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, with the percentage dependent or on adjusted gross income, as provided.

This bill, for taxable years beginning on or after January 1, 2017, and before January 1, 2020, 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. The bill would make these provisions operative on the effective date of any budget measure enacted in 2017 that specifically appropriates funds to the Franchise Tax Board for its costs to administer these provisions for that taxable year.

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, with the percentage dependent or adjusted gross income, as provided.

This bill, for taxable years beginning on or after January 1, 2017, 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: April 26, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 230

Author:(Chávez) – As Amended Ver:April 18, 2017

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

SUMMARY:

This bill expands the Child and Dependent Care Expenses tax credit for taxable years beginning on or after January 1, 2017, and before January 1, 2020, 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. Makes these expanded state percentages operative on the effective date of any budget measure that appropriates funds to the Franchise Tax Board (FTB) for its administration.

FISCAL EFFECT:

1. Minor GF cost pressures for FTB’s administration of the proposed tax credit expansion. These costs only materialize if FTB receives a budget appropriation to administer the provisions of this bill, as required.
2. Additional General Fund (GF) cost pressures in the range of $2.5 million each year beginning in 2017-18. These cost pressures reflect the potential GF revenue loss if the proposed tax credit expansion becomes operative once FTB receives an appropriation to administer it.

COMMENTS:

1. Purpose. According to supporters, AB 230 will help families cope with one of the largest expenses for low- and middle-income families. The author notes that that this bill is intended to help minimize the financial 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. Fiscal implications of tax expenditures. Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. These features of tax law are referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). One ongoing concern about tax expenditures is the lack of control over revenue losses, since the number of taxpayers taking advantage of any given tax expenditure can vary each year. This bill expands an existing tax expenditure, Child and Dependent Care Expenses tax credit, to help families cope with the high costs of child care.

A recent policy committee amendment that makes this new proposed credit expansion operative on years when the FTB receives an appropriation to administer it is a step in the right direction for controlling its year-to-year costs, but significant cost pressures remain. As amended, this bill creates the expectation that these new expanded state percentages will be available and puts in place the conditions for that deduction to be made available. Moreover, the nature of PIT tax expenditures means that once the expanded state percentages are made operative by funding the administrative costs, the revenue loss associated with them can no longer be managed or capped for that year.

1. Recent legislation. AB 2676 (Chavez), of the 2015-16 Legislative Session, would have created similar modifications to the Child and Dependent Care Expenses tax credit. AB 2676 was held on this committee’s Suspense File.

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

Date of Hearing: April 3, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 230 (

Author:Chávez) – As Introduced Ver:January 26, 2017

Majority vote. Tax levy. Fiscal committee.

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) cap. Specifically, this bill:

1. Increases the maximum AGI cap from $100,000 to $150,000 for taxable years beginning on or after January 1, 2017.
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 individual.

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 estimates that this bill will result in an annual General Fund revenue loss of $140 million in fiscal year (FY) 2017-18, $140 million in FY 2018-19, and $140 million in FY 2019-20.

COMMENTS:

1. Author’s Statement: The author has stated that “[w]e need to support the efforts of our hardworking families in California… and part of that is to alleviate the financial strains that hinder the State’s lower income and middle income families from providing for themselves. California needs to lead the way in helping families thrive, not take a back seat to the Federal government.”
2. The California Alternative Payment Program Association (CAPPA) states that “[c]hild care is one of the largest expense that families face, easily exceeding $10,000 annually. This high cost often puts families in a position in which they must choose between employment and staying at home to care for their children.” As such, CAPPA believes that “[h]ardworking families need an updated and increased tax credit to minimize the financial strain that the cost of child care places on families.”
3. Committee Staff Comments:
   1. The Purpose of this Bill: Child care is one of the largest expenses for low- and middle-income families. While California offers the Child and Dependent Care Expenses Credit, it is limited based on the taxpayer's AGI. 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.
   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 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 percentage 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.
   3. 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.
   4. 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, this bill 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.
   5. LAO Report: On April 7, 2016, the Legislative Analyst's Office released a report providing options for modifying the state Child and Dependent Care 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 Option Four would increase benefits across income ranges, 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.
   6. Prior Legislation: AB 2676 (Chaves), of the 2015-16 Legislative Session, made similar modifications to the Child and Dependent Care Expenses tax credit. AB 2676 was held in the Assembly Committee on the Appropriations’ Suspense File

REGISTERED SUPPORT / OPPOSITION:

Support

California Alternative Payment Program Association

Opposition

California Tax Reform Association

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

Date of Hearing: March 13, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 230 (

Author:Chávez) – As Introduced Ver:January 26, 2017

Majority vote. Tax levy. Fiscal committee.

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) cap. Specifically, this bill:

1. Increases the maximum AGI cap from $100,000 to $150,000 for taxable years beginning on or after January 1, 2017.
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 estimates that this bill will result in an annual General Fund revenue loss of $140 million in fiscal year (FY) 2017-18, $140 million in FY 2018-19, and $140 million in FY 2019-20.

COMMENTS:

1. Author’s Statement: The author has stated that “[w]e need to support the efforts of our hardworking families in California… and part of that is to alleviate the financial strains that hinder the State’s lower income and middle income families from providing for themselves. California needs to lead the way in helping families thrive, not take a back seat to the Federal government.”
2. Committee Staff Comments:
   1. Arguments in Support: The California Alternative Payment Program Association (CAPPA) states that “[c]hild care is one of the largest expense that families face, easily exceeding $10,000 annually. This high cost often puts families in a position in which they must choose between employment and staying at home to care for their children.” As such, CAPPA believes that “[h]ardworking families need an updated and increased tax credit to minimize the financial strain that the cost of child care places on families.”
   2. The Purpose of this Bill: Child care is one of the largest expenses for low- and middle-income families. While California offers the Child and Dependent Care Expenses Credit, it is limited based on the taxpayer's AGI. 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 percentage 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, this bill 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. LAO Report: On April 7, 2016, the Legislative Analyst's Office released a report providing options for modifying the state Child and Dependent Care 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 Option Four would increase benefits across income ranges, 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.
   7. Prior Legislation: AB 2676 (Chaves), of the 2015-16 Legislative Session, made similar modifications to the Child and Dependent Care Expenses tax credit. AB 2676 was held in the Assembly Committee on the Appropriations’ Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

California Alternative Payment Program Association

Opposition

None on file

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098