California Already Has a Basic Income Policy – It’s Called the EITC and It Should Be Expanded

What do people who are struggling to make ends meet need most? The obvious answer: cash. While that answer is both intuitive and a long-held tenet of the anti-poverty community, heightened concern about rising levels of income and wealth inequality, and about the changing nature of work (automation, more prevalent use of independent contractors, etc.), is leading to increased interest in a “universal basic income” policy, or UBI.

Providing direct cash payments to every person, regardless of their economic circumstances, through a UBI policy is an old idea that is gaining new momentum. Proponents view UBI as a simple way to address economic insecurity, which extends well into the middle class in high-cost places like California, by providing a meaningful income “floor” to as many people as possible. As interest in UBI was moving into mainstream policy debates, the Budget Center began exploring the ideas behind UBI, first with a panel of experts at Policy Insights — our annual conference — earlier this year and more recently through an in-depth examination of various cash assistance options that might be pursued in California. (Look for more on that in an upcoming post.)

Our bottom-line take? California already has a basic income policy in the California Earned Income Tax Credit (CalEITC), and this policy should be significantly expanded.

Is UBI, or Something Like It, Feasible?

One of the most important questions about UBI is whether it’s feasible to implement. Proponents typically argue that the “U” in UBI (“universal”) is essential for two reasons: because it avoids the stigma that is often attached to programs targeting people with low incomes, and because it would be relatively easy to administer, since every US resident would be eligible for it. In addition, providing this benefit universally would likely help generate support for the policy across the political spectrum.

Unfortunately, providing a universal basic income is fiscally infeasible without raising significant new revenues. Consider this: In an effort to provide a meaningful income floor, UBI proposals often envision providing everyone with about $12,000 annually — an income that roughly approximates the official federal poverty line (FPL) for an individual. However, a UBI supplement of this amount would be extremely expensive. At the state level alone, guaranteeing that all 39 million Californians have at least $12,000 annually would cost about $468 billion a year — more than two-and-a-half times what California spends each year through the state budget.

Some proponents of basic income policies, however, point to evidence that a smaller basic income level — perhaps $1,200 a year ($100 per month) — would still be meaningful to many households who are struggling to make ends meet. More than 2 in 5 people nationwide (44 percent) say that they do not have $400 for an emergency expense, and in California, nearly half of state residents (46 percent) lack any emergency savings. For these individuals, an additional $1,200 annually would provide greater financial security. Yet, even providing $1,200 a year universally would be fiscally infeasible without significant new revenues. Guaranteeing this level of income to all California residents would cost about $46.8 billion annually or around a quarter of the state budget.

But, many of the people intrigued by UBI readily admit that a more targeted benefit focused on improving the economic security of low- and middle-income households is a worthwhile goal and would also avoid the inefficiencies of providing cash to households that do not need the assistance. (We discuss how a basic income policy could be targeted in more detail below.)

How Might a UBI Policy Be Funded?

At the national level, some argue that the high cost of a meaningful UBI isn’t a problem because it could be paid for by eliminating spending on existing public supports, such as Medicaid, SNAP food assistance, the Earned Income Tax Credit (EITC), and housing vouchers, all of which they assume would be made unnecessary by a new income supplement. However, others defend the merits of existing public supports and argue that the revenues freed up by these cuts would still likely be insufficient to fund a meaningful UBI. Moreover, replacing existing public supports with UBI is not wise because it would redistribute income upward, reducing aid to the lowest-income families and individuals.

Given these facts, a basic income policy would likely need to be financed through new revenues. At the federal level, however, raising new revenues is unlikely any time soon given that the Trump Administration and some congressional leaders are prioritizing massive cuts to supports that help struggling families in order to pay for huge tax cuts for the wealthy and large corporations.

While the debate about a basic income at the national level often breaks down over how to pay for it, providing a targeted basic income at the state level might be more feasible. A state basic income policy likely couldn’t be financed by eliminating major public supports. This is because these are largely supported with federal dollars, and federal policymakers would be unlikely to allow California to shift these existing resources to a new UBI program. But funding targeted basic income assistance through new revenues at the state level may be more likely, particularly if the policy is targeted to lower the cost.

Could a State Basic Income Policy Be Structured in a Way That Makes the Cost More Realistic in California?

If financing a universal basic income policy at a significant benefit level is cost-prohibitive, how might a basic income policy be structured at the state level that is more realistic? As noted above, one option would be to significantly cut the size of the benefit to a level that would still be meaningful. But, even a dramatically smaller benefit would still be cost-prohibitive if universal.

Another option to lower the cost would be to limit who can receive a basic income. Targeting it to people with low and moderate incomes would not only reduce the cost but also produce a better policy: providing a more meaningful benefit to those who struggle the most to make ends meet. Providing $1,200 to every Californian living in households with incomes below the median ($64,500 in 2015) would cost about $20.4 billion annually. (In this example, a five-person household would receive $6,000 per year, whereas a household with three people would receive $3,600.) Limiting the benefit further, to all individuals living in households with incomes below $25,600 (the bottom fifth of household income in 2015) would cost around $7.0 billion each year. This cost could be further reduced by providing the benefit on a per household basis rather per person, which would also arguably be a more logical design since households tend to share resources. Providing each California household in the bottom quintile with $1,200 annually would lower the cost to $3.1 billion — still expensive, but far more realistic.

