BILL ANALYSIS Ó
SB 1073
Page 1
Date of Hearing: August 23, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
SB
1073 (Monning) - As Amended August 19, 2016
2/3rd vote
SENATE VOTE: Not relevant
SUBJECT: Personal income taxes: earned income credit: credit
percentage: phaseout percentage
SUMMARY: Clarifies that, for eligible individuals with 3 or
more qualifying children, the state's Earned Income Tax Credit
(EITC) credit percentage shall be 45%. Specifically, this bill:
1)Amends California's EITC law by "updating" California's
SB 1073
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standalone credit table. Specifically, this bill explicitly
provides that, for eligible individuals with 3 or more
qualifying children, the credit percentage shall be 45%.
2)Deletes cross-references to now obsolete provisions of the
Internal Revenue Code (IRC) providing a "temporary" enhanced
credit percentage of 45%.
3)Provides that these changes shall apply to taxable years
beginning on or after January 1, 2016.
EXISTING FEDERAL LAW:
1)Allows a refundable EITC for certain low-income individuals
who have earned income from specified sources and who meet
certain other requirements.
2)Provides that in the case of an eligible individual with 3 or
more qualifying children, the credit percentage is 45%.
EXISTING STATE LAW:
1)Allows various tax credits under the Personal Income Tax Law.
These credits are generally designed to encourage socially
beneficial behavior or to provide relief to taxpayers who
incur specified expenses.
2)Allows, in modified conformity with federal law, an EITC for
taxable years beginning on or after January 1, 2015. The
credit is allowed to eligible individuals in an amount
determined in accordance with federal law multiplied by the
EITC adjustment factor, as specified. Specifically, the
credit amount is calculated as a percentage of the eligible
individual's earned income and is phased out above a specified
amount as income increases. The credit percentage and the
phase out percentage is based on the number of qualifying
children of the eligible individual.
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3)Provides that, in lieu of the table prescribed in IRC Section
32(b)(1), relating to percentages, the "permanent" credit
percentage for eligible individuals with 2 or more qualifying
children is 40%. However, the state credit also conforms to
former IRC Section 32(b)(3)(A), since deleted, which provided
a temporarily enhanced credit percentage of 45% for 3 or more
qualifying children.
FISCAL EFFECT: Unknown
COMMENTS:
1)The author has provided the following information in support
of this bill:
SB 1073 will allow the current California statute regarding
the Earned Income Tax Credit to conform to federal law,
providing a 45% tax credit for individuals and families
with three or more qualifying children [. . . .]
Prior federal law provided the enhanced 45% tax credit rate
for three or more qualifying children in a separate
paragraph of the Internal Revenue Code (IRC) that was
specifically meant for temporary "extensions" of that
enhanced rate.
Beginning with the 2016 tax year, the enhanced federal 45%
tax credit rate was unexpectedly made permanent, and added
to permanent tax credit rates by repealing provisions that
contained the "temporary extensions" of the enhanced 45%
tax credit rate.
For California purposes, the 45% tax credit rate applies
for the 2015 taxable year, but expires for taxable years
beginning on or after January 1, 2016. Because of the
unexpected way that Congress restructured the code section,
California statute does not conform to the revised federal
section.
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SB 1073 will make the necessary conforming changes in state
statute to reflect the revisions made in federal law
allowing qualified Californians to benefit from the
increased Earned Income Tax Credit funds available to them.
2)Committee Staff Comments
a) The California EITC : For taxable years beginning on or
after January 1, 2015, California law allows an EITC in an
amount determined under IRC Section 32, except as modified.
Specifically, the credit amount is calculated as a
percentage of the eligible individual's earned income and
is phased out above a specified amount as income increases.
The credit percentage is based on the number of qualifying
children of the eligible individual.
b) Determining the credit percentage : State law provides
that, in lieu of the federal table set forth in IRC Section
32(b)(1), which sets forth the various federal credit
percentages, the state credit percentages shall be
determined under a standalone state table. This state
table, in turn, provides a state credit percentage of 40%
for eligible individuals with 2 or more qualifying
children.
When the state EITC law was enacted in 2015, however, the
state law also conformed to a then-existing provision of
the IRC (i.e., Section 32(b)(3)(A)) that provided a
temporarily enhanced credit percentage of 45% for eligible
individuals with 3 or more qualifying children. In late
2015, however, Congress made the once temporary 45% credit
percentage permanent by deleting IRC Section 32(b)(3) and
adding the 45% percentage to the federal table for eligible
individuals with 3 or more qualifying children.
This federal law change, in turn, has given rise to
questions regarding what credit percentage applies under
California's EITC for individuals with 3 or more qualifying
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children. The Franchise Tax Board appears to have taken
the position that, because IRC Section 32(b)(3) no longer
exists, the credit percentages are governed by the state's
standalone table, which provides a 40% credit.
c) What does this bill do ? To avoid any confusion, and to
promote continued conformity with federal law, this bill
amends California's EITC law by "updating" California's
standalone credit table. Specifically, this bill
explicitly provides that, for eligible individuals with 3
or more qualifying children, the credit percentage shall be
45%. This bill also deletes the references to the now
obsolete provisions of the IRC providing a "temporary"
enhanced credit percentage. Finally, this bill provides
that its changes shall apply to taxable years beginning on
or after January 1, 2016.
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098