BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
------------------------------------------------------------------
|Bill No: |SB 38 |Hearing |4/29/15 |
| | |Date: | |
|----------+---------------------------------+-----------+---------|
|Author: |Liu |Tax Levy: |No |
|----------+---------------------------------+-----------+---------|
|Version: |3/23/15 |Fiscal: |Yes |
------------------------------------------------------------------
-----------------------------------------------------------------
|Consultant|Bouaziz |
|: | |
-----------------------------------------------------------------
PERSONAL INCOME; CREDIT: EARNED INCOME: TAX PREPARER
EDUCATION
Allows a refundable Earned Income Tax Credit (EITC), upon
appropriation of the Legislature, equal to 30% or 100% of the
federal EITC.
Background and Existing Law
Federal law allows eligible individuals a refundable EITC, which
allows the taxpayer to obtain a refund for the excess of the
credit over the taxpayer's liability. As the name implies, the
credit is based on a percentage of the taxpayer's earned income,
and phases 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.
Federal law specifies that if the federal EITC is denied, and
the Internal Revenue Service (IRS) determined that the
taxpayer's error was due to reckless or intentional disregard of
EITC rules, the EITC would be denied for the next two years. If
the error was due to fraud, the denial period would be ten
years.
State law provides various tax credits designed to provide tax
SB 38 (Liu) 3/23/15 Page 2
of ?
relief for tax-payers who incur certain expenses or to influence
behavior, including business practices.
State law allows individuals with income below a certain
threshold to not file a return, when the standard deduction and
personal exemption credit eliminate any tax liability. For
2014, these thresholds are $16,047 in gross income or $12,838 in
adjusted gross income (AGI) for single taxpayers and $33,097 in
gross income or $25,678 in AGI for married individuals filing
jointly. These thresholds are increased based on the number of
dependents claimed, and are increased annually for inflation.
State law does not provide an EITC.
Proposed Law
Senate Bill 38 allows a refundable tax credit, upon
appropriation by the Legislature, equal to 30% of the federal
EITC for eligible individuals with qualifying children or 100%
for individuals with no qualifying children. In a year when an
appropriation is not made by the Legislature, the credit becomes
nonrefundable, but can be carried over to succeeding taxable
years until exhausted.
An "eligible individual" would have the same meaning as in
Section 32(c)(1) of the Internal Revenue Code (IRC), except that
an individual without a qualifying child would qualify for the
credit at age 21 instead of 25. Any amounts refunded to a
taxpayer under SB 38 would not be included in income.
For an individual who is a nonresident or is a part-year
resident of this state, the amount of the credit or refund
allowed under this bill would be determined based on the part of
the earned income credit that is attributable to California.
SB 38 also requires FTB to establish a pilot program to allow
eligible individuals to secure advance payments of the EITC
through their employers and requires FTB to report findings on
the program. The pilot program applies to taxable years
beginning on or after January 1, 2017 and before January 1,
2019.
SB 38 requires FTB to report to the legislature information on
SB 38 (Liu) 3/23/15 Page 3
of ?
the effectiveness of the credit. Additionally, the bill
requires providers of basic and continuing education to tax
preparers to include instruction for preparing taxes for a
taxpayer who is eligible for the state earned income tax credit
SB 38 takes effect immediately as a tax levy and applies to
taxable years beginning on or after January 1, 2016 and before
January 1, 2027.
State Revenue Impact
FTB estimates that this bill would reduce General Fund revenues
by $60 million in fiscal year 2015-16, $300 million in 2016-17,
and $350 million in 2017-18 if there is no appropriation made by
the Legislature.
If there is a yearly appropriation made by the Legislature, FTB
estimates that this bill would reduce General Fund revenues by
$600 million in 2015-16, $2.9 billion in 2016-17, and $3 billion
in 2017-18
Comments
1. Purpose of the bill. According to the author, "SB 38 will
create a refundable state Earned Income Tax Credit (EITC) equal
to 30% of the federal EITC for eligible individuals with
qualifying dependents and 100% of the federal rate for eligible
individuals with no qualifying dependents. Further, it calls
upon the Franchise Tax Board (FTB) to establish a pilot advance
pay program for the credit. The state EITC will help thousands
of low- and middle-income working Californians and is an
excellent complement to the federal tax credit. The federal
EITC lifts 6.6 million Americans, including 3.3 million
children, out of poverty each year, making it the nation's
largest and most successful anti-poverty program. Research
shows that the credit does more than reduce poverty and provide
a short-term safety net for low-income working families The
EITC, which benefits between 25 and 30 million low- and
moderate-income families, stimulates the local economy by
increasing their spending power. That is in addition to the
income, employment, educational, and health benefits to children
that can extend into adulthood. Nearly 70% of families living
SB 38 (Liu) 3/23/15 Page 4
of ?
in poverty in 2013 had at least one working adult. Further,
according to the PPIC 61% of all of our state's impoverished
children live in working families. The state Earned Income Tax
Credit will help struggling families while increasing the take
up rate of the federal EITC, bringing more federal dollars into
our state. With the economy improving this is an ideal time to
make an investment in those that have yet to recover from the
Great Recession. The state EITC is an effective anti-poverty
policy and will help working Californians and our state's
children."
2. What is an EITC? The EITC is a federal 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. When EITC exceeds the amount of taxes owed,
it results in a tax refund to those who claim and qualify for
the credit.
In order for a taxpayer to qualify for the credit, an
individual's AGI in the 2014 taxable year must be less than:
$46,997 ($52,427 filing jointly) with three or more
qualifying children.
$43,756 ($49,186 filing jointly) with two qualifying
children.
$38,511 ($43,941 filing jointly) with one qualifying
child.
