BILL ANALYSIS Ó
SENATE COMMITTEE ON BUDGET AND FISCAL REVIEW
Senator Mark Leno, Chair
2015 - 2016 Regular
Bill No: AB 107 Hearing Date: June 18,
2015
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|Author: |Committee on Budget |
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|Version: |January 9, 2015 Introduced |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant|Mark Ibele |
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Subject: Budget Act of 2015: Earned Income Tax Credit.
Summary: This bill is necessary for the enactment of the 2015 Budget Act
and would establish a refundable tax credit for eligible
individuals based on a certain percentage of earned income up to
a specified amount.
Background: The measure would create a state Earned Income Tax
Credit (EITC), providing a refundable tax credit for wage
income. It would focus on households with incomes less than
$6,580 if there are no dependents and up to $13,870 if there are
three or more dependents. The proposed state program dovetails
with the existing federal EITC and would match 85 percent of the
federal credits, up to half of the federal phase-in range, and
then begin to taper off relative to these maximum wage amounts.
The credit would be available beginning with tax returns filed
for wages earned in 2015, and is expected to reduce revenues by
$380 million annually beginning in 2015-16. It will benefit an
estimated 825,000 families and two million individuals. The
estimated mean household benefit is $460 per year, with a
maximum credit for a household with three or more dependents of
over $2,600. The proposed state EITC is intended to complement
the federal EITC. The Franchise Tax Board (FTB) would be
assigned responsibility for administering the proposed EITC
program.
Proposed
Law: The bill would establish an EITC credit, specifically:
AB 107 (Committee on Budget) Page 2
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a. Establish a refundable credit for tax years beginning on
or after January 1, 2015 against personal income taxes owed
based on earned wage income, which does not include
self-employment income.
b. Provide for the calculation of a credit amount during a
phase-in range of earned wage income according to specified
percentages based on the number of qualifying children.
i. The credit percentage would be 7.65 percent
for individuals without qualifying children, 34
percent for individuals with one qualifying child, 40
percent for individuals with two or more qualifying
children, and 45 percent for individuals with three or
more qualifying children.
ii. The phase-in range would be for earned wage
income of up to $3,290 for individuals without
qualifying children, $4,940 for individuals with one
qualifying child, and $6,935 for individuals with two
or more qualifying children.
c. Provide for the calculation a phase-out of the credit
when earned wage income reaches a certain threshold amount.
The credit is phased out by an amount determined by
multiplying the applicable phase-out percentage by the
excess of the amount of the individual's adjusted gross
income (earned wage income plus certain other income) over
the phase-out amount. The inclusion of additional income
during the phase-out period results in a more rapid loss of
the credit amount than there was a gain in the credit
during the credit phase-in period.
i. The phase-out percentage would be 7.65 percent
for individuals without qualifying children, 34
percent for individuals with one qualifying child, 40
percent for individuals with two or more qualifying
children, and 45 percent for individuals with three or
more qualifying children.
ii. The phase-out amount would be $3,290 for
individuals without qualifying children, $4,940 for
individuals with one qualifying child, and $6,935 for
AB 107 (Committee on Budget) Page 3
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individuals with two or more qualifying children.
d. Establishes that the credit amount is to be multiplied
by the adjustment factor to determine the amount of the
actual credit, with the adjustment factor specified in the
annual budget act. Unless otherwise specified, the
adjustment factor would be zero percent. The Administration
has proposed 85 percent as the adjustment factor in
2015-16.
e. Specifies that the tax credit would be operative only
for taxable years for which resources are authorized in the
annual budget act for the Franchise Tax Board to administer
the program.
f. Sets forth that if the amount of allowable credit
exceeds an individual's tax liability, the balance shall be
paid to that individual from the Tax Relief and Refund
Account, which is continuously appropriated.
g. Provides for a re-computation of the earned wage income
amount and the phase-out amount based on inflation, in the
same manner as the re-computation of income tax brackets
under the personal income tax law.
h. Provides that disqualified income from interest and
dividends, royalties and other similar sources in excess of
$3,400 shall make an individual ineligible for the EITC,
with this amount adjusted in the same manner as indicated
in (g) above.
i. Specifies the failure to be diligent in determining
eligibility for the EITC can result in a penalty of $500
for false claims for refund.
j. Includes annual reporting requirements of the Franchise
Tax Board relating to the usage of the credit, average
credit, distribution of the credit by income and number of
dependents, and estimate of the impact on poverty.
aa. Includes uncodified language expressing the
Legislature's intent to expand the EITC, as the state's
fiscal situation allows.
AB 107 (Committee on Budget) Page 4
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bb. Contains a continuous appropriation for the refundable
tax credit.
Fiscal
Effect: Refundable amounts would be continuously appropriated from the
Tax Relief and Refund Account, and are expected to total $380
million during 2015-16 based on an adjustment factor of 85
percent incorporated in the 2015 Budget Act..
Support: None on file
Opposed: None on file
Comments: The federal EITC has long been regarded as an
effective and efficient program to direct resources to
low-income households while theoretically providing work
incentives. State EITCs, including the one proposed by the
Governor, may channel additional resources towards low-income
families, but are likely to have only a marginal work incentive
effect, due to the credit amount available. While the maximum
credit under the Governor's proposal is around $2,600,
Department of Finance indicates that the mean credit is about
$460. In discussions with staff, Department of Finance indicated
that the median-arguably a more suitable measure of central
tendency of the credit-is "probably between $150 and $200." (The
median is the midpoint at which 50 percent of households would
receive more and 50 percent less than that amount.) The design
of the state EITC dovetails with the design of the federal EITC
and is targeted at the lowest income population. As noted, the
program does not include self-employment income, which is likely
to result in the exclusion of the earnings of some individuals
and disqualification of other individual entirely.
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