BILL ANALYSIS �
AB 1196
Page A
Date of Hearing: May 2, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1196 (Allen) - As Amended: March 31, 2011
2/3 vote. Fiscal committee.
SUBJECT : Personal Income Tax Law: credit: earned income
SUMMARY : Allows a refundable tax credit equal to 15% of the
federal Earned Income Tax Credit (EITC). Specifically, this
bill :
1)Provides that the credit amount shall be computed by
multiplying the "federal credit amount" by 15% and subtracting
therefrom the amount of tax imposed by Revenue and Taxation
Code (R&TC) Section 17062, relating to the alternative minimum
tax, if any, for the same taxable year.
2)Defines "federal credit amount" as the amount determined under
Internal Revenue Code Section 32, as in effect on January 1,
2011.
3)Provides that this credit shall not be allowed to any person
who is:
a) Treated as a nonresident for any portion of the taxable
year; or,
b) Married, within the meaning of R&TC Section 17021.5, and
files a separate return for the taxable year.
4)Specifies that if the credit amount exceeds the taxpayer's tax
liability, the excess shall be credited against other amounts
due, if any, and the balance shall be refunded to the
taxpayer. Provides for the continuous appropriation from the
General Fund (GF) of those amounts necessary to make the
refunds.
5)Provides that, notwithstanding any other state law, and to the
extent permitted by federal law, amounts refunded shall be
treated the same as the federal credit for purposes of
determining eligibility to receive benefits under Welfare and
Institutions Code Section 10000 et seq.
AB 1196
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6)Applies to taxable years beginning on or after January 1,
2012.
EXISTING FEDERAL LAW allows eligible individuals a refundable
EITC. As the name implies, the credit is based on a percentage
of the taxpayer's earned income, and is phased 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.
EXISTING STATE LAW :
1)Allows various tax credits designed to provide tax relief for
taxpayers who incur certain expenses or to influence behavior,
including business practices.
2)Provides that individuals with income below a certain
threshold are not required to file a return because the
standard deduction and personal exemption credit eliminate any
tax liability. For 2010, these thresholds are $14,754 in
gross income or $11,803 in adjusted gross income (AGI) for
single taxpayers and $29,508 in gross income or $23,607 in AGI
for married individuals filing jointly. These thresholds are
increased based on the number of dependents claimed and are
increased annually for inflation.
3)Does not provide an EITC.
FISCAL EFFECT : The Franchise Tax Board (FTB) estimates that
this bill would reduce GF revenues by $420 million in fiscal
year (FY) 2011-12, $750 million in FY 2012-13, and $750 million
in FY 2013-14.
COMMENTS :
1)The author states, "�W]ith rising child care costs and
decreased state funding for CalWORKS-type programs, this tax
credit helps bring full time, low wage workers at or above the
poverty line. Twenty-Five states have an EITC match, and
multiple versions have been proposed for California."
AB 1196
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2)Opponents state, "Budget experts often lament about the
state's revenue volatility during times of fiscal morass. A
refundable earned-income tax credit, even one that piggybacks
on a comparable federal credit, further adds to the volatility
problem by narrowing the base of the personal income tax."
3)The FTB notes the following implementation concerns in its
staff analysis of this bill:
a) "Many taxpayers eligible for the federal �EITC] have no
California income tax return filing requirement. These
nonfilers 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."
b) "Typically, refund returns are filed early in the filing
season. If taxpayers claiming the California �EITC] file
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. The �FTB] could be required
to issue an assessment to retrieve incorrect refunds and
incur costs to do so."
c) "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."
d) "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 refundability provision from this
credit would substantially reduce the department's concerns
regarding fraud."
