BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SCR 12 HEARING: 4/27/11
AUTHOR: Liu FISCAL: No
VERSION: 4/25/11 TAX LEVY: No
CONSULTANT: Lui
EARNED INCOME TAX CREDIT
Raises awareness about the Earned Income Tax Credit among
Californians.
Background and Existing Law
In 1975, Congress enacted the Earned Income Tax Credit
(EITC) to help alleviate the burden of Social Security
taxes and to encourage work among low- and moderate-income
taxpayers. The EITC is a federal income tax credit that
gives low-income individuals a credit equal to a percent of
their earned income. The EITC is targeted to low- to
moderate- income households. The federal government
refunds the credit when the EITC exceeds the amount of
taxes owed for those who claim and qualify for the credit.
The EITC is one of the federal government's largest and
most successful anti-poverty programs, raising roughly 4
million people out of poverty each year. According to the
Tax Policy Center of the Urban Institute and Brookings
Institution, more than 80% of families with children
eligible for the EITC claim the credit--a much higher
take-up rate than for Temporary Assistance to Needy
Families (52% in 1999) or for food stamps (67% in 1999). In
2006, 23 million households received a total of $44.4
billion in reduced taxes and payment. According to a 2010
New America Foundation study, "Left on the Table," nearly
2.4 million California residents will claim $4.95 billion
in EITC refunds. In 2010, as part of the federal American
Recovery and Reinvestment Act (ARRA), we've temporarily
increased to $457 for a worker with no qualifying children;
$3,050 to a worker with one qualifying child; $5,036 to a
worker with 2 qualifying children; and, $5,666 to a worker
with 3 or more qualifying children.
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Legislators want more people to know about and use the
EITC. To attract filers, existing federal and state laws
require that employers notify eligible employees of the
EITC. The notification must be given in one of the
following ways:
On the W-2 tax form.
A substitute W-2 form with the same EITC
information.
Provide "Notice 797."
An employer's written statement as
"Notice 797."
California employers must also visibly post a statement
about the EITC in the workplace. In November 2010, the
Internal Revenue Service sent notices to over 46,000
California taxpayers who appeared to be eligible for the
EITC. These notices included instructions, worksheets, and
information on where to get help filling out the forms.
Proposed Bill
Senate Concurrent Resolution 12 encourages state and local
governments and community organizations to utilize federal
outreach tools to improve educational awareness of the EITC
among Californians.
State Revenue Impact
No estimate.
Comments
1. Purpose of the resolution . SCR 12 urges state, local
governments, and community organizations to collaboratively
promote and mobilize working individuals to avail of
federal resources. In 2010, over 800,000 of eligible
Californians failed to claim the EITC because they were
unaware of their eligibility or were unaware of the program
altogether. In an economic climate with slow wage growth,
the EITC provides low- to moderate-income households a
much-needed income boost. SCR 12 seeks to complement the
federal outreach with additional state mobilization, like
community events, public service announcements, and
collaborations with local banking institutions to increase
SCR 12 - 4/25/11 -- Page 3
claims among eligible Californians.
2. Simple solution to a complex problem . Though raising
awareness is a noble goal, the sheer complexity of the EITC
system impedes the neediest populations from accessing
federal funds. There are Volunteer Income Tax Assistance
(VITA) programs, located in community and neighborhood
centers, libraries, schools, or shopping malls, that offer
free tax assistance to low- to moderate-income populations;
but how many people know about and use VITA centers?
First, the bill fails to distinguish two key groups who
don't use the EITC: 1) people who file for federal tax
returns but don't claim the EITC; and 2) people who don't
file federal tax returns. When the IRS mailed 46,000 EITC
notices to Californians, those mailers only reached
individuals who filed for taxes, were deemed "eligible,"
and whose addresses were accurate on tax forms. How can
outreach efforts be targeted without knowing who the target
is? If people don't file for federal returns, there is no
information to know if they are eligible for the EITC. It
is difficult to pinpoint how many additional California
families were eligible to claim the credit but failed to do
so. Second, because of complicated EITC forms, families
may not receive any of the credit because of simple
paperwork mistakes, like mismatches on Social Security
numbers, duplicate claims, or math errors. Third, if an
outreach endeavor fails to address barriers like access to
a Volunteer Income Tax Assistance (VITA) center or an
individuals' time, language, or culture, how can the state
generate more filers? Without addressing these implicit
barriers of the EITC, promoting the utilization of existing
resources may not be enough to reach populations that need
the EITC the most.
3. Winners and losers . Despite the EITC's ability to
raise 4 million people nationwide out of poverty, its
benefits are not equitably spread. The EITC delivers the
credit in a phase-out structure, meaning that tax benefits
increase as work increases but phase-out as a household's
income rises above the poverty level. However, the EITC's
own phase-out structure creates perverse disincentives for
married couples, single persons without qualified dependent
children, or second-wage earners in a household. For
instance, if a single parent receiving the EITC marries,
the addition of the spouse's income may reduce or eliminate
the credit. Also, low-income workers who approach the
SCR 12 - 4/25/11 -- Page 4
phase-out range of EITC benefits may decide to refrain from
entering the full-time workforce. Second wage-earner in a
households are more sensitive to job decisions because they
must weigh the relative benefit of entering the workforce
full-time, which may come with the benefits of stability or
health benefits, versus part-time work to receive EITC
benefits under a lower income.
