BILL ANALYSIS Ó AB 1847 Page A Date of Hearing: April 4, 2016 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Sebastian Ridley-Thomas, Chair AB 1847 (Mark Stone) - As Amended March 8, 2016 Majority vote. Fiscal committee. SUBJECT: Earned Income Tax Credit Information Act: California Earned Income Tax Credit SUMMARY: Expands the employee notification requirement relating to the federal Earned Income Tax Credit to include a reference to the California Earned Income Tax Credit (EITC). Specifically, this bill: 1)Modifies the existing findings and declarations relating to the federal EITC to provide that: a) In 2015, the State of California authorized a state EITC to amplify the poverty-reducing efforts of the federal EITC for the poorest working Californians. b) The state shall facilitate the furnishing of information AB 1847 Page B to working poor persons and families regarding the availability of state EITC to ensure that they claim it on their state income tax returns. c) Legislative intent is to offer the most cost-effective assistance to eligible taxpayers to ensure that eligible Californians claim both the federal and state EITC. 2)Requires an employer to notify its employees about their possible eligibility for the California EITC, in addition to the federal EITC. Specifically: a) Requires an employer to notify all employees that they may be eligible for the California EITC within one week before, after, or at the same time, the employer provides an annual wage summary, including a Form W-2 or a Form 1099, to any employee. b) Specifies that the employer shall hand directly to the employee or mail to the employee's last known address either a specified notice created by the employer or instructions on how to obtain notices from the Franchise Tax Board (FTB), including the information on the California EITC at the FTB Web site. 3)Revises the language of the EITC notice, which must be furnished to employees, to include the notification about the California EITC and the FTB Web address. 4)Modifies the notification requirements applicable to the state departments and agencies that serve those who may qualify for the federal EITC to include a reference to those persons who may also qualify for the California EITC. AB 1847 Page C 5)Removes the Managed Risk Medical Insurance Board (MRMIB) from the list of state departments and agencies that are subject to the EITC notification requirements. 6)Makes several technical, conforming changes. 7)Provides that the amended EITC notification provisions will apply to notices furnished on or after January 1, 2017. EXISTING FEDERAL LAW: 1)Allows a refundable EITC to certain eligible individuals. A refundable credit allows for the excess of the credit over the taxpayer's tax liability to be refunded to the taxpayer. The federal EITC amount 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. 2)Requires employers to notify their employees that the employees may be eligible for the federal EITC. EXISTING STATE LAW: 1)Allows, in modified conformity with the federal EITC, a refundable EITC for the lowest income Californians for taxable years beginning on or after January 1, 2015. AB 1847 Page D 2)Provides that the EITC is only available for taxable years for which resources are authorized in the annual Budget Act for the FTB to oversee and audit returns associated with the credit. 3)Requires California employers, state departments, and certain state agencies to provide formal notification of possible eligibility for the federal EITC. FISCAL EFFECT: Unknown, but most likely no impact on the General Fund revenues. COMMENTS: 1)Author's Statement . The author has provided the following statement in support of this bill: "AB 1847 builds upon the 2015 creation of the statewide California Earned Income Tax Credit (EITC), which provides a new tax credit to the state's poorest working families. The creation of the California EITC represents a necessary step to reduce the poverty rate of working families and improve the economic outlook on the state's impoverished communities. However, the only way that families can benefit from these credits is by filing for taxes, even though most families for the state EITC are not required to file. This simple measure requires employers to notify their employees of possible eligibility for the State EITC in AB 1847 Page E order to increase the number of families who file taxes and receive benefits, just as employers are already required to notify their employees about possible eligibility for the federal EITC." 2)The Purpose of This Bill . Under current state law, employers are required to notify all of their employees of possible eligibility for the federal EITC. This bill proposes to expand the EITC notification requirement to include notification of the California EITC. The author states that this bill is necessary to ensure that more working families receive the intended benefits of the state EITC, which in turn will lead to a reduction in the poverty rate. According to the IRS, California's federal EITC participation rate in 2014 was 74.3%, which was lower than the estimated national rate of 80%. The author argues that without sufficient outreach many eligible individuals will not claim state tax EITC to which they are entitled. Many eligible individuals are not required to file tax returns. 3)Federal EITC . The federal EITC is an income 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. To qualify for the EITC an individual must be employed. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. The EITC is a percentage of the taxpayer's earned income and is phased out as income increases. The EITC percentage varies depending on whether the taxpayer has qualifying children. The federal credit rate varies from 7.65% to 45%, depending on the number of qualifying children. In order for a taxpayer to qualify for the federal EITC in 2016, an individual's adjusted gross income must be less than $47,955 ($53,505 filing jointly) with three or more qualifying AB 1847 Page F children; $44,648 ($50,198 filing jointly) with two qualifying children; $39,296 ($44,846 filing jointly) with one qualifying child; or $14,880 ($20,430 filing jointly) without a qualifying child. The current maximum credit amount for taxpayers with three or more qualifying children is $6,269; for taxpayers with two qualifying children, the maximum is $5,572. For taxpayers with one qualifying child, the maximum credit amount is $3,373; for taxpayers with no qualifying children, the maximum amount is currently $506. 