,870 (three or more
dependents). The credit matches 85 percent of the federal
credits up to half of the federal phase-in range; and then
begins to taper off relative to these maximum wage amounts. The
tax credit is estimated to reduce revenues by $380 million
annually beginning in 2015-16, and benefit an estimated 825,000
families. The estimated average household benefit is $460 per
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year, with a maximum credit of $2,653.
Proposed Law: This bill would allow a refundable EITC, 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 percent, unless the Legislature provides
a percentage in a bill related to the budget.
The bill identifies three categories of taxpayers: (1) an
individual who has at least one qualifying child under five
years of age, (2) an individual who does not have a qualifying
child, and (3) an individual who does not meet the above
requirements.
The bill 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.
It would take effect immediately as a tax levy, and apply to
taxable years 2016 through 2020.
Related
Legislation: SB 80 (Committee on Budget and Fiscal Review,
Chapter 21, Statutes of 2015), created a refundable CA EITC for
taxable years beginning on or after January 1, 2015.
Staff
Comments: FTB estimates that the state's current EITC will
impact less than one million individuals. Administrative costs
are estimated to be $22 million in 2015-16, $11.6 million in
2016-17, and $10.1 million annually thereafter.
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