BILL ANALYSIS Ó
AB 1847
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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
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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.
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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.
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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
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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
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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,
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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
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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.<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
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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); 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.
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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
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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.
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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
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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
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