BILL ANALYSIS Ó
AB 2676
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2676
(Chávez) - As Introduced February 19, 2016
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Income taxes: credit: dependent care
SUMMARY: Increases the Child and Dependent Care Expenses tax
credit amount by modifying the amount of the applicable state
credit percentage and the amount of the applicable adjusted
gross income (AGI). Specifically, this bill:
1)Increases the maximum AGI cap from $100,000 to $150,000 for
taxable years beginning on or after January 1, 2016.
2)Modifies the credit percentages and the AGI brackets
associated with each credit percentage as follows:
a) For taxpayers with AGI of $100,000 or less, the
applicable credit percentage is $200%;
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b) For taxpayers with AGI between $100,000 and $125,000,
the applicable credit percentage is 100%;
c) For taxpayers with AGI between $125,000 and $150,000,
the applicable credit percentage is 50%; and,
d) For taxpayers with more than $150,000 of AGI, the
applicable credit percentage is 0%.
3)Makes technical, non-substantive changes to the related
provisions.
4)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
1)Allows a tax credit equal to a percentage of
employment-related costs of care for a qualifying individual.
The amount of the credit percentage ranges between 20% and 35%
and depends on the taxpayer's AGI.
2)Defines a "qualifying individual" as any of the following:
a) A dependent of the taxpayer that is under the age of 13;
or,
b) A dependent or spouse who is physically or mentally
unable to provide self-care.
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3)Defines "employment-related expenses" as those expenses
incurred to enable gainful employment.
4)Limits the amount of "employment-related expenses" to the
lesser of the taxpayer's earned income or $3,000 per taxable
year for one qualifying individual or $6,000 if there are two
or more qualifying individuals.
EXISTING STATE LAW:
1)Conforms generally to the federal Child and Dependent Care
Credit program, including the definitions of "qualifying
individuals" and the maximum amount and types of eligible
expenses.
2)Limits eligible expenses to care provided only in California
and, for purposes of calculating the earned income
limitations, allows only earned income from California
sources.
3)Provides that the state credit must be computed by first
applying the applicable federal credit percentage to the
smallest of the expense cap, California expenses, or
California earned income; and then by applying the state
credit percentage.
4)Prescribes credit percentages based on the taxpayer's AGI.
Specifically, for taxpayers with AGI of $40,000 or less, the
applicable state credit percentage is 50%, for taxpayers with
AGI between $40,000 and $70,000, the applicable state credit
percentage is 43%, and for taxpayers with AGI between $70,000
and $100,000, the applicable state credit percentage is 34%.
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5)Limits the application of the credit to taxpayers with AGI of
$100,000 or less.
FISCAL EFFECT: The Franchise Tax Board (FTB) staff estimates
that this bill will result in an annual revenue loss of $160
million in the fiscal year (FY) 2016-17, $160 million in FY
2017-18, and $170 million in FY 2018-19.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"We need to support the efforts of our hardworking families in
California, and part of that effort is to alleviate the
financial strains that hinder the opportunity of the ? lower
income and middle income families to thrive."
2)The Purpose of this Bill . Child care is one of the largest
expenses for low- and middle-income families. While
California offers Child and Dependent Care Expenses Credit, it
is limited based on the taxpayer's AGI amounts. The author
argues that the existing credit is insufficient to meet the
needs of hardworking low- and middle-income families. The
purpose of this bill is to help minimize the financial strains
of child care and dependent care by relieving the tax burden
on these families, allowing them to redirect more of their
money to other basic family needs.
3)Background . The federal Child and Dependent Care Credit is a
nonrefundable credit, equal to a portion of qualifying child
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or dependent care expenses paid for the purpose of allowing
the taxpayer to be gainfully employed. To obtain the credit,
the taxpayer must incur employment-related expenses to provide
care for a dependent who has not attained the age of 13. The
maximum amount of employment-related expenses to which the
credit may be applied is $3,000 if one qualifying individual
is involved or $6,000 if two or more qualifying individuals
are involved. The credit amount is equal to the applicable
percentage (20 to 35%), as determined by the taxpayer's AGI
times the qualified employment expenses paid. Taxpayers with
an AGI of $15,000 or less use the highest applicable
percentage of 35%.
