The Personal Income Tax Law, in modified conformity to federal income tax law, authorizes a credit for household and dependent care expenses necessary for gainful employment, as provided. That law provides that the amount of the state credit is a percentage of the allowable federal credit determined on the basis of the amount of federal adjusted gross income earned, as provided.

This bill, for taxable years beginning on or after January 1, 2016, and before January 1, 2019, would increase the amount of the applicable state credit percentage and revise adjusted gross income amounts, as provided. for taxpayers with adjusted gross income amounts of $70,000 or less, as provided.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law, in modified conformity to federal income tax law, authorizes a credit for household and dependent care expenses necessary for gainful employment, as provided. That law provides that the amount of the state credit is a percentage of the allowable federal credit determined on the basis of the amount of federal adjusted gross income earned, as provided.

This bill, for taxable years beginning on or after January 1, 2016, would increase the amount of the applicable state credit percentage and revise adjusted gross income amounts, as provided.

This bill would take effect immediately as a tax levy.

Date of Hearing: May 25, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 2676

Author:(Chávez) – As Amended Ver:May 16, 2016

Urgency: Yes State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill expands the Child and Dependent Care Expenses tax credit for tax years 2016 through 2018 by modifying the size of the credit as follows:

1. For taxpayers with an adjusted gross income (AGI) of $40,000 or less, the applicable credit percentage is 65% instead of 50%.
2. For taxpayers with AGI between $40,000 and $70,000, the applicable credit percentage is 50%, instead of 43%.
3. For taxpayers with AGI over $70,000 but not over $100,000, the applicable credit percentage is unchanged at 34%, and those with AGI over $100,000 remain ineligible for the credit.

FISCAL EFFECT:

1. Minor and absorbable administrative costs to the Franchise Tax Board (FTB) to update forms, processes, and software.
2. Annual GF revenue loss of approximately $2 million in FY 2016-17, FY 2017-18, and FY 2018-19.

COMMENTS:

1. Purpose. AB 2676 is intended to strengthen the state Child and Dependent Care Expenses Credit, which is insufficient to meet the needs of hardworking families. The author argues that this bill will help minimize the federal strains of child care and dependent care by relieving the tax burden on these families.
2. Background. The federal Child and Dependent Care Credit is a nonrefundable credit, equal to a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer to be employed. To obtain the credit, the taxpayer must incur employment-related expenses to provide care for a dependent under the age of 13. The maximum amount of employment-related expenses to which the federal credit may be applied is $3,000 if one qualifying individual is involved or $6,000 if two or more qualifying individuals are involved. The credit amount is equal to the applicable percentage (20 to 35%), as determined by the taxpayer's AGI times the qualified employment expenses paid. Taxpayers with an AGI of $15,000 or less use the highest applicable percentage of 35%.

Existing California law provides a tax credit similar to the federal child care credit, the Child and Dependent Care Expenses Credit. State law conforms to the federal expenses cap, and applies the federal credit percentage to calculate the credit amount. The state credit is computed by first applying the federal credit percentage (20 to 35%) to the smallest of three amounts: the expense cap, California expenses, or California earned income. The state credit percentage is then applied. Unlike the federal credit, the state credit has an income limit: taxpayers with AGI over $100,000 cannot claim the state credit.

1. Who claims the Child Care and Dependent Care Expenses Credit? Data for 2012 shows that a large majority of Child Care and Dependent Care Expenses Credit benefits are concentrated among households with incomes between $50,000 to $99,999. Around 85% of allocated credit amounts were given to households in this income range. Until December 31, 2010, this credit was refundable; thus, it was available to Californians with little or no tax liability. Beginning with 2011, the refundable portion of the credit was repealed.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: May 9, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 2676 (

Author:Chávez) – As Introduced Ver:February 19, 2016

Majority vote. Fiscal committee. Tax levy.

