To amend the Internal Revenue Code of 1986 to permit States to make advance payments of the earned income tax credit.

Summary: Amends the Internal Revenue Code to provide for advance earned income credits to be paid through a State Advance Payment Program rather than by the employer.  Authorizes appropriations.

SECTION 1. ADVANCE PAYMENT OF EARNED INCOME TAX CREDIT THROUGH STATE 
              DEMONSTRATION PROGRAMS.

    (a) In General.--Section 3507 of the Internal Revenue Code of 1986 
(relating to the advance payment of the earned income tax credit) is 
amended by adding at the end the following:
    ``(g) State Advance Payment Program.--
            ``(1) In general.--In lieu of receiving earned income 
        advance amounts from an employer under subsection (a), a 
        participating resident shall receive advance earned income 
        payments from a responsible State agency pursuant to a State 
        Advance Payment Program that is designated pursuant to 
        paragraph (2).
            ``(2) Designations.--
                    ``(A) In general.--The Secretary (in consultation 
                with the Secretary of Health and Human Services) shall 
                designate State Advance Payment Programs for States 
                submitting plans that satisfy the requirements of 
                paragraph (3). The Secretary is required to approve a 
                State plan 90 days after submission to the Secretary by 
                the State, or submit to the State the reasons for not 
                approving the State plan. Administrative costs of a 
                State in conducting a State Advance Payment Program 
                under this section may be included for matching under 
                section 403(a) of the Social Security Act and section 
                16(a) of the Food Stamp Act of 1977.
                    ``(B) Period for which designation is in effect.--
                            ``(i) In general.--Designations made under 
                        this paragraph shall be effective only after 
                        December 31, 1996.
                            ``(ii) Revocation of designations.--The 
                        Secretary may revoke a State's designation 
                        under this paragraph if the Secretary 
                        determines that the State is not complying 
                        substantially with the plan described in 
                        paragraph (3) submitted by the State.
            ``(3) State plans.--No State may be designated under 
        paragraph (2) unless the State's proposal for such 
        designation--
                    ``(A) identifies the responsible State agency,
                    ``(B) describes how and when the advance earned 
                income payments will be made by that agency, including 
                a description of any other State or Federal benefits 
                with which such payments will be coordinated,
                    ``(C) describes how the State will obtain the 
                information on which the amount of advance earned 
                income payments made to each participating resident 
                will be determined in accordance with paragraph (4),
                    ``(D) describes how State residents who will be 
                eligible to receive advance earned income payments will 
                be selected, notified of the opportunity to receive 
                advance earned income payments from the responsible 
                State agency, and given the opportunity to elect to 
                participate in the program,
                    ``(E) describes how the State will verify, in 
                addition to receiving the certifications and statement 
                described in paragraph (6)(D)(iv), the eligibility of 
                participating residents for the earned income tax 
                credit,
                    ``(F) commits the State to furnishing to each 
                participating resident and to the Secretary by January 
                31 of each year a written statement showing--
                            ``(i) the name and taxpayer identification 
                        number of the participating resident, and
                            ``(ii) the total amount of advance earned 
                        income payments made to the participating 
                        resident during the prior calendar year,
                    ``(G) commits the State to furnishing to the 
                Secretary by December 1 of each year a written 
                statement showing the name and taxpayer identification 
                number of each participating resident, and
                    ``(H) commits the State to assess the development 
                and implementation of its State Advance Payment 
                Program, including an agreement to share its findings 
                and lessons with other interested States in a manner to 
                be described by the Secretary.
            ``(4) Amount and timing of advance earned income 
        payments.--
                    ``(A) Amount.--
                            ``(i) In general.--The method for 
                        determining the amount of advance earned income 
                        payments made to each participating resident is 
                        to conform to the full extent possible with the 
                        provisions of subsection (c).
                            ``(ii) Special rule.--A State may, at its 
                        election, apply the rules of subsection 
                        (c)(2)(B)--
                                    ``(I) by substituting for `60 
                                percent' in such subsection a 
                                percentage between 60 percent and 75 
                                percent which is elected by the State, 
                                and
                                    ``(II) by using the credit 
                                percentage for the number of qualifying 
                                children of the eligible individual in 
                                lieu of the credit percentage specified 
