BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1189 HEARING: 4/24/2014
AUTHOR: Liu FISCAL: Yes
VERSION: 2/20/2014 TAX LEVY: Yes
CONSULTANT: Bouaziz
PERSONAL INCOME TAX: EARNED INCOME TAX CREDIT
Allows a nonrefundable Earned Income Tax Credit (EITC),
equal to 15% of the federal EITC.
Background and Existing Law
Federal law allows eligible individuals a refundable EITC,
which allows the taxpayer to obtain a refund for the excess
of the credit over the taxpayer's liability. As the name
implies, the credit is based on a percentage of the
taxpayer's earned income, and phases 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.
Taxpayers cannot claim the federal EITC if their 2013
investment income (from interests and dividends) is more
than $3,300. The amount of the federal EITC is reduced by
the alternative minimum tax (AMT), if any.
State law provides various tax credits designed to provide
tax relief for taxpayers who incur certain expenses or to
influence behavior, including business practices.
State 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 2013, these thresholds
are $15,702 in gross income or $12,562 in adjusted gross
income (AGI) for single taxpayers, and $31,406 in gross
income or $25,125 in AGI for married individuals filing
jointly. These thresholds are increased based on the
number of dependents claimed and are increased annually for
inflation. State law does not provide an EITC.
SB 1189 -- 02/20/14 -- Page 2
Proposed Law
Senate Bill 1189 allows a nonrefundable tax credit equal to
15% of the federal EITC. The amount of state EITC would be
reduced by state AMT, if any. SB 1189 takes effect
immediately as a tax levy and applies to taxable years
beginning on or after January 1, 2015.
State Revenue Impact
The Franchise Tax Board (FTB) estimates that this bill
would reduce General Fund revenues by $24 million in fiscal
year (FY) 2014-15, $120 million in FY 2015-16, and $130
million in FY 2016-17.
This estimate does not account for changes in employment,
personal income, or gross state product that could result
from this bill.
Comments
1. Purpose of the bill . According to the author, "SB 1189
would create a California Working Family Tax Credit equal
to 15% of the Federal Earned Income Tax Credit. This
credit will strengthen the economic standing of families
across California and make work pay for those in low wage
jobs. This tax credit will increase upward mobility and
help rebuild the middle class in California by giving low
income earners more purchasing power to spend, save, and
recover from economic hardship. The Working Family Tax
Credit will help struggling families while increasing the
take up rate of federal EITC, bringing more federal dollars
into our state. Research indicates that children of EITC
recipients do better in school, are more likely to attend
college, and earn more as adults. A significant investment
in California's working poor families is an important step
towards moving our state forward together."
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
SB 1189 -- 02/20/14 -- Page 3
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 2013 taxable year must be less
than:
$46,227 ($51,567 filing jointly) with three or more
qualifying children.
$43,038 ($48,378 filing jointly) with two
qualifying children.
$37,870 ($43,210 filing jointly) with one
qualifying child.
$14,340 ($19,680 filing jointly) without a
qualifying child.
The 2013 maximum credit for taxpayers is as follows:
$6,044 with three or more qualifying children.
$5,372 with two qualifying children.
$3,250 with one qualifying child.
$487 with no qualifying children.
In 2009, 800,000 eligible Californians failed to claim over
$1.2 billion worth of federal EITC dollars. According to
the New America Foundation study Left on the Table, 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, 25 states and the District of Columbia offer
state-level EITC for their residents.
3. FTB Implementation and Technical Concerns . FTB has
identified the following concerns:
a) "The taxpayer error rate and fraud concerns on the
federal [EITC] 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] would be required to
issue assessments to correct and collect tax due as
result of a change to the federal [EITC]."
SB 1189 -- 02/20/14 -- Page 4
b) "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."
c) "The definition of "federal earned income tax
credit amount" would mean the amount determined under
Section 32 of the IRC s that section reads as amended
by Public Law 112-240. It would be clearer to the
reader if "as that section reads as amended by Public
Law 112-240" was deleted and replaced with "as in
effect as of January 1, 2014.""
4. Nonrefundable Credit . The federal EITC is the second
largest cash assistance program targeted at low-income
families. According to the IRS, over 27 million eligible
individuals and families received nearly $62 billion in
2012. Many individuals and families claiming the federal
EITC have little or no tax liability so a refundable credit
provides cash assistance to struggling families.
As a nonrefundable credit, SB 1189 would provide limited
relief to individuals and families with no tax liability.
The author may wish to consider the following amendments:
Make the credit refundable.
Make the credit refundable upon appropriation of
the Legislature.
Include a provision to allow taxpayers to carryover
the unused portion of the credit in future tax years.
5. A Note on Fraud . Although the federal EITC lifts
families and individuals out of poverty, the refundable
credit is highly susceptible to fraud. The
Treasury Inspector General for Tax Administration estimates
that improper EITC claims total over $10 billion a year.
The payments paid out improperly for 2012 were at least
21-25% of all payments, according to the latest report from
the IRS inspector general.
6. Lack of Sunset . As drafted, this bill has no sunset
date. Sunset dates enable the Legislature to review the
SB 1189 -- 02/20/14 -- Page 5
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.
Committee staff recommends the following amendments:
Adding a sunset date of December 31, 2025.
Requiring FTB to report back to the Legislature on
credit utilization.
7. Legislative History .
i) AB 1974 (Dickinson), of the 2011-12 Legislative
Session, would have established a refundable EITC
equal to 15% of the federal EITC. AB 1196 was held
under submission by the Assembly Committee on
Appropriations.
ii) AB 1196 (Allen), of the 2011-12 Legislative
Session, would have established a refundable EITC
equal to 15% of the federal EITC. AB 1196 was held
under submission by the Assembly Committee on
Appropriations.
iii) 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.
iv) 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.
v) 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.
vi) 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.
SB 1189 -- 02/20/14 -- Page 6
vii) 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 the Assembly Committee on Revenue and
Taxation.
Support and Opposition (04/21/14)
Support : California Catholic Conference of Bishops;
California Family Resource Association; California for
Shared Prosperity; EARN California.
Opposition : None received.