SUBJECT: Income taxes: credit: dependent care

SUMMARY: Increases the Child and Dependent Care Expenses tax credit amount by modifying the amount of the applicable state credit percentage and the amount of the applicable adjusted gross income (AGI). Specifically, this bill:

1. Increases the maximum AGI cap from $100,000 to $150,000 for taxable years beginning on or after January 1, 2016.
2. Modifies the credit percentages and the AGI brackets associated with each credit percentage as follows:
   1. For taxpayers with AGI of $100,000 or less, the applicable credit percentage is $200%;
   2. For taxpayers with AGI between $100,000 and $125,000, the applicable credit percentage is 100%;
   3. For taxpayers with AGI between $125,000 and $150,000, the applicable credit percentage is 50%; and,
   4. For taxpayers with more than $150,000 of AGI, the applicable credit percentage is 0%.
3. Makes technical, non-substantive changes to the related provisions.
4. Takes effect immediately as a tax levy.

EXISTING FEDERAL LAW:

1. Allows a tax credit equal to a percentage of employment-related costs of care for a qualifying individual. The amount of the credit percentage ranges between 20% and 35% and depends on the taxpayer's AGI.
2. Defines a "qualifying individual" as any of the following:
   1. A dependent of the taxpayer that is under the age of 13; or,
   2. A dependent or spouse who is physically or mentally unable to provide self-care.
3. Defines "employment-related expenses" as those expenses incurred to enable gainful employment.
4. Limits the amount of "employment-related expenses" to the lesser of the taxpayer's earned income or $3,000 per taxable year for one qualifying individual or $6,000 if there are two or more qualifying individuals.

EXISTING STATE LAW:

1. Conforms generally to the federal Child and Dependent Care Credit program, including the definitions of "qualifying individuals" and the maximum amount and types of eligible expenses.
2. Limits eligible expenses to care provided only in California and, for purposes of calculating the earned income limitations, allows only earned income from California sources.
3. Provides that the state credit must be computed by first applying the applicable federal credit percentage to the smallest of the expense cap, California expenses, or California earned income; and then by applying the state credit percentage.
4. Prescribes credit percentages based on the taxpayer's AGI. Specifically, for taxpayers with AGI of $40,000 or less, the applicable state credit percentage is 50%, for taxpayers with AGI between $40,000 and $70,000, the applicable state credit percentage is 43%, and for taxpayers with AGI between $70,000 and $100,000, the applicable state credit percentage is 34%.
   
5. Limits the application of the credit to taxpayers with AGI of $100,000 or less.

FISCAL EFFECT: The Franchise Tax Board (FTB) staff estimates that this bill will result in an annual revenue loss of $160 million in the fiscal year (FY) 2016-17, $160 million in FY 2017-18, and $170 million in FY 2018-19.

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:
   
   "We need to support the efforts of our hardworking families in California, and part of that effort is to alleviate the financial strains that hinder the opportunity of the … lower income and middle income families to thrive."
2. The Purpose of this Bill. Child care is one of the largest expenses for low- and middle-income families. While California offers Child and Dependent Care Expenses Credit, it is limited based on the taxpayer's AGI amounts. The author argues that the existing credit is insufficient to meet the needs of hardworking low- and middle-income families. The purpose of this bill is to help minimize the financial strains of child care and dependent care by relieving the tax burden on these families, allowing them to redirect more of their money to other basic family needs.
3. Background. The federal Child and Dependent Care Credit is a nonrefundable credit, equal to a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer to be gainfully employed. To obtain the credit, the taxpayer must incur employment-related expenses to provide care for a dependent who has not attained the age of 13. The maximum amount of employment-related expenses to which the credit may be applied is $3,000 if one qualifying individual is involved or $6,000 if two or more qualifying individuals are involved. The credit amount is equal to the applicable percentage (20 to 35%), as determined by the taxpayer's AGI times the qualified employment expenses paid. Taxpayers with an AGI of $15,000 or less use the highest applicable percentage of 35%.
   
   Existing California law provides a tax credit similar to the federal child-care credit, the Child and Dependent Care Expenses Credit. State law conforms to the federal expenses cap, and applies the federal credit percentage to calculate the credit amount. However, state law limits expenses to care provided in California, and income earned from California sources. The state credit is computed by first applying the federal credit percentage (20 to 35%) to the smallest of three amounts: the expense cap, California expenses, or California earned income. The state credit percentage is then applied. Unlike the federal credit, the state credit has an income limit: taxpayers with AGI over $100,000 cannot claim the state credit.
   
