BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 874 (Gaines) - Personal Income Tax Law: exemption credit:
dependents
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|Version: May 4, 2016 |Policy Vote: GOV. & F. 6 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: May 16, 2016 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 874 would increase the dependent exemption credit by
10 percent, from $337 to $371.
Fiscal
Impact: The Franchise Tax Board (FTB) estimates that the bill
would result in a General Fund revenue loss of $140 million in
2016-17, $150 million in 2017-18, and $150 million in 2018-19.
FTB's implementation costs have yet to be determined, but are
likely minor.
Background: Federal law provides an exemption for each claimed dependent on
an income tax return. Each exemption is worth an identical
amount, $4,000 in taxable year 2015. Taxpayers multiply the
total number of exemptions by the current-year exemption amount.
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This product is then subtracted from adjusted gross income
(AGI), consequently reducing a taxpayer's taxable income. The
dependent exemption is phased out for high income taxpayers, and
is indexed annually for inflation. 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 for a dependent exemption credit. Unlike
federal law, the exemption amount is not deducted from AGI, but
is instead a credit against tax due (a dollar-for-dollar
reduction in tax liability). 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
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 state
dependent exemption credit amount for taxable year 2015 is $337.
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Proposed Law:
This bill would, beginning in taxable year 2016, increase the
dependent exemption credit from $337 to $371, indexed annually
for inflation.
Related
Legislation: SB 31 (Gaines, 2015) would have increased the
dependent exemption credit to $652 per dependent. The bill was
never set for a hearing in the Senate Governance and Finance
Committee.
Staff
Comments: The average cost of raising a child born in 2013 for a
middle-income family in the U.S. was 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.
FTB's estimated revenue impact of increasing the dependent
exemption credit was computed using a two-step analysis. First,
the $337 dependent exemption credit from taxable year 2015 was
grown using the California Consumer Price Index (CPI) for 2016,
resulting in an estimated dependent exemption credit of $343.
This amount and the indexed amounts for each year thereafter
were run through FTB's simulation model to calculate the tax
impact of the credit under current law. Next, the proposed $371
credit amount and the indexed amounts for the credit were run
through the PIT simulation model to calculate the tax impact of
the proposed credit. The current law amounts were subtracted
from the proposed law amounts resulting in the taxable year 2016
estimated tax impact of $140 million.
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