                                in clause (i) thereof.
                    ``(B) Timing.--The frequency of advance earned 
                income payments may be made on the basis of the payroll 
                periods of participating residents, on a single 
                statewide schedule, or on any other reasonable basis 
                prescribed by the State in its plan; however, in no 
                event may advance earned income payments be made to any 
                participating resident less frequently than on a 
                calendar-quarter basis.
            ``(5) Payments to be treated as payments of withholding and 
        fica taxes.--
                    ``(A) In general.--For purposes of this title, 
                advance earned income payments--
                            ``(i) shall neither be treated as a payment 
                        of compensation nor be included in gross 
                        income, and
                            ``(ii) shall be treated as made out of--
                                    ``(I) amounts required to be 
                                deducted and withheld by the State 
                                under section 3401 (relating to 
wage withholding) for the period (under paragraph (4)(B)) on the basis 
of which advance earned income payments are made by the State, and
                                    ``(II) amounts required to be 
                                deducted for such period under section 
                                3102 (relating to FICA employee taxes), 
                                and
                                    ``(III) amounts of the taxes 
                                imposed on the State for such period 
                                under section 3111 (relating to FICA 
                                employer taxes),
                        as if the State had paid to the Secretary, on 
                        the day on which payments are made to 
                        participating residents, an amount equal to 
                        such payments.
                    ``(B) Advance payments exceed taxes due.--If for 
                any period the aggregate amount of advance earned 
                income payments made by the responsible State agency 
                under a State Advance Payment Program exceeds the sum 
                of the amounts referred to in subparagraph (A)(ii), 
                each such advance earned income payment shall be 
                reduced by an amount which bears the same ratio to such 
                excess as such advance earned income payment bears to 
                the aggregate amount of all such advance earned income 
                payments.
            ``(6) Definitions.--For purposes of this section--
                    ``(A) State advance payment program.--The term 
                `State Advance Payment Program' means the program 
                described in a proposal submitted for designation under 
                paragraph (1) and designated by the Secretary under 
                paragraph (2).
                    ``(B) Responsible state agency.--The term 
                `responsible State agency' means the single State 
                agency that will be making the advance earned income 
                payments to residents of the State who elect to 
                participate in a State Advance Payment Program.
                    ``(C) Advance earned income payments.--The term 
                `advance earned income payments' means an amount paid 
                by a responsible State agency to residents of the State 
                pursuant to a State Advance Payment Program.
                    ``(D) Participating resident.--The term 
                `participating resident' means an individual who--
                            ``(i) is a resident of a State that has in 
                        effect a designated State Advance Payment 
                        Program,
                            ``(ii) makes the election described in 
                        paragraph (3)(D) pursuant to guidelines 
                        prescribed by the State,
                            ``(iii) certifies to the State the number 
                        of qualifying children the individual has, and
                            ``(iv) provides to the State the 
                        certifications and statement set forth in 
                        subsection (b) (except that paragraph (3) 
                        thereof shall be applied by substituting `any 
                        employer' for `another employer'), along with 
                        any other information required by the State.''.
    (b) Technical Assistance.--The Secretary of the Treasury and the 
Secretary of Health and Human Services shall jointly ensure that 
technical assistance is provided to State Advance Payment Programs and 
that such Programs are rigorously evaluated.
    (c) Annual Reports.--The Secretary of the Treasury shall issue 
annual reports detailing the extent to which--
            (1) residents participate in the State Advance Payment 
        Programs,
            (2) participating residents file Federal and State tax 
        returns,
            (3) participating residents report accurately the amount of 
        the advance earned income payments made to them by the 
        responsible State agency during the year, and
            (4) recipients of excessive advance earned income payments 
        repaid those amounts.
The report shall also contain an estimate of the amount of advance 
earned income payments made by each responsible State agency but not 
reported on the tax returns of a participating resident and the amount 
of excessive advance earned income payments.
    (d) Authorization of Appropriations.--For purposes of providing 
technical assistance described in subsection (b), preparing the reports 
described in subsection (c), and providing grants to States in support 
of designated State Advance Payment Programs, there are authorized to 
be appropriated in advance to the Secretary of the Treasury and the 
Secretary of Health and Human Services a total of $1,400,000 for fiscal 
years 1997 through 2000.