BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 1073 |Hearing |8/29/16 |
| | |Date: | |
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|Author: |Monning |Tax Levy: |No |
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|Version: |8/19/16 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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Personal income taxes: earned income credit: credit
percentage: phaseout percentage
Clarifies that, for eligible individuals with three or more
qualifying children, the state's Earned Income Tax Credit (EITC)
credit percentage shall be 45%.
Background
California law does not automatically conform to changes to
federal tax law, except for specific retirement provisions.
Instead, the Legislature must affirmatively conform to federal
changes. Conformity legislation is introduced either as
individual tax bills to conform to specific federal changes,
like the Mortgage Debt Forgiveness Relief Act (AB 1393, Perea,
2014), or as one omnibus bill that provides that state law
conforms to federal law as of a specified date, currently
January 1, 2015 (AB 154, Ting, 2015).
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.
Federal law specifies that in the case of an eligible individual
with three or more qualifying children, the credit percentage is
SB 1073 (Monning) 8/19/16 Page 2
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45%.
On June 23, 2015, Governor Brown signed SB 80 (Committee on
Budget and Fiscal Review), which established a state EITC. The
state EITC is a refundable credit, available to individuals
earning less than $6,580, and households with children earning
less than $13,870. The state EITC was made available to
taxpayers beginning January 1, 2015. State law states that the
credit percentage for eligible individuals with two or more
qualifying children is 40%. However, the state credit also
conforms to former Internal Revenue Code (IRC) Section
32(b)(3)(A), which provided an enhanced credit percentage of 45%
for 3 or more qualifying children. On December 18, 2015,
President Obama signed the Protecting Americans From Tax Hikes
Act of 2015, which deleted IRC Section 32(b)(3)(A) and added the
45% credit percentage to the federal table for eligible
individuals with 3 or more qualifying children. As a result of
the change to federal law, the state EITC contains an incorrect
cross reference to federal law and may not provide an enhanced
45% credit percentage to eligible individuals with three or more
qualifying children.
This bill seeks to clarify that a taxpayer with three or more
qualifying children shall receive a 45% credit percentage as
provided in federal law.
Proposed Law
Senate Bill 1073 provides that for eligible individuals with
three or more qualifying children, the state's Earned Income Tax
Credit percentage shall be 45%.
SB 1073 also deletes an obsolete cross reference and applies to
taxable years beginning on or after January 1, 2016,
State Revenue Impact
Pending.
SB 1073 (Monning) 8/19/16 Page 3
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Comments
1. Purpose of the bill. According to the author, "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. 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. Issue at hand. 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 state EITC sets the following credit
percentages to determine the credit amount:
For an individual with no qualifying children 7.65%.
For an individual with one qualifying child 34%.
For an individual with two or more qualifying children
40%.
Additionally, the state EITC conforms to former IRC Section
32(b)(3)(A), which provided an enhanced credit percentage of 45%
for individuals with three or more qualifying children,
originally set to sunset at the end of the 2017 taxable year.
However, in late 2015, Congress made the once temporary 45%
credit percentage enhancement permanent by deleting IRC Section
32(b)(3) and adding the 45% credit percentage to the federal
table for eligible individuals with 3 or more qualifying
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children. The Franchise Tax Board stated 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 for eligible individuals with three or more children.
Thus parents with three or more children would be eligible for a
smaller credit for the 2016 taxable than in the 2015 taxable
year. To ensure these taxpayers receive the enhanced credit
amount, this bill explicitly provides that the credit percentage
is 45%.
Assembly Actions
Assembly Revenue and Taxation9-0
Assembly Floor 78-0
Support and
Opposition (8/24/16)
Support : None received.
Opposition : None received.
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