4. Potential Beneficiaries. This bill allows high-income working families to take advantage of the tax credit by raising the maximum AGI. According to a 2012 report by Child Care Aware of America, the average yearly cost of child care in California for an infant is $12,068; $8,407 for a four-year-old; and $2,792 for a school-age child. Under current law, a family with an infant and a toddler could be spending 20% of their income on child care and not qualify for the child-care credit. This bill would help alleviate the high cost of child care for higher-income earners.
   
5. Low- Income Families. From 2000 to 2010, the state Child and Dependent Care Expenses Credit was refundable, allowing tax filers with no state tax liability to receive some benefit from the credit. Due to budget constraints, that was changed by SB 86 (Senate Committee on Budget and Fiscal Review), Chapter 14, Statutes of 2011. Because this tax credit is currently nonrefundable and because California's poorest working families have little or no tax liability, AB 2676 would have minimal impact, if any, on lower income families. Since the stated purpose of this bill is to help low-income and middle-income families, the Committee may wish to consider amending the existing credit to make it refundable.
   
6. Other Alternatives. The rising cost of child care is a real issue for working parents, but there may be other ways to help alleviate the high cost of child care. The Legislature may decide to expand CalWORKs Stage II and III eligibility for low-income families, fund preschool programs, before- and after-school programs, or expand the California Department of Education's voucher program. Alternatively, the Legislature may consider expanding the state Earned Income Tax Program for low-income families.
   
7. Federal and California's Earned Income Tax Programs (EITC). The state EITC was enacted into law in 2015 and is intended to complement the federal EITC to allow a greater benefit per household. The federal EITC is an income 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. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. The EITC is a percentage of the taxpayer's earned income and is phased out as income increases. The EITC percentage varies depending on whether the taxpayer has qualifying children. The federal credit rate varies from 7.65% to 45%, depending on the number of qualifying children. The current maximum federal credit amount for taxpayers with three or more qualifying children is $6,269; for taxpayers with two qualifying children, the maximum is $5,572. For taxpayers with one qualifying child, the maximum credit amount is $3,373; for taxpayers with no qualifying children, the maximum amount is currently $506.
   
   Similar to the federal EITC, the California EITC is established as a refundable credit against personal income taxes owed based on earned wage income. However, unlike the Federal Government, California excludes self-employment income from the definition of "earned income" and only workers with earnings subject to wage withholding qualify for the credit.
   
   The California EITC is available for tax returns filed for wages earned in 2015. A credit amount is calculated according to specified percentages of the earned income based on the number of qualifying children. The California EITC is expected to benefit approximately 825,000 families and two million individuals. The estimated mean household benefit is $460 per year, with a maximum credit for a household with three or more dependents of over $2,600. This program, however, is operative only for taxable years for which resources are authorized in the annual Budget Act for the FTB to oversee and audit returns associated with the credit. The Committee may wish to consider whether expanding the state EITC would be a more effective way of helping low income and middle income families in California to cope with ever increasing child-care costs.
   
8. LAO Report. On April 7, 2016, the Legislative Analyst's Office released a report providing options for modifying the state Child Care Tax Credit. The report provided four alternative proposals for legislative consideration. All options presented in the report would make this credit refundable again, but otherwise retain most of the structural features of the state credit as it exists today. Option One would benefit low- to middle-income filers. Option Two offers to restore refundability at a somewhat lower cost by providing less benefit than Option One. Option Three would increase benefits for lower-income filers, and the last option would increase benefits across income range, including higher-income earners, by increasing the state credit percentage but keeping the AGI percentages the same. The LAO report concluded that if the state child-care credit were made refundable again, it would provide a noticeable income boost to California working families and also encourage participation in the formal labor market to some extent.
9. FTB's Policy Considerations. The FTB staff points out that this bill would authorize the state credit amount that is twice the amount of the federal credit for taxpayers with AGI less than $100,000. Furthermore, for taxpayers with AGIs between $100,000 and $125,000, the state credit amount would equal the federal credit amount. As such, this modified state credit would provide a greater proportionate benefit to taxpayers for state tax purposes than for federal tax purposes, even though generally speaking a taxpayer's federal income tax liability is significantly higher than the state one.
10. FTB's Suggested Amendment:
    
    On page 3, line 19, delete "152(c)(3), relating to age requirements" and insert:
    
    152(f)(1), relating to child defined

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

California Tax Reform Association

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098