BILL ANALYSIS Ó
SB 80
Page 1
(Without Reference to File)
SENATE THIRD READING
SB
80 (Committee on Budget and Fiscal Review)
As Amended June 16, 2015
Majority vote. Budget Bill Appropriation Takes Effect
Immediately
SENATE VOTE: Vote not relevant
SUMMARY: Creates the California Earned Income Tax Credit.
Specifically, this bill:
1)Creates a refundable California Earned Income Tax Credit
(EITC), commencing it for the 2015 tax year, and conforms the
program with Internal Revenue Code (IRC) Section 32 with
certain modifications.
2)Provides that the state EITC is multiplied by an adjustment
factor for the tax year, which is set at 85% in the 2015-16
Budget.
3)Establishes an adjustment annual adjustment factor of zero as
a default and specifies that the adjustment factor is
determined each year in the annual budget act.
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4)Specifies the state EITC shall only be implemented in taxable
years when resources are authorized in the annual budget act
to support the program.
5)Specifies credit percentages to be used by the state in lieu
of the phase in and phase out percentage in IRC Section
32(b)(1). Both values are the same due to the fact that the
state credit only applies to half of the federal phase-in
rate.
6)Specifies earned income amounts to be used by state in lieu of
the phase in and phase out income in IRC Section 32(b)(2)(A).
Both values are the same due to the fact that the state credit
only applies to half of the federal phase-in amount.
7)Specifies IRC Section 32(b)(2)(B) does not apply to the state
EITC. The joint return provisions that increase the phase-out
amounts are not applicable because the state EITC is only
applied to specified phase-in ranges of the federal EITC.
8)Specifies that IRC Section 32(b)(3) also applies through 2017
and allows a 45% credit when the taxpayer has three or more
qualifying children and specifies the phase out percentage is
also 45%. Both values are the same because the state credit
only applies to half of the federal phase-in rate.
9)Substitutes "this state" for "the United States" for purposes
of defining an eligible individual. The eligible individual
would be required to reside in California. The state program
also conforms to the following federal provisions:
a) An individual with a qualifying child for the tax year.
b) An individual with no qualifying children for the tax
year that:
i) Lived in the state more than half of the year.
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ii) Be between the ages of 25 and 65.
iii) Cannot be claimed as a dependent.
10)Specifies that certain components of federal earned income
provisions are modified for the state EITC.
11)Changes the definition of "earned income" to specify that
income is only those amounts subject to withholding by the
Employment Development Department as outlined in Unemployment
Insurance Code Division 6 (i.e. California wages).
12)Specifies self-employment income is excluded from the
definition of "earned income."
13)Substitutes "this state" for "the United States" for purposes
of defining a qualifying child and to specify the child must
reside in the state to be claimed as a dependent for the state
EITC.
14)Increases the amount of disqualified income from $2,200 in
IRC to $3,400 to qualify for the state EITC. Disqualified
income may be derived from interest and dividends, rents,
royalties, etc. This adjustment incorporates the current
value of disqualified income due to federal indexing of the
$2,200 since 1996. In the future, this number is further
adjusted. Any investment income above this level would make
an individual ineligible for the EITC. In lieu of using
federal inflation adjustments to annually change the earned
income amounts, adjustments should use the same methodology as
is used for recomputing income tax brackets.
15)Specifies that the amount of the refundable credit shall be
paid from the Tax Relief and Refund Account, which is
continuously appropriated.
16)Allows the Franchise Tax Board (FTB) to adopt rules,
guidelines, and procedures necessary to implement the state
EITC. Provides for an exemption from the Administrative
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Procedures Act.
17)Treats the refundable state EITC the same way as the federal
EITC when determining eligibility for specified benefits, such
as the California Work Opportunities and Responsibility to
Kids (CalWORKs) program.
18)Provides for a short-term exemption from various
administrative requirements to support implementation of the
state EITC in 2015.
19)Specifies that the FTB will incorporate the scope, costs, and
schedule changes associated with the implementation of the
state EITC in its next anticipated Special Project Report for
its Enterprise Data to Revenue Project.
20)States that the purpose of the state EITC is to reduce
poverty among California's poorest working families and
individuals, and that, to measure whether the credit achieves
its intended purpose, the FTB will annually prepare a written
report, and provide this report to specified committees of the
Legislature, on the following:
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. The income ranges shall encompass the
phase-in and phase-out ranges of the credit.
e) Using data from tax returns claiming the credit,
including an estimate of the federal tax credit, an
estimate of the number of families who are lifted out of
deep poverty by the credit and an estimate of the number of
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families who are lifted out of deep poverty by a
combination of the credit and the federal tax credit. A
family is in "deep poverty" if the income of the family is
less than 50% of the federal poverty threshold.
21)Specifies that no underpayment penalties can be imposed
resulting from the change that is occurring after the start of
the 2015 tax year or for future changes in the annual
adjustment factor.
22)Specifies that failure to be diligent in determining
eligibility for the state EITC can result in a penalty of $500
for false claims for a refund by a tax preparer.
23)States that in future years, it is the intent of the
Legislature to enact legislation that would expand the
California EITC allowed by these changes, as the state budget
conditions permit, to benefit a broader section of working
poor Californians.
24)States that this act provides for appropriations related to
the Budget Bill and has been identified as related to the
budget in the Budget Bill, and shall take effect immediately.
Background. The proposed state EITC is structured to complement
the federal EITC and will provide a refundable tax credit for
the lowest-income Californians, households with incomes less
than $6,580 if there are no dependents or $13,870 if there are
three or more dependents. The proposed state credit would match
85% of the federal credits up to half of the federal phase-in
range and then begin to taper off relative to these maximum wage
amounts. This targeted approach will allow a greater benefit
per household. The table below illustrates the interaction
between the state and federal EITC and the total benefits
estimated until the California EITC maximum is reached for two
taxpayer classifications. Note that individuals earning more
than the state credit maximums will continue to receive a
federal EITC through the phase-out range, $14,820 for an
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individual and $53,267 for a married couple (filing joint) with
three dependents.
------------------------------------------------------------
| | No Dependents | Three or More Dependents |
| | | |
------------------------------------------------------------
|----+------+------+------+------+------+------+------+-------|
| | Wage |Federa|State |Total | Wage |Federa|State | Total |
| |Income| l | EITC | EITC |Income| l | EITC | EITC |
| | | EITC | | | | EITC | | |
| | | | | | | | | |
|----+------+------+------+------+------+------+------+-------|
|Phas|1,000 |77 |65 |142 |2,000 |900 |765 |1,665 |
|e-in| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|----+------+------+------+------+------+------+------+-------|
| |2,000 |153 |130 |283 |4,000 |1,800 |1,530 |3,330 |
| | | | | | | | | |
|----+------+------+------+------+------+------+------+-------|
| |3,000 |230 |195 |425 |6,000 |2,700 |2,295 |4,995 |
| | | | | | | | | |
|----+------+------+------+------+------+------+------+-------|
|Phas|3,290 |252 |214 |466 |6,935 |3,121 |2,653 |5,773 |
|e-ou| | | | | | | | |
|t | | | | | | | | |
| | | | | | | | | |
|----+------+------+------+------+------+------+------+-------|
| |4,500 |344 |135 |480 |10,000|4,500 |1,480 |5,980 |
| | | | | | | | | |
| | | | | | | | | |
|----+------+------+------+------+------+------+------+-------|
| |6,580 |503 |- |503 |13,870|6,242 |- |6,242 |
| | | | | | | | | |
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Analysis Prepared by:
Nicole Vazquez / BUDGET / (916) 319-2099 FN: 0001033