BILL ANALYSIS �
AB 1196
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Date of Hearing: May 18, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1196 (Allen) - As Amended: May 10, 2011
Policy Committee: Revenue and
Taxation Vote: 5-3
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill establishes a .7 % surcharge on the portion of a
taxpayer's taxable income that exceeds $1 million and, with the
proceeds from that tax, 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
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)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.
3)Requires FTB to establish a wait list for refunds if the
amounts refunded exceed the amount available in the EITC fund.
FISCAL EFFECT
Franchise Tax Board has not provided a revenue estimate for the
tax surcharge. However they have estimated that the EITC will
cost $420 million in 2011-12 and $750 million in subsequent
years which should be covered by the revenue surcharge. The
estimated additional administrative costs are approximately $10
million.
COMMENTS
AB 1196
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1)Purpose . The author argues that with rising child care costs
and decreased state funding for CalWORKS-type programs, this
tax credit helps bring full time, low wage workers close to or
above the poverty line. Twenty-Five states have an EITC
match, and multiple versions have been proposed for
California.
2)Federal EITC. 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. Under provisions of federal law (Title IV of the
Personal Responsibility and Work Opportunity Reconciliation
Act of 1996 (P.L. 104-193)), certain individuals not lawfully
admitted for permanent residence in the United States are
ineligible for federal, state, and local public benefits,
including the EIC.
3)Increases number of filers. California law 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.
4)Implementation issues . The FTB notes that many individuals
eligible for the federal EITC probably have little or no state
tax liability and do not have a California filing requirement.
Consequently, about 620,000 current nonfilers would be
required to file tax returns to claim the proposed EITC, which
would account for a significant portion of the FTB's
administrative cost estimate. Additionally, the FTB would have
to process about 2.5 million refunds for current filers who
would be eligible for the credit.
5)Refundable credit . Historically, FTB has had significant
problems with refundable credits and fraud. These problems
AB 1196
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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.
6)Opposition. Opponents, the California Taxpayers Association,
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."
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081