BILL ANALYSIS Ó AB 1847 Page 1 ASSEMBLY THIRD READING AB 1847 (Mark Stone) As Amended April 7, 2016 Majority vote ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Revenue & |9-0 |Ridley-Thomas, | | |Taxation | |Brough, Dababneh, | | | | |Gipson, Mullin, | | | | |O'Donnell, Patterson, | | | | |Quirk, Wagner | | | | | | | |----------------+-----+----------------------+--------------------| |Appropriations |20-0 |Gonzalez, Bigelow, | | | | |Bloom, Bonilla, | | | | |Bonta, Calderon, | | | | |Chang, Daly, Eggman, | | | | |Gallagher, Eduardo | | | | |Garcia, Roger | | | | |Hernández, Holden, | | | | |Jones, Obernolte, | | | | |Quirk, Santiago, | | | | |Wagner, Weber, Wood | | | | | | | | | | | | ------------------------------------------------------------------ AB 1847 Page 2 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 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 AB 1847 Page 3 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. 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 AB 1847 Page 4 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. 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: According to the Assembly Appropriations Committee: 1)Minor and absorbable costs to the FTB to update guidance on notifying employees of the California EITC. 2)Possible General Fund (GF) revenue loss due to an increase in the number of taxpayers claiming the California EITC as a result of this new notification. However, the impact of this AB 1847 Page 5 notification on EITC participation is unknown. If this new employer notification were to result in 500 additional households receiving the California EITC who otherwise would not have received it, then this would result in a GF revenue loss of approximately $300,000. 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 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 AB 1847 Page 6 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)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 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. 4)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 AB 1847 Page 7 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. Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0003097