4. Wearing flowers in your hair . Currently, 23 states,
the District of Columbia, and three local governments-San
Francisco, New York, and Montgomery County, Maryland-have
their own EITC programs. California does not have its own
program. In 2005, San Francisco implemented the Working
Families Credit (WFC), a locally funded and administered
tax credit that supplements to the federal EITC. In 2006,
9,600 San Franciscans claimed the WFC, and the city paid an
average of $220 to each applicant. This year, the WFC is
only available to first time applicants and offers $125 to
qualified applicants who use direct deposit to a bank
account; if claimants ask for a paper check, they will only
receive $50. Eligible WFC claimants must have earned less
than $48,400 in 2010, claimed at least one qualifying
dependent child on their federal income tax return, and
live in San Francisco.
5. Impacts of unclaimed EITC . Researchers worry that not
enough low- or moderate-income people file for the EITC
because they are unaware of the program or unaware of their
eligibility. The "Left on the Table" study cites that
nearly 800,000 working Californians do not claim $1.2
billion in EITC refunds. This translates to: Los Angeles
County missing out on $370 million, San Bernardino County
missing $84.9 million, San Diego County missing $77.7
million, Riverside County missing $76.6 million, Orange
County missing $63.4 million, Fresno County $45.6 million,
Sacramento County $41.3 million, Kern County $37.9 million,
Tulare $31.2 million, and Alameda County $29.1 million.
According to the IRS, California's EITC non-filer
rate-eligible claimants who don't file-is 24.9%, compared
to the national average of 17.8%. Moreover, a number of
researchers have found that counties with higher number of
non-claimants are those with: 1) higher concentrations of
Hispanics; 2) significant numbers of low-income
individuals; 3) high participation in the food stamp
SCR 12 - 4/25/11 -- Page 5
assistance programs; 4) significant numbers of families
with no qualifying children.
6. Economic stimulation . Both "Left on the Table" (Avalos
and Alley, New American Foundation, 2010) and Neumark's
study (2010) find that the EITC could stimulate the economy
in the long-term. The New American Foundation study argue
that the EITC generates additional tax revenue for cities,
counties, and the state because of a multiplier effect,
where low- to moderate-income recipients spend nearly 80%
of their new money-funds that have not previously cycled
through the state. In turn, that new money is injected
into local communities and ripples out to create new jobs
and new revenue. The multiplier effect would generate
"more than $355 million tax revenue, and 65% of the amount
comes from indirect business taxes, like sales taxes
(Avalos and Alley, New American Foundation, 2010)."
According to the Neumark study, when programs that
subsidize workers to join the labor market, like the EITC,
are coupled with hiring credits, there may be long-term
positive benefits for California's labor market. Hiring
credits increase labor demand, while worker subsidies, like
the EITC, increase the labor supply. Worker subsidies
encourage people to work because their labor earnings are
supplemented with additional income. As a stand-alone
policy, the EITC offers little immediate assistance when
unemployment reduces income because families collect EITC
when they file their tax returns, which means that the EITC
arrives too late to help recipients during recessions. LAO
concludes that the EITC does increase the number of people
working and hours worked in the EITC subsidy range.
7. Alphabet soup . The interaction of EITC with other
public benefits is complicated. Researchers worry that
low- to moderate-income populations don't claim the EITC
for fear of losing their existing benefits or reducing
their eligibility for other state and federal benefits
resources. However, EITC refunds are not considered income
when determining eligibility of, or determining how much
can be received from, Medi-Cal, Supplemental Security
Income (SSI), CalFresh food stamps, or low-income housing.
But, the EITC may be counted as a resource in Supplemental
Security Income (SSI) Medi-Cal, Food Stamps, Temporary
Assistance for Needy Families (TANF), Children's Health
SCR 12 - 4/25/11 -- Page 6
Insurance Program (CHIP), Veterans' benefits, federally
assisted housing. Moreover, if the credit is not spent
within a certain period of time, it may count as an asset,
or resource, and affect eligibility. In December 2010,
Congress passed the Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act of 2010 (H.R. 4853,
Title 7, Section 728), declaring that any refund cannot be
considered income nor a resource for a year after receiving
the benefit assistance, nor can the refund be used to
affect eligibility of an individual for federal, state, or
local programs that are financed with the federal funds.
8. Similar bill . On May 2, the Assembly Revenue and
Taxation Committee will hear AB 509 (Skinner, 2011). AB
509 would require state departments and agencies, which
serve low-income individuals or families, to notify service
recipients that they may be eligible for the EITC. The
Committee may wish to consider if SCR 12, which calls for
utilizing existing resources, is the appropriate measure to
get more people to claim the EITC.
9. Prior legislation . SCR 12 is not the first legislation
seeking to mobilize EITC outreach efforts. AB 650 (Lieu and
Jones, 2007) requires any employer that is required to
provide unemployment insurance to employees to notify them
of their possible eligibility for the EITC. AB 2813
(Nunez, 2004) and AB 1370 (Wesson, 1999) would have
required employers to notify eligible employees about the
EITC program and its benefits. Governor Davis vetoed AB
1370 (Wesson, 1999) stating, "it is the responsibility of
the federal government to educate taxpayers on its
availability." Governor Schwarzenegger vetoed AB 2813
(Nunez, 2004) because "it is duplicative of federal
efforts."
Support and Opposition (4/21/11)
Support : California Tax Reform Association.
Opposition : Unknown.
SCR 12 - 4/25/11 -- Page 7