BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 107| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 107 Author: Committee on Budget Amended: 6/16/15 in Senate Vote: 21 SENATE BUDGET & FISCAL REVIEW COMMITTEE: 15-1, 6/18/15 AYES: Leno, Nielsen, Allen, Anderson, Beall, Block, Hancock, Mitchell, Monning, Nguyen, Pan, Pavley, Roth, Stone, Wolk NOES: Moorlach ASSEMBLY FLOOR: Not relevant SUBJECT: Personal income taxes: earned income credit SOURCE: Author DIGEST: This bill is necessary for the enactment of the 2015 Budget Act and establishes a refundable tax credit for eligible individuals based on a certain percentage of earned income up to a specified amount. ANALYSIS: This bill creates a state Earned Income Tax Credit (EITC), providing a refundable tax credit for wage income. It focuses 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 matches 85 percent of the federal credits, up to half of the federal phase-in range, and then AB 107 Page 2 begins 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) is assigned responsibility for administering the proposed EITC program. This bill establishes an EITC credit, specifically: 1) Establishes 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. 2) Provides 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. a) The credit percentage is 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. AB 107 Page 3 b) The phase-in range is 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. 1) Provides 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 again in the credit during the credit phase-in period. a) The phase-out percentage is 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. b) The phase-out amount is $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. 4) 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. AB 107 Page 4 5) 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. 6) 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. 7) 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. 8) 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. 9) Specifies the failure to be diligent in determining eligibility for the EITC can result in a penalty of $500 for false claims for refund. AB 107 Page 5 10) 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. 11) Includes uncodified language expressing the Legislature's intent to expand the EITC, as the state's fiscal situation allows. 12) Continuously appropriates funds for the refundable tax credit. FISCAL EFFECT: Appropriation: Yes Fiscal Com.:YesLocal: No According to the Senate Budget and Fiscal Review Committee, 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: (Verified6/18/15) None received OPPOSITION: (Verified6/18/15) None received Prepared by:Mark Ibele / B. & F.R. / (916) 651-4103 AB 107 Page 6 6/18/15 18:55:40 **** END ****