BILL ANALYSIS
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|SENATE REVENUE & TAXATION COMMITTEE | SB1421 - Solis|
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|Senator Wesley Chesbro, | Amended: April 6, 2000|
|Chair | |
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|Hearing: April 12, 2000 | Tax Levy | Fiscal: Yes|
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SB 1421 - Solis
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SUBJECT: Personal Income Tax: Creates a refundable earned
income tax credit equal to 15 percent of the
federal credit
EXISTING FEDERAL LAW provides eligible individuals a
refundable Earned Income Credit, which is a percentage of
the taxpayer's earned income and is phased out as income
increases.
PRIOR STATE LAW provided a nonrefundable low-income tax
credit in an amount ranging from 20 percent to 100 percent
of the "computational tax" (regular tax less all
nonrefundable tax credits), based on the taxpayer's
adjusted gross income. The tax credit expired in 1992.
THIS BILL creates a tax credit equal to 15 percent of the
federal earned income tax credit (EITC) amount. The bill
provides that if the credit exceeds the tax liability, the
balance shall be refunded to the taxpayer if funds are
appropriated by the Legislature.
Specifically the bill:
1.Provides that no credit shall be allowed to any person
who is married and files a separate return for the
taxable year or to any person who does not have a
"qualifying child" for the taxable year.
2.Makes the credit applicable to taxable years beginning on
or after January 1, 2000, and before January 1, 2005.
3.Prohibits "advance" payments of the state EITC.
4.Provides that if the credit exceeds the tax liability,
the excess shall be credited against other amounts due,
if any, and the balance refunded to the taxpayer only if
funds are appropriated for that purpose by the
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Legislature.
5.Includes the EITC in the list of credits that can reduce
regular tax below tentative minimum tax for purposes of
the alternative minimum tax.
6.Requires the Franchise Tax Board to provide training and
information to employers in order that employees claiming
the credit are allowed to adjust their withholding
allowances to reflect the credit.
7.Repeals the EITC on December 1, 2005.
FISCAL EFFECT:
The Franchise Tax Board estimates General Fund revenue
losses of $595 million in 2000-01, $607 million in 2001-02
and $622 million in 2002-03.
FTB estimates administrative costs of $13.9 million in
the first year and ongoing annual costs of $11 million for
printing and processing an estimated 540,000 additional tax
returns for filers who would file to claim the refundable
EITC.
COMMENTS:
A. Purpose of the bill
The author indicates welfare roles have dropped by 35
percent since 1995 and more parents are working, yet
poverty among children persists. More than one-quarter of
California's children are poor, 46th among the states based
on data through 1998 (The Annie E. Casey Foundation, 1999
Kids Count). Nationally, the number of full-time
year-round workers with incomes below the poverty line rose
by 459,000 in 1998. A state EITC is a good investment in
California's families because it:
1. Encourages people to work.
2. Would benefit an estimated 3.8 million low-income
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working families with annual incomes less than
$30,000.
3. Would provide annual benefits up to $572 for
households with two or more children and a full-time
minimum wage worker.
4. Would be simple to administer.
5. Would partially address the inequities in the tax
structure between the top and bottom income brackets.
6. Can provide relief to low-income working families
who would not benefit from an increase in the tax
threshold.
B. Who would qualify for the state EITC under SB 1421?
Eligible Individual Earned Income Max. federal
Max. state
credit credit
1 qualifying child
$6,600-$26,928$2,312$347
2 or more qualifying
$9,500-$30,580$3,816$572
children
C. Individuals with no filing requirement would be
required to file a tax return to claim the credit
FTB estimates that many taxpayers eligible for the
federal earned income credit have little or no federal or
state tax liability and have no California filing
requirement. FTB estimates approximately 500,000 current
nonfilers would be required to file tax returns to claim
the proposed EITC.
D. President's Budget for 2001 expands the EITC
In his proposed budget for 2001, President Clinton
proposes to provide a larger EITC to families with three or
more qualifying children, increase the point at which
phase-out begins for specified families, reduce the
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phase-out rate for specified families, provide that
nontaxable earned income is not treated as earned income
for purposes of the EITC and modify the treatment of
taxpayers who lack identification numbers for qualifying
children.