4)California EITC . The Governor's 2015 May revise of the state budget included the first ever state EITC, which is refundable and focuses on the state's lowest income individuals. The state EITC was enacted into law in 2015 and is intended to complement the federal EITC to allow a greater benefit per household. Similar to the federal EITC, the California EITC is established as a refundable credit against personal income taxes owed based on earned wage income. However, unlike the Federal Government, California excludes self-employment income from the definition of "earned income" and only workers with earnings subject to wage withholding qualify for the credit. The California EITC is available for tax returns filed for wages earned in 2015. A credit amount is calculated according to specified percentages of the earned income based on the number of qualifying children. The credit percentage for 2015 tax year is 7.65% for individuals without qualifying children, 34% for individuals with one qualifying child, 40% for individuals with two or more qualifying children, and 45% for individuals with three or more qualifying children. The maximum 2015 income limitation for both the adjusted gross income and earned income may not be more than $6,580 for individuals with no qualifying children, $9,880 for individuals with one qualifying child, and $13,870 for individuals with two or more qualifying children. Finally, the amount of investment income, such as interest, dividends, royalties, and capital gains, cannot exceed $3,400 for the entire tax year. Thus, AB 1847 Page G unlike most other state EITCs, California's credit only reaches a portion of workers who are eligible for the federal EITC. The California EITC is expected to benefit approximately 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. This program, however, is operative only for taxable years for which resources are authorized in the annual Budget Act for the FTB to oversee and audit returns associated with the credit. 5)EITC: Encouraging Workforce Participation and Other Benefits . 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; 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 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 --------------------------- <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. AB 1847 Page H participation of unmarried mothers.<4> In addition to increasing labor participation, the EITC provides a long list of 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<5>. Additionally, the EITC may help offset the disproportionate cost that low-income families pay in state and local taxes<6> and provide the additional income necessary to lift that family out of poverty. 6)Implementation of the California EITC . The FY 2015-16 Budget included $22 million for the FTB to implement the credit and conduct public outreach efforts, which is important because the credit targets workers whose earnings are so low they likely do not ordinarily have to file taxes. The FTB is working with a large external partnership that includes 24 state agencies, United Way, AARP, and the Golden State --------------------------- <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); 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). <5> 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) <6> California Budget Project, A STATE EITC, citing the analysis conducted by Institute on Taxation and Economic Policy. AB 1847 Page I Opportunity Foundation. Together, the partnership has built an external clearinghouse for all EITC information - CalEITC4Me.org, which is supported by the public affairs firm Dewey Square. The site includes a Voluntary Tax Assistance finder as well as a calculator that determines how much an individual can receive back from the federal and state EITC. Additionally, the FTB has aggressively pursued media coverage in local markets across the state, produced brochures and other promotional materials, and sent those brochures to more than 100 organizations ranging from nonprofits to tax preparers. On March 10, 2016, the FTB released data identifying that 201,700 individuals have already claimed the California EITC. Of the individuals claiming this credit 26,000 are first-time filers, meaning they had no existing state tax liability and filed a tax return for the sole purpose of claiming the California EITC. To date, $100 million in California EITC has been claimed. While it had been projected that 600,000 individuals would claim the credit, the FTB was pleased with the results as there was still one month remaining for individuals to file their tax returns prior to April 15, 2016. 7)The Current EITC Notification Requirement . Both federal and state laws require employers to notify all employees that they may be eligible for the federal EITC. Under federal law, an employer must provide an employee with Form W-2, a substitute of W-2, Notice 797, or a written statement with the same wording as Notice 797. Under California's law - the Earned Income Tax Credit Information Act (EITC Act) - an employer must also notify employees about the federal EITC within one week before or after the employer provides the employees with AB 1847 Page J their annual wage summary (e.g., a Form W-2 or a Form 1099). Employers are required to either hand the notice directly to each employee or mail it to the employee's last known address. Furthermore, all California employers must post a statement about the EITC in the workplace. In addition, state law requires certain specified state departments, agencies and programs serving individuals who may qualify for the federal EITC to notify these individuals of the availability of this credit and the ways to claim it. The law encourages departments, agencies, and programs to develop the least costly, as well as the most effective, methods to provide notice. 8)What Does This Bill Do ? This bill proposes to amend the EITC Information Act to require California employers and some state departments to provide formal notification of possible eligibility for the new California EITC, in addition to the federal EITC. In this regard, this bill would also implement several technical changes to the existing law, including deleting the existing references to the federal Form W-5, which was eliminated by the federal government starting with the 2011 taxable year, and to the Managed Risk Medical Insurance Board, which was abolished. This bill would also update the sample EITC notice by deleting obsolete information and including a reference to the California EITC. 9)Proposed Amendments . The FTB staff suggested the following technical amendment to this bill: On page 6, line 19, delete "eligibility" and insert "availability" 10)Prior Legislation . SB 80 (Committee on Budget and Fiscal Review), Chapter 21, Statutes of 2015, established the refundable California EITC for taxable years beginning on or after January 1, 2015. AB 1847 Page K AB 509 (Skinner), Chapter 542, Statutes of 2011, amended the EITC Information Act by requiring specified state departments and agencies to notify benefit recipients of their eligibility for the federal EITC. AB 650 (Lieu and Jones), Chapter 606, Statutes of 2007, established the EITC Information Act that requires employers to notify their employees that they may be eligible to claim the federal EITC. REGISTERED SUPPORT / OPPOSITION: Support California Tax Reform Association California Catholic Conference Small Business California California Association of Public Authorities Children's Defense Fund Inland Empire United Way Nurse-Family Partnership AB 1847 Page L United Way of the Bay Area United Ways of California United Ways of Fresno and Madera Counties United Way of Stanislaus County Abrazar, Inc. Opposition None on file Analysis Prepared by:Oksana G. Jaffe / REV. & TAX. / (916) 319-2098 AB 1847 Page M