BILL ANALYSIS �
AB 1974
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Date of Hearing: April 9, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1974 (Dickinson) - As Amended: March 26, 2012
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Personal Income Tax: Earned income tax credit.
SUMMARY : Allows a tax credit, for taxable years beginning on or
after January 1, 2012, equal to 15% of the federal Earned Income
Tax Credit (EITC). Provides that, in those years in which an
appropriation is made by the Legislature, the credit would be
refundable. Specifically, this bill :
1)Authorizes a credit under the Personal Income Tax (PIT) Law
equal to 15% of the federal earned income tax amount, as
defined.
2)Defines "federal earned income credit amount" as the amount
determined under Internal Revenue Code (IRC) Section 32, as in
effect on January 1, 2012.
3)Provides that this credit shall not be allowed to any person
who is:
a) A nonresident for any portion of the taxable year; or,
b) Married and files a separate return for the taxable
year.
4)Defines the phrase "any person who is married" by reference to
Revenue and Taxation Code (R&TC) Section 17021.5.
5)Allows a carryover of the EITC to reduce a taxpayer's PIT
liability in future taxable years, until the credit is
exhausted.
6)Specifies that, if the amount allowable as a credit exceeds
the tax liability, the excess shall be credited against other
amounts due, if any, and the balance, if any, shall, upon
appropriation by the Legislature, be paid from the Tax Relief
and Refund Account, and shall be refunded to the taxpayer.
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7)Requires the Franchise Tax Board (FTB) to establish a wait
list for refunds, if the amounts eligible for refund exceed
the amount available in the Tax Relief and Refund Account, and
to notify a taxpayer if he/she has been placed on the wait
list. Provides that the wait list shall be established with
an order of priority based on the date the taxpayer's return
was received by the FTB.
8)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 for benefits under Welfare and
Institutions Code Section 10000 et seq.
9)Applies to taxable years beginning on or after January 1,
2012.
10)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW allows eligible individuals a refundable
EITC. A refundable credit allows for the excess of the credit
over the taxpayer's tax liability to be refunded to the
taxpayer. 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 2011, these thresholds are $15,152 in
gross income or $12,122 in adjusted gross income (AGI) for
single taxpayers and $30,305 in gross income or $24,244 in AGI
for married individuals filing jointly. These thresholds are
increased based on the number of dependents claimed and are
increased annually for inflation.
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3)Does not allow an EITC.
FISCAL EFFECT : The FTB estimates that this bill would reduce
General Fund revenues by $100 million in fiscal year (FY)
2012-13, $100 million in FY 2013-14, and $110 million in FY
2014-15.
COMMENTS :
1)Author's Statement . The author states that, "At the federal
level, the Earned Income Tax Credit (EITC) has acted as the
largest poverty reduction program in the United States. The
EITC lifts more children out of poverty than any other
program.
"EITC dollars also have a significant impact on the lives and
communities of the nation's lowest paid working people.
Economists have found that every increased dollar received by
low- and moderate-income families can have a multiplier effect
of 1.5 to 2 times the original amount received. This is due
to the money being spent in and around the communities where
these families live. The EITC is an economic stimulus,
improving the local and state economy.
"Given our current economic climate, a state EITC will provide
needed assistance to low-income working families and stimulate
both the local and state economy."
2)What is an EITC ? The EITC is a federal tax credit for
low-to-moderate income individuals and families. Congress
originally approved the tax credit legislation in 1975, in
part to offset the burden of social security taxes and to
provide an incentive to work. When EITC exceeds the amount of
taxes owed, it results in a tax refund to those who claim and
qualify for the credit. In order for a taxpayer to qualify
for the credit, an individual's AGI in the 2011 taxable year,
must be less than $43,998 ($49,078 filing jointly) with three
or more qualifying children, $40,964 ($46,044 filing jointly)
with two qualifying children, $36,052 ($41,132 filing jointly)
with one qualifying child, or $13,660 (18,740 filing jointly)
without a qualifying child. The current maximum credit for
taxpayers with more than two qualifying children is $5,751,
and for taxpayers with two qualifying children the maximum is
$5,112. For taxpayers with one qualifying child, the maximum
credit amount is $3,094, and for taxpayers with no qualifying
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children, the maximum amount is currently $464.