E. Other states have Earned Income Tax Credit programs
The Center for Budget and Policy Priorities recently
reported that eleven states now offer state EITCs based on
the federal credit and that Montgomery County, Maryland
offers a local EITC. The CBPP summarized the state
programs as follows:
REFUNDABLE CREDITS
State Percentage of
Federal Credit
Colorado 8.5 percent
Kansas 10 percent
Maryland* 10 percent
Massachusetts 10 percent
Minnesota 15-46 percent,
based on earnings
New York 20 percent
Vermont 25 percent
Wisconsin Varies, based on #
of children
NON-REFUNDABLE CREDITS
State Percentage of
Federal Credit
Iowa 6.5 percent
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Oregon 5 percent
Maryland* 10 percent
Rhode Island 26.5 percent
*= Maryland offers a refundable credit set at 10
percent of the federal credit and a non-refundable
credit set at 50 percent of the federal credit.
Taxpayers may claim either, but not both, credits.
F. EITC would benefit CalWORKS and non-CalWORKS working
poor
Staff of the Senate Committee on Health and Human
Services provide the following comments:
1) Under current federal law, the federal earned
income tax credit (EITC) generally is not considered in
calculations to determine a family's eligibility for the
major income support programs serving low-income
households, or for calculating the monthly benefit amount
under those programs. These programs are means-tested and
include: Food Stamps, Medicaid (Medi-Cal in California);
and Supplemental Security Income/State Supplementary
Payment Program (SSI/SSP); and the Temporary Assistance for
Needy Families (CalWORKS in California). The exception to
this general rule is that after a certain period of time,
payments the household receives from EITC are counted as an
asset and, if the family's income is close to reaching the
means test level, receipt of the EITC could result in the
family's losing eligibility. For example, the time periods
are one year for Food Stamps, the third month for SSI/SSP
and two months for Medi-Cal.
2) A state EITC could be of significant benefit to
families who are under time limits under California's
CalWORKS program. Between 400,000 and 500,000 households
in California, who were receiving CalWORKS on 1/1/98, could
be facing the 5-year time limit in 2003; a number of these
families could experience a significant drop in income if
they lose CalWORKS benefits and cannot find sufficient work
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hours at a wage that support their families.
3) CalWORKs families would benefit from receipt of an
Earned income tax credit. Approximate 600,000 households
are receiving CalWORKS in FY 99-00, with 1.2 million
children in those households. CalWORKs benefits for a
household of 3 persons provide just over $600 per month, on
average. When parents on CalWORKS find employment, their
wages are quite low; the average wage for parents on
CalWORKS in Los Angeles County is $6.81 per hour. These
wage levels will be inadequate to provide for the basic
needs of a family of 3 (one adult, two children) without
other sources of income support; for example, child
support, food stamps, and including income supports for
employed parents (such as subsidized child care or an
earned income tax credit).
G. Other major tax relief programs
The following information is presented to provide
context for comparing the cost of the tax credit proposed
by SB 1421 with other major tax assistance programs. The
information was obtained from the 1998-99 Tax Expenditure
Report prepared by the Department of Finance.
Tax Program Full Year
Cost
(in millions)
Home mortgage interest deduction $3,030
Exclusion of pension contributions/earnings$2,610
Exclusion of employer health contributions$1,910
Subchapter S-corporations $1,235
Exclusion of Social Security benefits $ 850
Charitable contributions deduction $ 810
Exclusion of gains on sale of principal residence$
750
Exclusion capital gains at death $ 650
Manufacturers' investment credit $ 390
Carryover of net operating losses $ 375
Water's edge election $ 355
Research and development credit $ 350
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H. EITC impacts lauded
Center for Budget and Policy Priorities - In an
article entitled "A HAND UP: How State Earned Income Tax
Credits Help Working Families Escape Poverty", Nicholas
Johnson of the Center for Budget and Policy Priorities
writes, "The EITC has been widely praised for its success
in supporting work and reducing poverty. The federal credit
now lifts more children out of poverty than any other
government program. Some 4.8 million people, including 2.6
million children, are removed from poverty as a result of
the federal EITC. The EITC lifts more children out of
poverty than any other federal program. The federal EITC
also has been proven effective in encouraging work among
welfare recipients; studies show it has a large impact in
inducing more single mothers to work."