Existing California law provides a tax credit similar to the
federal child-care credit, the Child and Dependent Care
Expenses Credit. State law conforms to the federal expenses
cap, and applies the federal credit percentage to calculate
the credit amount. However, state law limits expenses to care
provided in California, and income earned from California
sources. The state credit is computed by first applying the
federal credit percentage (20 to 35%) to the smallest of three
amounts: the expense cap, California expenses, or California
earned income. The state credit percentage is then applied.
Unlike the federal credit, the state credit has an income
limit: taxpayers with AGI over $100,000 cannot claim the state
credit.
4)Potential Beneficiaries . This bill allows high-income working
families to take advantage of the tax credit by raising the
maximum AGI. According to a 2012 report by Child Care Aware
of America, the average yearly cost of child care in
California for an infant is $12,068; $8,407 for a
four-year-old; and $2,792 for a school-age child. Under
current law, a family with an infant and a toddler could be
spending 20% of their income on child care and not qualify for
the child-care credit. This bill would help alleviate the
high cost of child care for higher-income earners.
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5)Low- Income Families . From 2000 to 2010, the state Child and
Dependent Care Expenses Credit was refundable, allowing tax
filers with no state tax liability to receive some benefit
from the credit. Due to budget constraints, that was changed
by SB 86 (Senate Committee on Budget and Fiscal Review),
Chapter 14, Statutes of 2011. Because this tax credit is
currently nonrefundable and because California's poorest
working families have little or no tax liability, AB 2676
would have minimal impact, if any, on lower income families.
Since the stated purpose of this bill is to help low-income
and middle-income families, the Committee may wish to consider
amending the existing credit to make it refundable.
6)Other Alternatives . The rising cost of child care is a real
issue for working parents, but there may be other ways to help
alleviate the high cost of child care. The Legislature may
decide to expand CalWORKs Stage II and III eligibility for
low-income families, fund preschool programs, before- and
after-school programs, or expand the California Department of
Education's voucher program. Alternatively, the Legislature
may consider expanding the state Earned Income Tax Program for
low-income families.
7)Federal and California's Earned Income Tax Programs (EITC) .
The state EITC was enacted into law in 2015 and is intended to
complement the federal EITC to allow a greater benefit per
household. 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. The current maximum federal 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.
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 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. The Committee may
wish to consider whether expanding the state EITC would be a
more effective way of helping low income and middle income
families in California to cope with ever increasing child-care
costs.
8)LAO Report . On April 7, 2016, the Legislative Analyst's
Office released a report providing options for modifying the
state Child Care Tax Credit. The report provided four
alternative proposals for legislative consideration. All
options presented in the report would make this credit
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refundable again, but otherwise retain most of the structural
features of the state credit as it exists today. Option One
would benefit low- to middle-income filers. Option Two offers
to restore refundability at a somewhat lower cost by providing
less benefit than Option One. Option Three would increase
benefits for lower-income filers, and the last option would
increase benefits across income range, including higher-income
earners, by increasing the state credit percentage but keeping
the AGI percentages the same. The LAO report concluded that
if the state child-care credit were made refundable again, it
would provide a noticeable income boost to California working
families and also encourage participation in the formal labor
market to some extent.
9)FTB's Policy Considerations . The FTB staff points out that
this bill would authorize the state credit amount that is
twice the amount of the federal credit for taxpayers with AGI
less than $100,000. Furthermore, for taxpayers with AGIs
between $100,000 and $125,000, the state credit amount would
equal the federal credit amount. As such, this modified state
credit would provide a greater proportionate benefit to
taxpayers for state tax purposes than for federal tax
purposes, even though generally speaking a taxpayer's federal
income tax liability is significantly higher than the state
one.
10)FTB's Suggested Amendment :
On page 3, line 19, delete "152(c)(3), relating to age
requirements" and insert:
152(f)(1), relating to child defined
REGISTERED SUPPORT / OPPOSITION:
AB 2676
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Support
None on file
Opposition
California Tax Reform Association
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098