AB 1196
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4)Committee Staff Comments:
a) The arguments on both sides : Advocates of the federal
EITC argue that the credit incentivizes individuals,
including single parents, to join the workforce which, in
turn, reduces the need for public assistance. Advocates
also contend that the EITC helps to minimize income
disparities between the rich and poor. Critics, however,
point to evidence of fraudulent EITC claims at the federal
level and argue that it violates principles of sound tax
policy to provide a credit to individuals with no
underlying tax liability.<1>
b) Is the EITC an effective tool for spurring job
creation? : California experienced significant employment
declines during the recent economic downturn, and the
state's unemployment rate is consistently higher than the
national average. As a result, numerous proposals have
been advanced in an effort to promote job creation. In a
report for the Public Policy Institute of California, David
Neumark examined two of these "direct" job creation
proposals: (i) subsidizing employers who hire workers
(i.e., hiring credits); and, ii) subsidizing individuals
who enter the labor market (i.e., worker subsidies). While
hiring credits theoretically increase the demand for labor,
worker subsidies like the one proposed by this bill are
designed to increase the labor supply. Dr. Neumark found
that, under normal circumstances, either policy should lead
to increased employment. However, in periods of economic
recession, Dr. Neumark notes that employer subsidies are
preferable in the short term, especially when the subsidies
are specifically tied to the hiring of unemployed
individuals.<2> Dr. Neumark notes that a state EITC would
prove more beneficial in the long term, when the labor
market has recovered more fully.
c) Potential legal challenge : This bill explicitly
--------------------------
<1> Advocates counter that, while low income Californians often
have no income tax liability, they do pay payroll, sales and
excise taxes.
<2> With a state unemployment rate north of 12%, there is little
reason to believe that incentivizing more people to enter the
applicant pool would lead to increased employment in the short
term. Of course, a state EITC would still achieve the goal of
bringing certain low-wage workers with existing jobs out of
poverty.
AB 1196
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provides that the state EITC shall not be allowed to any
individual who is treated as a nonresident for any portion
of the taxable year. In Lunding v. New York Tax Appeals
Tribunal (1998), 522 U.S. 287, the United States Supreme
Court reviewed a New York law that effectively denied only
nonresident taxpayers an income tax deduction for alimony
paid. The Court concluded that the state had not
adequately justified the discriminatory treatment of
nonresidents and, as a result, held that the law violated
the Privileges and Immunities Clause. Consequently, the
FTB notes that a state EITC conditioned on full-year
residency in California may be subject to constitutional
challenge.
d) Related legislation :
i) AB 21 (Jones), of the 2007-08 Legislative Session,
would have allowed a specified credit based on earned
income. AB 21 was held by the Assembly Committee on
Appropriations.
ii) SB 224 (Cedillo), of the 2003-04 Legislative
Session, would have provided a refundable EITC equal to
15% of the federal EITC. SB 224 died in the Senate
Committee on Revenue and Taxation.
iii) AB 106 (Cedillo), of the 2001-02 Legislative
Session, would have provided a refundable EITC equal to
15% of the federal EITC. AB 106 was held by the Assembly
Committee on Appropriations.
iv) AB 1854 (Cedillo), of the 1999-2000 Legislative
Session, would have provided a refundable EITC equal to
15% of the federal EITC. AB 1854 was held by the
Assembly Committee on Appropriations.
v) AB 2466 (Wiggins), of the 1999-2000 Legislative
Session, would have provided a nonrefundable EITC in an
amount equal to an unspecified percentage of the federal
EITC. AB 2466 died in this Committee.
e) A note on sunsets : As drafted, this bill has no sunset
date. Sunset dates enable the Legislature to review the
efficacy of tax expenditure programs in the future. In
addition, this bill lacks any provisions requiring the FTB
to report back to the Legislature regarding credit
AB 1196
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utilization.
f) Amendment proposed by the author : The author has
recently expressed a desire to take amendments to offset
this bill's projected revenue losses by imposing a
surcharge on individuals with taxable income of $1 million
or more.
g) Technical amendments :
i) On page 2, line 18, strike "treated as"; and,
ii) On page 2, line 29, strike "subdivisions" and insert
"subdivision".
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Taxpayers Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098