$14,590 ($20,020 filing jointly) without a qualifying
child.
The 2014 maximum credit for taxpayers is as follows:
$6,143 with three or more qualifying children.
$5,460 with two qualifying children.
$3,305 with one qualifying child.
$496 with no qualifying children.
SB 38 (Liu) 3/23/15 Page 5
of ?
Taxpayers cannot claim the federal EITC if their 2014 investment
income (from interests and dividends) is more than $3,350. The
amount of the federal EITC is reduced by the alternative minimum
tax (AMT), if any.
In 2009, 800,000 eligible Californians failed to claim over $1.2
billion worth of federal EITC dollars. According to the New
America Foundation study Left on the Table, if these refunds
were claimed, they would spur over $1.2 billion in business
sales, pay $311 million in wages, and add nearly 7,500 jobs to
the California economy, which would result in $88 million in
taxes coming back to the state. According to the Internal
Revenue Service (IRS), currently, 25 states and the District of
Columbia offer state-level EITC for their residents.
3. A Note on Fraud. Although the federal EITC lifts families
and individuals out of poverty, the refundable credit is highly
susceptible to fraud. The Treasury Inspector General for Tax
Administration estimates that improper EITC claims total over
$10 billion a year. The payments paid out improperly for 2012
were at least 21-25% of all payments, according to the latest
report from the IRS inspector general.
4. Another way? As stated in SB 38's legislative findings, the
federal EITC is a proven antipoverty measure, but there are
other programs we can invest in to help working families. The
state can invest in increasing TANF grants, restore CalWORKs
childcare subsidies that were cut during the recession, and
increase funding for food stamps, to name a few.
5. Let's get clear. SB 38 lays out the framework for a
California EITC, and a pilot program to secure advance payment
of an EITC, but leaves out many critical details needed to
implement both components of the bill. For example, the credit
is refundable upon appropriation of the legislature, thus if
there is no appropriation in the first two years, but an
appropriation in the third, can individuals who would have
received a refund amend their last two returns? Would
individuals who are amending returns be entitled to payment
first or would FTB prioritize individuals filing original
returns? The simple solution would be to amend the bill to
include a continuous appropriation; however this would likely
result in the bill requiring a 2/3 vote for passage.
Additionally, the pilot program does not specify an application
SB 38 (Liu) 3/23/15 Page 6
of ?
process for participating or an entity that would process
applications and determine eligibility. Also the pilot program
does not contain a funding mechanism so employers can make
advance payments. The Committee may wish to consider amending
the bill to provide the infrastructure needed to implement the
pilot program and to clarify the mechanics of who is eligible
for a refund when an appropriation is made by the Legislature.
6. Related legislation. SB 152 (Vidak) creates a refundable
EITC equal to 15 percent of the federal EITC. SB 152 is set to
be heard on April 29, 2015 in this Committee. AB 43 (Stone)
creates a refundable EITC equal to 15 to 60 percent of the
federal EITC. AB 43 is set to be heard in the Assembly Revenue
and Taxation Committee.
7. FTB's Implementation Concerns. FTB notes the following
implementation concerns in its analysis of this bill:
Many taxpayers eligible for the federal EITC have no
California income tax return filing requirement. These
non-filers would be required to file a California income
tax return to claim the proposed state EITC, which could
impact the department's programs and costs.
Typically, refund returns are filed early in the filing
season. If taxpayers claiming the California EITC file
late in the filing season, after they receive their federal
EITC, that behavior could have a major impact on the
processing of returns and possibly cause delays in the
issuance of refunds. The taxpayer error rate on the
federal EITC and the fraud concerns cause the IRS to adjust
many returns. Consequently, the correct federal EITC
amount may be unknown until after the taxpayer has filed
the state return, claimed the proposed California credit,
and received a refund. FTB could be required to issue an
assessment to retrieve incorrect refunds and incur costs to
do so.
Relying on the EITC under federal law may present
implementation problems for Registered Domestic Partners
(RDPs). RDPs are required to file California income tax
returns using the rules applicable to married individuals.
If the author's intent is to allow EITCs for RDPs, a rule
should be included in the bill to address the difference
SB 38 (Liu) 3/23/15 Page 7
of ?
between federal and state law.
Historically, the department has had significant
problems with refundable credits and fraud. These problems
are aggravated because if a refund is made that is later
determined to be fraudulent, the refund commonly cannot be
recovered. Striking the refund provision from this credit
would substantially reduce the department's concerns
regarding fraud.
8. Let's get technical. FTB has proposed the following
clarifying amendment:
On page 6, line 19, after 17052.1, add "for taxable
years beginning"
On page 6, line 19, after "on or after" strike out
"taxable years" and add "January 1, 2017"
Support and
Opposition (4/23/15)
Support : Alameda County Board of Supervisors; American Academy
of Pediatrics, California; American Association of University
Women (AAUW); California Association of Food Banks; California
Catholic Conference of Bishops; California Food Policy Advocates
(CFPA); California Hunger Action Coalition (CHAC); California
Partnership; California Reinvestment Coalition; Children's
Defense Fund - California (CDF-CA); Coalition of California
Welfare Rights Organization; Community Action Partnership of
Kern (CAPK); Community Action Partnership of Riverside County
(CAP); Courage Campaign; Friends Committee on Legislation of
California; Lutheran Office of Public Policy - California;
National Association of Social Workers, California Chapter
(NASW-CA); Pacoima Beautiful; PolicyLink; Ventura County Board
of Supervisors; Western Center on Law and Poverty.
Opposition : California Taxpayers Association (CalTax)
SB 38 (Liu) 3/23/15 Page 8
of ?
-- END --