BILL ANALYSIS Ó
AB 1929
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Date of Hearing: April 4, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 1929
(Brough) - As Amended March 28, 2016
Majority vote. Fiscal committee.
SUBJECT: Personal income taxes: earned income credit: report
SUMMARY: Requires the Franchise Tax Board (FTB) to include in
its annual California Earned Income Tax Credit (EITC) report to
the Legislature the number of tax returns claiming the credit
where the credit is either denied or reduced in part.
Specifically, this bill:
1)Requires the FTB to include in its annual written EITC report
to the Legislature, in addition to all other required
information, the number of income tax returns that claim the
California EITC:
a) Where the credit is reduced in part before any refund is
issued; or,
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b) Where the credit is denied in full before any refund is
issued.
2)Makes technical non-substantive changes.
3)Applies to reports required to be submitted by the FTB to the
Legislature 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.
2)Provides that the EITC is only available for taxable years for
which resources are authorized in the annual Budget Act for
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the FTB to oversee and audit returns associated with the
credit.
3)Requires the FTB to report annually to the Legislature the
following information related to the California EITC:
a) The number of tax returns claiming the credit.
b) The number of individuals represented on tax returns
claiming the credit.
c) The average credit amount on tax returns claiming the
credit.
d) The distribution of credits by number of dependents and
income ranges.
e) An estimate of the number of families who are lifted out
of deep poverty by the credit and an estimate of the number
of families who are lifted out of deep poverty by the
combination of the credit and the federal EITC.
FISCAL EFFECT: According to the FTB staff, this bill will not
impact General Fund revenues.
COMMENTS:
1)The Author's Statement . The author has provided the following
statement in support of this bill:
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"Current law requires the Franchise Tax Board (FTB) to provide a
written report to the legislature on specific statistics that
measure whether the newly established CalEITC achieves its
intended purpose. It is equally as important for the
legislature to evaluate the number of improper payments,
whether fraudulent or accidental, in the report to determine
the effectiveness of the CalEITC. Including this information
that the FTB already collects as a measure of whether the
credit achieves its intended purpose ensures that the
administration of the CalEITC maximizes its potential
effectiveness to lift people out of poverty.
"We must make sure the CalEITC is both sustainable and monitored
so that it may continue to benefit California's most
vulnerable working class. Analyzing additional elements will
make CalEITC reports reliable and comprehensive, further
proving their effectiveness. It is essential that all aspects
of the CalEITC are reported so that the Legislature may find
ways to continue tracking its success and identify ways to
improve it if necessary."
2)Arguments in Support . The proponents of this bill state that
"California must be vigilant to ensure" that improper EITC
payments do not occur and argue that "legislative oversight of
the state EITC program - and the taxpayer dollars used to pay
for the refundable tax credit - will be improved if lawmakers
have easy access to important data from the FTB."
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
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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
children; $44,648 ($50,198 filing jointly) with two qualifying
children; $39,296 ($44,846 filing jointly) with one qualifying
child; and $14,880 ($20,430 filing jointly) without a
qualifying child. The maximum credit amount currently is
$6,269 for taxpayers with three or more qualifying children;
$5,572 for taxpayers with two qualifying children; $3,373 for
taxpayers with one qualifying child; and $506 for taxpayers
with no qualifying children.
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 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. For 2015 tax year, the credit
percentage is 7.65% for individuals without qualifying
children, 34% for individuals with one qualifying child, 40%
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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, may not exceed $3,400 for the
entire tax year. Thus, 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. 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)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 that 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
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 you
can get 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 materials to more than
100 organizations, ranging from nonprofits to tax preparers.
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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.
6)EITC: Encouraging Workforce Participation . 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
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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.
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normally be out of the labor force to start working<3>. Most
studies have shown a significant increase in labor force
participation of unmarried mothers. In fact, one study showed
that more than 60% of employment gains made by single mothers,
when compared to mothers without children, was due to the
EITC<4>. Additionally, a separate study focused on employment
among California women who received cash assistance at some
point between 1987 and 2000. The study found that more than
three-quarters of the employment gains between 1991 and 2000
for women with several children relative to those with only
one child was attributable to the expansion of the EITC<5>.
7)Additional Benefits . 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<6>.
Additionally, the EITC may help offset the disproportionate
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<3> The President's Proposal To Expand the Earned Income Tax
Credit, Executive Office of the President and U.S. Treasury
Department, March 2014.
<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).
<5> 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).
<6> 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)
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cost that low-income families pay in state and local taxes.<7>
8)Annual Reporting Requirement . On September 29, 2014, Governor
Brown signed into law SB 1335 (Leno), Chapter 845, Statutes of
2014, which added R&TC Section 41. SB 1335 recognized that
the Legislature should apply the same level of review used for
government spending programs to tax preference programs,
including tax credits. Thus, Section 41 requires any bill
introduced on or after January 1, 2015, which creates a new
tax credit, to contain specific goals, purposes, and
objectives that the tax credit will achieve. In addition,
Section 41 requires detailed performance indicators for the
Legislature to use when measuring whether the tax credit meets
the goals, purposes, and objectives so-identified.
As required by Section 41, the California EITC law, which was
enacted in 2015, expressly stated the purpose of the credit.
