BILL ANALYSIS �
SCR 12
Page A
Date of Hearing: June 13, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
SCR 12 (Liu) - As Amended: April 25, 2011
Majority vote.
SENATE VOTE : 24-15
SUBJECT : Federal earned income tax credit: education and
awareness.
SUMMARY : Urges state and local governments and community
organizations to promote education and awareness of the federal
Earned Income Tax Credit (EITC) and other credits, as provided.
Specifically, this bill :
1)States all of the following:
a) Since its enactment, the EITC has brought the income of
millions of families above the poverty level and has had a
high participation rate relative to other programs for
low-income Americans;
b) The EITC has been expanded by a series of Democratic and
Republican Presidents of the United States;
c) The EITC is available to taxpayers who work, but do not
earn high incomes and may often struggle to make ends meet;
d) Working California individuals may be missing out on a
federal refund of up to $5,666 because they are not aware
of the EITC;
e) According to the Internal Revenue Service (IRS), up to
25% of eligible taxpayers nationwide may fail to claim the
EITC because they are not aware of the credit or of free
assistance to claim the credit;
f) The IRS and other organizations collaborate with local
agencies to offer Volunteer Income Tax Assistance (VITA) to
raise awareness of the EITC;
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g) Employers can help increase the take-home pay of their
employers by making employees aware of the EITC;
h) The federal EITC increases California's revenue and
stimulates the local and state economy; and
i) Every year an estimated $1 billion is lost to
hardworking families and the California economy because of
failure to claim the EITC.
2)Resolves that:
a) The Legislature urges state and local governments and
community organizations to promote education and awareness
of the federal EITC and other tax credits that help working
families persevere through difficult economic times; and
b) The Secretary of the Senate transmits copies of this
resolution to the author for appropriate distribution.
EXISTING FEDERAL LAW allows a refundable EITC to qualifying
individuals. 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 that the taxpayer claims. Currently, to
qualify for the credit, an individual's adjusted gross income
must be less than $43,352 ($48,362 filing jointly) with more
than two qualifying children, $40,363 ($45,373 filing jointly)
with two qualifying children, $35,535 ($40,545 filing jointly)
with one qualifying child, or $13,460 (18,470 filing jointly)
without a qualifying child. The current maximum credit for
taxpayers with more than two qualifying children is $5,666, and
for taxpayers with two qualifying children is $5,036. For
taxpayers with one qualifying child, the maximum credit amount
is $3,050, and for taxpayers with no qualifying children, the
maximum amount is currently $457.
EXISTING STATE LAW requires employers to notify employees that
they may be eligible for the EITC, and specifies that this
notice shall be provided within one week before or after an
employer provides his/her employees with their annual wage
summary (e.g. a Form W-2 or a Form 1099). Employers are
required to either hand the notice directly to each employee or
to mail the notice to each employee's last known address.
SCR 12
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FISCAL EFFECT : None.
COMMENTS :
1)The Author's Statement . The author states that, "This
resolution urges state and local governments and community
organizations to promote education and awareness of the Earned
Income Tax Credit (EITC) in order to help working families
persevere through difficult economic times. The EITC is a
refundable tax credit designed to relieve the financial burden
on low-income working families and stimulate the economy.
EITC refunds can range from a few hundred to several thousand
dollars. When spent, these monies fuel the local economy. It
is estimated that Californians fail to claim over one billion
dollars of EITC refunds every year. This resolution is one
step to increase utilization of the EITC. It is more
important than ever to seize opportunities to help the working
poor."
2)The EITC: Background . The EITC is a refundable federal
income tax credit, which was originally created in 1975, in
part, to offset the burden of Social Security taxes on low and
moderate-income working households and to provide an incentive
for those taxpayers to work. The value of the EITC was
expanded in 1990 and 1993. The amount of the credit is
determined by the taxpayer's earnings and family size. If the
amount of the credit exceeds the taxpayer's federal income tax
liability, it results in a tax refund for those who claim and
qualify for the EITC. As such, it provides assistance to
families even if they do not have any tax liability. In some
respect, the EITC functions like other federal programs that
provide a benefit to poor families; however, it is different
in that it requires a qualifying taxpayer to have earned
income in order to claim the credit. Since the EITC is
usually not used to determine eligibility for Medicaid,
Supplemental Security Income, food stamps, low-income housing
or most Temporary Assistance for Needy Families payments, it
can provide important monetary relief for families in need.
