BILL ANALYSIS                                                                                                                                                                                                    






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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  
          ---------------------------


          <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  
          ---------------------------
          <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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