BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 152 |Hearing |4/29/15 |
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|Author: |Vidak |Tax Levy: |Yes |
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|Version: |4/14/15 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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PERSONAL INCOME TAX: EARNED INCOME CREDIT
Allows a refundable Earned Income Tax Credit (EITC), upon
appropriation of the Legislature, equal to 15% 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
relief for tax-payers who incur certain expenses or to influence
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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 152 allows a refundable tax credit, upon
appropriation of the Legislature, equal to 15% of the federal
EITC. 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.
SB 152 defines "federal earned income credit amount" to mean the
amount determined under Section 32 of the IRC as amended by
several public laws, except as provided.
This bill defines a "qualified taxpayer" to mean an individual
who:
is eligible for a credit, for federal income tax
purposes;
is legally working in the state; and
possesses a valid SSN, legal work authorization, or
taxpayer's identification number (TIN).
The credit allowed may be claimed only on a qualified taxpayer's
timely filed original return, and any amounts refunded would not
be included in income. FTB's determination with respect to the
date a return was received could not be reviewed in any
administrative or judicial proceeding. Any simple error would
be treated as a mathematical error appearing on the return.
This bill requires FTB, from the 2017 taxable year to taxable
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year 2022, to adjust the phase-out percentages and the maximum
investment income amount for inflation. The inflation
adjustment would be based on the percentage change in the
California Consumer Price Index (CCPI) for all items, on a
calendar year June-to June basis, as provided to the FTB by the
Department of Industrial Relations.
SB 152 requires the FTB to do all of the following:
Administer enforcement activities to address improper
payments;
Collaborate with the Employment Development Department
(EDD) to develop criteria for, and a process to verify,
taxpayer income information using wage and withholding
data;
Establish criteria for, and a process to identify,
high-risk returns that may be subject to increased
verification procedures and suspension of payments until
the information is verified; and
Submit a yearly report to the Legislature that includes
information on the eligibility for the credit, use of the
credit, and information regarding improper payments.
SB 152 takes effect immediately as a tax levy and applies to
taxable years beginning on or after January 1, 2016 and before
January 1, 2023.
State Revenue Impact
FTB estimates that this bill would reduce General Fund revenues
by $24 million in fiscal year 2015-16, $120 million in 2016-17,
and $120 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
$240 million in 2015-16, $1.2 billion in 2016-17, and $1.2
billion in 2017-18.
Comments
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1. Purpose of the bill. According to the author, "The federal
EITC is a refundable tax credit for low and middle class working
households that helps reduce poverty and reward work.
Researchers cite the federal EITC as among the most effective
tool for reducing poverty since it promotes work and provides
resources that lift families out of poverty. Nationwide 28
million American tax returns received the federal EITC in tax
year 2013. In fact over 3.1 million Californian tax returns
received the EITC. These 3.1 million returns resulted in $7.3
billion in refundable tax credits for California families with
the average tax credit being $2,373. The Legislative Analyst
Office (LAO) estimates that the federal EITC alone helps to keep
750,000 Californians out of poverty every year. Twenty five
states and the District of Columbia have already established
their own EITC to magnify the impact of the federal EITC, but
California has yet to do so. These state EITC's range from 40%
of the federal EITC in the District of Columbia to 3.5% in
Louisiana. Some states have credits which fluctuate between
34-37% of EITC in Minnesota and 0-34% in Wisconsin. Studies
based on other states EITCs have estimated that each additional
dollar received back by a tax filer generates a further
$1.50-2.00 in local economic activity. The impact of this
increased purchasing power in communities benefited by federal
and state EITC dollars can help to support local jobs and small
businesses. Senate Bill 152 creates a refundable California
Earned Income Tax Credit (CEITC) that would be equal to 15% of
the federal EITC. Eligible individuals must meet the federal
EITC requirements for the current tax year as well as have
either a Social Security Number, legal work authorization, or a
taxpayer identification number. This EITC would sunset in 2023.
Additionally, the legislation creates a framework for the
Franchise Tax Board (FTB) to use to ensure that eligible
families are receiving the California EITC."
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
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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.
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
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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 152'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 152 lays out the framework for a
California EITC, but leaves out many critical details needed to
implement the credit. 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. The Committee may wish to
consider amending the bill to clarify the mechanics of who is
eligible for a refund when an appropriation is made by the
Legislature.
6. Related legislation. SB 38 (Liu) creates a refundable EITC
equal to 15 or 100 percent of the federal EITC. SB 38 is set to
be heard on April 22, 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
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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
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 amendments:
On page 3, line 10 delete the incorrect cross-reference
On page 3, line 36, remove "taxpayer's" and replace it
with "taxpayer"
On page 3, line 40, insert "the" after "exceeds"
Support and
Opposition (4/16/15)
Support : Fresno Chamber of Commerce; Western Center on Law and
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Poverty.
Opposition : California Taxpayers Association (CalTax).
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