BILL ANALYSIS �
AB 1974
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Date of Hearing: August 8, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1974 (Dickinson) - As Amended: May 16, 2012
Policy Committee: Revenue and
Taxation Vote: 6-2
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill 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)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 shall be refunded to the
taxpayer.
2)Requires the Franchise Tax Board (FTB) to establish a wait
list for refunds and if the cost of eligible refunds exceeds
the amount available, FTB must notify taxpayers that they are
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 FTB.
FISCAL EFFECT
1)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. With an
appropriation, the revenue loss could rise to an estimated
$900 million annually.
2)FTB will also incur increased administrative costs in the
hundreds of thousands of dollars. FTB will have to develop a
new form or worksheet, establish and maintain a waitlist of
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taxpayers, notify taxpayers of an appropriation, notify
taxpayers if they have been placed on the waitlist and develop
regulations for the program.
3)Litigation costs could result from constitutional challenges
to the bill's provisions that exclude nonresidents.
COMMENTS
1)Author's Statement . The author states at the federal level,
the EITC has acted as the largest poverty reduction program in
the United States and has lifted more children out of poverty
than any other program. According to the author, EITC dollars
also have a significant impact on the lives and communities of
the nation's lowest paid working people and 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. The author argues
the EITC is an economic stimulus, improving the local and
state economy and 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)Background. 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. To qualify for the EITC, an
individual must be employed. The amount of the credit is
based on the taxpayer's income and is phased out as income
increases. The amount of the credit also varies based on the
number of qualifying children the taxpayer claims. Currently,
to qualify for the credit, an individual with two children
must have an adjusted gross income of less than $40,964
($46,044 filing jointly). The current maximum credit for
taxpayers with two children is $5,112.
3)FTB's concerns . The FTB notes implementation concerns
regarding an increase in administrative costs because of an
increase in tax filings to gain the credit, high fraud and
error rate in returns. The FTB also states that a state EITC
conditioned on full-year residency in California may be
subject to constitutional challenge because the credit will
not be granted to any individual who is treated as a
nonresident for any portion of the taxable year. Similar laws
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in other states have been overturned.
4)Support . The proponents of this bill state more than 5.6
million Californians had incomes below the federal poverty
line in 2009 and about 2 million California children lived in
families with incomes below the federal poverty line in 2009.
The proponents cite research findings suggesting 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.
5)Opposition . The California Taxpayers Association objects to
the provisions allowing the credit to be refundable. They
argue that refundable credits have been associated with
significant abuses, including taxpayers filing of invalid and
fraudulent returns. The opponents note many California
taxpayers eligible for the federal EITC have no California
income tax return filing requirement and requiring those
individuals to file a California return a state EITC could
have a major impact on tax return processing and possibly
cause delays in the issuance of refunds.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081