California Budget Project - In a recently-published
Budget Brief entitled "STRATEGIES TO REWARD WORK: How Can a
State Earned Income Tax Credit Assist California's Working
Poor?", the California Budget Project concludes "The most
significant argument against a state EITC is cost. The
fiscal impact of a state EITC could be minimized by
balancing the cost of a new credit with revenues raised by
limiting existing tax expenditures or by increasing some
other state tax. Alternately, a state EITC could be phased
in over time to minimize the immediate impact on the state
budget. As one component of a comprehensive anti-poverty
strategy, a state EITC provides a means to successfully
boost the income of millions of low income California
workers patterned after a federal program that has a
history of strong bipartisan support."
Mexican American Legal Defense and Educational Fund -
In a recent policy brief, MALDEF provides the following
comments regarding an EITC:
"There are over two million working poor families in
California and an additional 1.4 million families with an
income slightly above the poverty line. Latinos comprise a
large share of these families that are working, but poor.
?Latinos earn an annual median wage income of $14,560,
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slightly more than the federal poverty level. ?In part,
the lower median wage income of Latinos is due to their
overrepresentation in the low-wage job sector. For
example, 91 percent of farmworkers, 76 percent of
maids/housemaids, 69 percent of restaurant cooks, 66
percent of gardeners, 64 percent of construction
workers/labor employees, 60 percent of electronic
assemblers, 58 percent of household or childcare workers,
and 49 percent of janitors are immigrants. A substantial
number of these immigrant workers are Latino."
"The creation of a state EITC would help alleviate the
challenging obstacles faced by working poor families. The
combined impact of stricter welfare laws and the rising
cost of living have resulted in a deeper level of poverty
for many low-income working families. A state EITC would
not only raise the income of Latinos from the poverty level
but would also benefit the state. Latinos, currently
comprising 28 percent of the state labor force, are
expected to be the largest group of workers by the year
2025. The earnings and tax base that they represent,
therefore, are vital to the state's economy as their income
has the potential to help sustain the economic growth of
the state."
I. Federal program previously criticized for
inefficiency, fraud
The Franchise Tax Board indicates the Internal Revenue
Service has experienced a significant number of invalid and
fraudulent returns with the refundable federal earned
income credit.
In a 1997 paper entitled "Compliance and the Earned
Income Tax Credit: How Significant are the Problems?" the
California Budget Project concluded that the three most
common causes of overpayment of the federal earned income
credit were:
1) Taxpayers claiming the credit for children who did
not reside with them for over half of the year.
2) Taxpayers claiming the wrong filing status.
3) Taxpayers in complex living situations.
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Support and Opposition
Support: Children Now
Western Center on Law and Poverty
Catholic Charities of California
Jericho
Neighbor to Neighbor
American Federation of State, County and
Municipal Employees
California Budget Project
Consumers Union
California Food Policy Advocates
California Church
Housing California
Friends Committee on Legislation of California
Children's Advocacy Institute
National Center for Youth Law
Child Care Law Center
Los Angeles Coalition to End Hunger and
Homelessness
Coalition for Humane Immigrant Rights of Los
Angeles
Madera County Community Action Agency
Promise California's Children
California Association for the Education of
Young Children
American Association of University Women
Equal Rights Advocates
California Catholic Conference
California Tax Reform Association
Mexcan American Legal Defense and Educational
Fund
Coachella Valley Housing Coalition
St. Paul's Episcopal Church
Women's Employment Rights Clinic, Golden Gate
School of Law
Advocacy Committee for the Mobilization for the
Human Family
Legal Aid Society of San Francisco
Supportive Parents Information Network
156 letters from individuals
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Consultant: Jeanette Rapp
April 10, 2000 10:14 AM