In 2009, 800,000 eligible Californians failed to claim over $1.2
billion worth of federal EITC dollars. Some argue that, if
these refunds were claimed, they would spur over $1.2 billion
in business sales, pay $311 million in wages, and add nearly
7,500 jobs to the California economy, which would result in
$88 million in taxes coming back to the state. According to
the Internal Revenue Service (IRS), currently, 23 states and
the District of Columbia offer state-level EITC for their
residents.
3)Arguments in Support . The proponents of this bill state that
"�m]ore than 5.6 million Californians (15.3 percent) had
incomes below the federal poverty line in 2009" and that about
"2 million California children?lived in families with incomes
below the federal poverty line in 2009." The proponents cite
research findings suggesting that "the EITC can play a
powerful role in helping families leave welfare for work" and
argue that, a state EITC "would help California's working poor
move toward self-sufficiency and would provide needed tax
relief to the low income families who experience the heaviest
burden from state and local taxes."
4)Arguments in Opposition . Opponents object to the
refundability of the proposed credit. They argue that
refundable credits "have been associated with significant
abuses, including taxpayers filing of invalid and fraudulent
returns." The opponents further state that, under existing
law, many California taxpayers eligible for the federal EITC
"have no California income tax return filing requirement" and,
consequently, requiring those nonfilers to file a California
return in order to receive a state EITC could "have a major
impact on tax return processing and possibly cause delays in
the issuance of refunds."
5)FTB's Implementation Concerns . The FTB notes the following
implementation concerns in its 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."
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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."
6)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
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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
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
--------------------------
<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 of 10.9%, 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.
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FTB notes that a state EITC conditioned on full-year
residency in California may be subject to constitutional
challenge.
d) In its current form, this bill would require an
appropriation of funds by the Legislature to pay credit
refunds. Thus, if the amount of credit refunds allowed in
any given year exceeds the amount appropriated, refunds to
some taxpayers could be delayed. The FTB notes that, if
funds are not available to cover all refunds, this would
lead to the accumulation of interest on refunds due. Many
taxpayers who are eligible for the federal EITC are not
required to file state income tax returns. Under this
bill, however, approximately 650,000 current non-filers
would be required to file a California income tax return to
claim the proposed state EITC, leading to increased costs
for FTB.
e) Who is Eligible For the New Credit ? Under federal law,
only eligible individuals may claim the EITC. An "eligible
individual" is defined as an individual who either i) has a
qualifying child for the taxable year, or ii) is between 25
and 65 years of age, is not claimed as a dependent by other
taxpayers and whose principal residence for more than six
months in the taxable year was located in the United
States. (IRC Section 32).
AB 1974 authorizes a personal income tax credit and provides
that an amount of this new credit will be determined by
reference to the federal EITC. However, this bill does not
limit the application of the credit only to "eligible
individuals," as defined in IRC Section 32. Instead, it
excludes nonresidents and married taxpayers filing
separately from claiming the credit. The author may wish
to consider incorporating a definition of "eligible
individual" into this bill, in order to avoid taxpayer
confusion and minimize FTB's administrative costs.
f) Related legislation :
i) AB 1196 (Allen), of the 2011-12 Legislative Session,
would have established a nonrefundable EITC equal to 15%
of the federal EITC. AB 1196 was held under submission
by the Assembly Committee on Appropriations.
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ii) AB 21 (Jones), introduced in 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.
iii) SB 224 (Cedillo), introduced in 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.
iv) AB 106 (Cedillo), introduced in 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.
v) AB 1854 (Cedillo), introduced in 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.
vi) AB 2466 (Wiggins), introduced in 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.
g) 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
utilization.
REGISTERED SUPPORT / OPPOSITION :
Support
California Catholic Conference
California Family Resource Association
California Federation of Teachers
Catholic Charities of California United
Opposition
California Taxpayers' Association
AB 1974
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Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098