BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
------------------------------------------------------------------
|Bill No: |SB 874 |Hearing |4/27/16 |
| | |Date: | |
|----------+---------------------------------+-----------+---------|
|Author: |Gaines |Tax Levy: |Yes |
|----------+---------------------------------+-----------+---------|
|Version: |3/15/16 |Fiscal: |Yes |
------------------------------------------------------------------
-----------------------------------------------------------------
|Consultant|Bouaziz |
|: | |
-----------------------------------------------------------------
Personal Income Tax Law: exemption credit: dependents
Increases the dependent exemption credit 25 percent, from $337
to $422.
Background
Federal law provides a dependent exemption for each claimed
dependent. Each exemption is worth the same amount, and
taxpayers multiply the total number of exemptions by the
current-year exemption amount. The exemption is deducted from
adjusted gross income (AGI), and reduces a taxpayer's taxable
income. The dependent exemption is phased out for high income
taxpayers, and is indexed for inflation each year. Each
dependent's taxpayer identification number (TIN) must be
provided on the federal tax return or the dependent exemption
will be disallowed.
State law provides various exemption credits, including a
dependent exemption credit. Unlike federal law, the exemption
is not deducted from AGI but is a credit against tax. The
exemption credit amounts are indexed annually for inflation.
The exemption credits are not refundable and may not be carried
over to future years. Exemption credits begin to phase out at
federal AGI above for 2015 as follows:
$178,706 for filers that are single, married, or
SB 874 (Gaines) 3/15/16 Page 2
of ?
registered domestic partner filing separately.
$268,063 for filers that are the head of household.
$357,417 for filers that are married or registered
domestic partners filling jointly or a surviving spouse.
The dependent exemption credit amount is reduced by $6 for every
$2,500 ($1,250 for married taxpayers filing a separate return)
that the taxpayer's federal AGI exceeds the above threshold
amounts, not to exceed the full amount of the credit. Taxpayers
who file a joint return or who file as a surviving spouse must
reduce their credit by $12 for every $2,500.
For taxable years beginning on or after January 1, 2015, the
dependent's TIN must be provided on the California tax return or
the dependent exemption credit will be disallowed. The current
state dependent exemption credit amount is $337.
Proposed Law
Senate Bill 874 increases the dependent exemption credit from
$337 to $422, indexed annually for inflation. SB 874 applies to
taxable years beginning on or after January 1, 2016.
State Revenue Impact
According to the Franchise Tax Board (FTB), SB 874 results in
revenue losses of $390 million in fiscal year (FY) 2016-17, $410
million in FY 2017-18, and $420 million in FY 2018-19.
Comments
1. Purpose of the bill. According to the author, "California
has among the highest personal income tax rates in the nation.
To help alleviate the tax burden on families, the Personal
Income Tax Law in California allows for what was initially a
$227 credit per qualified dependent, adjusted for inflation. As
of 2015, the adjusted tax credit is $337 per California
dependent. These are credits against taxes owed, not
adjustments to gross income. This tax credit phases out at
SB 874 (Gaines) 3/15/16 Page 3
of ?
higher incomes until it disappears completely above certain
income thresholds."
2. Every bit counts. Dependent exemption credits are usually
justified on the grounds that taxpayers who raise children or
care for others incur extra expenses and, therefore, have less
disposable income from which to pay taxes. The average cost of
raising a child born in 2013 for a middle-income family in the
U.S. is approximately $245,340 (or $304,480, adjusted for
projected inflation), according to the latest annual "Cost of
Raising A Child" report from the U.S. Department of Agriculture.
The dependent exemption can help offset the high cost of caring
for children and other dependents.
3. Tax expenditures. Existing law provides various credits,
deductions, exclusions, and exemptions for particular taxpayer
groups. In the late 1960s, U.S. Treasury officials began
arguing that these features of the tax law should be referred to
as "expenditures," since they are generally enacted to
accomplish some governmental purpose and there is a determinable
cost associated with each (in the form of foregone revenues).
This bill would increase an existing tax expenditure, costing
the general fund $390 million dollars in foregone revenue in the
first year alone. The tradeoff for increasing the tax
expenditure, resulting in revenue losses, is higher taxes or
reductions to other services or programs.
4. How is tax expenditure different from a direct expenditure?
As the Department of Finance notes in its annual Tax Expenditure
Report, there are several key differences between tax
expenditures and direct expenditures. First, tax expenditures
are reviewed less frequently than direct expenditures once they
are put in place. This can offer taxpayers greater certainty,
but it can also result in tax expenditures remaining a part of
the tax code without demonstrating any public benefit. Second,
there is generally no control over the amount of revenue losses
associated with any given tax expenditure. Finally, once
enacted, it takes a two-thirds vote to rescind an existing tax
expenditure absent a sunset date. This effectively results in a
"one-way ratchet" whereby tax expenditures can be conferred by
majority vote, but cannot be rescinded, irrespective of their
efficacy, without a supermajority vote.
5. Technical amendments. FTB staff suggests the following
SB 874 (Gaines) 3/15/16 Page 4
of ?
technical amendments:
On page 2, line 20, after "(1)" insert: (A)
On page 2, line 25, and page 2, line 34, strikeout
"paragraph" insert: "subparagraph"
On page 2, line 29, strikeout "(2)" insert: (B)
On page 3, line 1, strikeout "(3)" insert: (2)
On page 3, line 15, strikeout "(4)" insert: (3)
Support and
Opposition (4/21/16)
Support : Howard Jarvis Taxpayers Association.
Opposition : California Tax Reform Association (unless amended)
-- END --