While the upside of a targeted income benefit is that it would be cheaper than a universal benefit, one downside is that it could disincentivize working more. If a $1,200 income supplement were available to households earning less than $25,600 a year, then a worker earning close to that amount could see her total income decline if she worked slightly more hours. For example, if a single parent who made $25,500 in one year decided to take on slightly more hours the next year, boosting her annual pay to $25,700 — just over the limit to qualify for the income supplement — her total income would drop by $1,000, from $26,700 ($25,500 in earnings plus the $1,200 income supplement) to $25,700. This means that workers earning near the cutoff to be eligible for the income supplement might choose not to work more to avoid losing that benefit. This “cliff effect” and the resulting work disincentive would be even greater if the income supplement were larger.

The good news is that this problem is not insurmountable. Work disincentives are inherent in any “means-tested” support and can easily be reduced by gradually phasing out the benefit as families’ incomes rise, similar to the way supports like CalWORKs (TANF) cash assistance and CalFresh (SNAP) food assistance work. It might also make sense to gradually phase in the benefit at the bottom of the income scale to incentivize working more. If the maximum benefit were available to people earning around $11,000 annually — the equivalent of part-time minimum wage work in California — then this policy would create an incentive for people to work at least part-time in order to maximize their benefit.

A Targeted Basic Income Looks a Lot Like an EITC

At first blush, a universal basic income policy sounds like an easy way to address the economic challenges facing people with low and moderate incomes. But in trying to make this policy work (limiting it to low-income families to cut the cost and phasing out the benefit to reduce work disincentives) we would essentially be creating a policy that looks very much like one that already exists and is a proven tool for boosting people’s economic security: the Earned Income Tax Credit (EITC). In other words, perhaps the solution to the economic challenges facing many people in our state is already right in front of us, to paraphrase the remarks of UC Berkeley Professor Hilary Hoynes at our conference workshop on UBI this past spring. That is, instead of creating a new income support that nearly replicates an existing support, perhaps we should build on California’s existing EITC — the CalEITC?

Established in 2015, the CalEITC is a refundable state tax credit, modeled after the federal EITC, that helps working families who earn very little to better afford the basics. Earlier this year, California expanded the credit so that families earning less than $22,300 now qualify for up to almost $2,800, while workers who are not supporting children and who earn under around $15,000 can receive up to about $224. Looking ahead, the CalEITC could be significantly expanded further to provide a more meaningful level of cash assistance for a broader group of Californians.

At the state level, providing basic income support through an expanded EITC has a number of upsides. First, the tax code would likely be the most efficient way of getting additional cash into the pockets of struggling families. This is because all of the information needed to determine eligibility for the supplement is already collected on tax forms. Further, piggybacking on an existing mechanism for getting cash into people’s pockets would keep administrative costs low. Second, providing income through a state tax credit would prevent the payment from being reduced by federal income tax. Income from refundable state EITCs like the CalEITC are not subject to federal taxation, while cash payments made outside of state income tax systems, like the Alaska Permanent Fund, are (meaning that the benefit level is reduced by federal taxes). Third, providing income via a state tax credit would avoid reducing other public supports that families receive. The CalEITC, for instance, is not considered “countable income” for the purpose of determining eligibility for federally funded programs like SNAP food assistance and TANF cash assistance, whereas cash payments provided outside of the state tax system likely would be. In other words, providing an income supplement through the tax system would avoid the unintended consequence of making some families worse off by reducing the other resources they use to make ends meet.

One disadvantage of using an EITC to provide a basic income supplement is that the EITC only benefits families who work. But there is a clear need for policymakers to do more to help people who are struggling to get by because they can’t find jobs or aren’t able to work because they are caring for family members or pursuing an education or other workforce skills. In recent decades, our nation’s efforts to increase families’ economic security have increasingly favored people who are working over those who aren’t, and this has led to a sharp rise in multigenerational deep poverty — an extreme level of deprivation in which families struggle to survive on incomes below half of the official federal poverty line. One advantage of a basic income model is that it would help address this problem by providing a cash supplement to all people regardless of their work status. There’s no reason, though, why the EITC couldn’t be extended to people who aren’t working for pay, but who are engaged in productive activities, like attending postsecondary school, caring for young children or an elderly adult, or participating in job training through the state’s welfare-to-work program, CalWORKs. (We’ll discuss how the CalEITC could be made more basic income-like in a subsequent blog.)

Connecting Basic Income Discussions to Urgent Policy Debates

There’s no question that the economy hasn’t been working for everyone for several decades now and that policymakers must do more to help all people share in our state’s and our nation’s economic prosperity. But right now, there is an urgent need to prevent federal policymakers from inflicting even greater hardship on families and individuals. The Trump Administration and Republican congressional leaders are proposing to decimate critical public supports, including Medicaid, food assistance, and disability insurance. If approved, these federal proposals would make it harder for millions of Californians to meet their basic needs, as we show in our Fact Sheets. This is because it would be extremely difficult for state policymakers to replace lost federal dollars in order to maintain these services. Therefore, working to prevent policy choices that would seriously damage vital public supports should be our first priority.

Amid this troubling federal policy environment, California policymakers could consider policies such as basic income assistance to help struggling families and individuals build a more secure future and advance. California could significantly expand the CalEITC in the ways touched upon above. A greatly expanded CalEITC would not only put economic security within more people’s reach, but could also bring in additional federal funds through the federal EITC, helping to offset some of the potential damage from harmful policy actions in Washington, DC. Indeed, some UBI proponents are already suggesting this very course of action for state-level EITCs.

In short, California already has a basic income policy — the CalEITC — and it should be significantly expanded. In a forthcoming blog post, we’ll explore ways to strengthen and expand the CalEITC, including by increasing the benefit level for households that receive relatively less, extending benefits beyond traditional workers, and implementing options that could help incentivize savings and asset building.

— Alissa Anderson, Sara Kimberlin, and Chris Hoene