Advocates of the federal EITC argue that the EITC program is one
of the federal government's largest and most successful
anti-poverty programs. It incentivizes individuals, including
single parents, to join the workforce which, in turn, reduces
the need for public assistance. It also helps to minimize
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income disparities between the rich and poor. Research shows
that the EITC credit is an effective tool for supporting work
and alleviating poverty by supplementing the earnings of
minimum-wage workers. (A. Avalos and S. Alley, Left on the
Table, New America Foundation, March 2010, p. 5). The EITC
program is considered "to be cheaper and even more efficient
than other programs designed to alleviate poverty, without
producing many of the negative incentives that other
traditional welfare programs can produce, such as discouraging
employment. Ibid. 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>
3)Potential Impact on the State's Economy. It was estimated
that, in 2009, 2.4 million California residents would claim
$4.95 billion in EITC refunds. However, researchers agree
that a large amount of EITC refunds go unclaimed: anywhere
between 17.8% and 25%. And it appears that California has the
highest EITC non-filer rate of 24.9%, which is higher than the
national rate of 17.8%. (Participation in the Earned Income
Tax Credit Program for Tax Year 1996, IRS-Small Business
Self-Employed research, 2002, IRS). Thus, 800,000
Californians failed to claim over $1.2 billion worth of EITC
dollars in 2009. The largest amounts of unclaimed EITC
refunds were due to residents of the counties of Los Angeles
($370 million), San Bernardino ($84.9 million), San Diego
($77.7 million), Riverside ($76.7 million), Orange ($63.4
million), Fresno ($45.6 million), Sacramento ($41.3 million),
Kern ($37.9 million), and Tulare ($31.2 million). Residents
of the poorest counties in California, such as Fresno, Merced
and Tulare, show the largest number of EITC returns by
percentage of the total returns and also the largest average
of EITC payments. (Left of the Table, p. 6).
Various studies demonstrate that the EITC refund payments have a
significant impact on state and local economies. (See, e.g.,
Left on the Table by New American Foundation and How Can
California Spur Job Creation by D. Neumark of the PPIC, 2010).
If California taxpayers had claimed the $1.2 billion of EITC
refunds otherwise due to them in 2009, it would have generated
$1.4 billion in business sales, $311 million in wages, and
---------------------------
<1> Advocates counter that, while low income Californians often
have no income tax liability, they do pay payroll, sales and
excise taxes.
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nearly 8,200 jobs in California. The lost opportunity
resulted in a loss of $88 million dollars in federal taxes
that were supposed to come back to the state.
4)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: a) subsidizing employers who
hire workers (i.e., hiring credits); and, b) subsidizing
individuals who enter the labor market (i.e., worker
subsidies). While hiring credits theoretically increase the
demand for labor, worker subsidies, such as the EITC, are
designed to increase the labor supply. Worker subsidies
encourage people to work because their labor earnings are
supplemented with additional income. 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.
Dr. Neumark notes that a state EITC would prove more
beneficial in the long term, when the labor market has
recovered more fully.
5)Duplication of Effort? To qualify for the EITC, an individual
must be employed. Both the federal and state laws require
employers to notify all employees that they may be eligible
for the EITC. Under federal law, an employer must provide an
employee with Form W-2, a substitute of W-2, Notice 797 or a
written statement with the same wording as Notice 797. Under
California's law, an employer must also notify the employees
about the EITC within one week before or after the employer
provides the employees with their annual wage summary (e.g. a
Form W-2 or a Form 1099). Employers are required to either
hand the notice directly to each employee or to mail the
notice to each employee's last known address. Furthermore,
all California employers must post a statement about the EITC
in the workplace. Given the existing federal and state
notification requirements applicable to every employer in
California, would another notification simply be a duplication
of effort by the state department or local government?
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6)Cost and Effectiveness of Notification. SCR 12 urges state
and local governments and community organizations to promote
education and awareness of the EITC. It does not, however,
specify the ways of increasing such awareness; nor does it
appropriate the funds to cover the costs associated with
promoting the EITC awareness. The time and costs associated
with notifying qualifying individuals of their potential
eligibility for the EITC may become a daunting task for some
state agencies, local governments and/or community
organizations. On balance, it is unclear how effective this
resolution will be in reaching its intended goal of increasing
the number of California taxpayers claiming the EITC refunds.
The Committee may wish to consider whether SCR 12 is the
appropriate measure for educating qualifying taxpayers about
the EITC and whether it will result in the increase of the
desired participation in the EITC program.
7)Related Legislation .
AB 509 (Skinner), introduced in the current legislative session,
requires state departments and agencies that serve low-income
individuals or families to notify service recipients of their
potential eligibility for the EITC. AB 509 passed out of the
Assembly with a 52-24 vote, and is pending in Senate Rules.
AB 650 (Lieu), Chapter 606, Statutes of 2007, requires employers
to notify their employees of their potential eligibility for
the federal EITC one week before, one week after, or at the
same time that the employer provides a W-2 Form or similar
wage statement.
AB 2813 (Leno and Nunez), introduced in the 2003-04 legislative
session, would have required employers to notify their
employees of the federal EITC. Governor Schwarzenegger vetoed
AB 2813, stating in his veto message that the bill was
"unnecessary because it is duplicative of federal efforts to
notify employees that may be eligible for the federal earned
income credit."
AB 1370 (Wesson), introduced in the 1999-2000 legislative
session, would have required that employers notify their
employees of the federal EITC. It was nearly identical to AB
2813. Governor Davis vetoed AB 1370, stating in his veto
message that "it is primarily the responsibility of the
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federal government to educate taxpayer on its availability."
REGISTERED SUPPORT / OPPOSITION :
Support
California Tax Reform Association
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098