Specifically, the purpose of the California EITC is to reduce
poverty among California's poorest working families and
individuals. To this end, the California EITC requires FTB to
prepare a written report to measure whether the credit
achieves its intended purpose. The report must include an
estimate of the number of families who are lifted out of deep
poverty by both the federal and the California EITC as well as
by the state credit alone. The report must also include the
number of tax returns claiming the credit as well as the
number of individuals represented on these tax returns, the
average credit amount, and the distribution of credits by
number of dependents and income ranges. This report is
required to be submitted to several legislative committees,
including this Committee.
9)What Does this Bill Do ? This bill proposes to expand the EITC
reporting requirement to include information on the number of
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<7> California Budget Project, A STATE EITC, citing the analysis
conducted by Institute on Taxation and Economic Policy.
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returns claiming the EITC that was either reduced in part or
denied in full before any refund is issued.
10)Federal EITC Overpayments: Fraud or Unintentional Errors ?
While the federal EITC program has been shown to increase
work, reduce poverty, lower welfare receipt, and improve
children's educational attachment,<8> concerns have been
raised about the EITC's error rate. The United States (U.S.)
Government Accountability Office reports that, in fiscal year
2014, the Internal Revenue Service (IRS) made payments of
$65.2 billion for the EITC.<9> According to the IRS, an
estimated 27.2%, or $17.7 billion, of these payments were
improper.<10> The IRS has reported that improper payments are
a mix of unintentional mistakes and fraud.<11>
Complexity "has remained a key factor contributing to improper
payments" in the federal EITC program.<12> The U.S. Treasury
Department estimates that 70% of the EITC improper payments
"stem from issues related to the EITC's residency and
relationship requirements, which are complex; filing status
issues, which can arise when married couples file (often
following a separation) as singles or heads of households; and
other issues related to who can claim a child in a
non-traditional family arrangements."<13> The Center on Budget
and Policy Priorities notes that analysis of "IRS data by
Treasury experts and studies by outside researchers suggest
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<8> Council of Economic Advisers, The War on Poverty 50 years
Later: A Progress Report, January 2014, Table 2, page 27.
<9> GAO, Testimony before the Senate Committee on the Budget,
U.S. Senate, Government Efficiency and Effectiveness, March 4,
2015, p.35.
<10> Id.
<11> Id., p. 37
<12> Id., p. 35
<13> Department of the Treasury, Agency Financial Report (AFR),
FY 2014, p. 198.
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that most EITC overpayments do not result from intentional
action by tax filers"<14> and actual overpayment rate is
likely lower that IRS estimate.<15>
11)Federal Efforts to Reduce Improper Payments . The IRS has
taken various steps since 2010 to reduce EITC errors,
including a major initiative to combat EITC errors by paid
return preparers. As explained by the IRS National Taxpayer
Advocate Nina Olson, the "low income population is vulnerable
to unskilled and unethical preparers" and the single "most
useful step Congress can take to improve EITC compliance and
reduce the Improper Payments is to enact a regulatory regime
that requires unenrolled preparers who prepare returns for fee
to demonstrate minimum levels of competency."<16> Ms. Olson
suggested that Congress explicitly authorize the IRS "to
require unenrolled return preparers to take a competency test
and fulfill annual continuing education requirements as a
condition of preparing tax returns for compensation."<17> In
addition, the GAO report recommended: (a) moving the W-2
filing deadlines to January 31 to facilitate the use of
earnings information in the detection of EITC noncompliance,
and (b) broaden IRS's authority to systematically disallow
certain erroneous EITC claims with unsupported wages.
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<14> Center for Budget and Policy Priorities, R. Greenstein, J.
Wancheck, and C. Matt, Reducing Overpayments in the Earned
Income Tax Credit, December 1, 2015, p.4 (citing J. Holtzblatt
and J. McCubbin, Issues Affecting Low-Income Filers; H. Aaron
and J. Slemrod, The Crisis in Tax Administration, Brookings
Institution Press, November 2002; and J. Liebman, Noncompliance
and the EITC: Taxpayer Error or Taxpayer Fraud, Harvard
University, November 1995).
<15> Id.
<16> Written Statement of Nina Olson, National Taxpayer Advocate
Hearing on IRS Oversight before the Subcommittee on Financial
Services and General Government Committee on Appropriations,
U.S. House of Representatives, February 26, 2014, pp. 46-47.
<17> Id.
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12)What is the Urgency ? This bill, if enacted, will take effect
on January 1, 2017 and will apply to the FTB annual reports
starting in 2017. Currently, the FTB tracks the number of
returns claiming the EITC that are "adjusted or denied before
refund" in the aggregate. The changes proposed by this bill
to the EITC program would require FTB to modify its existing
information systems to report the number of "adjusted" claims
and the number of "denied" claims separately, rather than as
one combined number. In light of the recent enactment of the
California EITC and ongoing federal efforts to reduce the
improper EITC payments, the Committee may wish to consider
whether the imposition of the reporting requirement proposed
by this bill would be premature and whether its implementation
should be delayed to later years.
13)Technical Amendments . Committee staff suggests the following
technical amendments:
AMENDMENT 1
On page 5, line 5, strike out "that are" and insert:
where the credit is
AMENDMENT 2
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On page 5, line 7, strike out "that are denied" and insert:
where the credit is
14)Related Legislation . AB 1847 (Mark Stone) would expands the
employee notification requirement relating to the federal EITC
to include a reference to the California EITC. AB 1847 will
be heard by this Committee today.
15)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.
REGISTERED SUPPORT / OPPOSITION:
Support
California Taxpayers Association
Opposition
None on file
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Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098