Momentum for creating a state Earned Income Tax Credit (EITC) in California is building. As we discussed in a recent report, a state EITC would foster economic security among low- and moderate-income workers by building on the federal credit of the same name. Several EITC proposals are currently being discussed in the Capitol, and to help policymakers assess their relative merits, we’ve compiled an analysis by the Institute on Taxation and Economic Policy (ITEP) estimating how each proposal would benefit California’s workers and their families. The sections below and the accompanying table provide a quick overview of two proposals: Assembly Bill 43 (Stone, et al.) and Senate Bill 38 (Liu). A third bill that proposes to create a state EITC — Senate Bill 8 (Hertzberg) — is not discussed here because the details of that proposal are not yet known.
Assembly Bill 43 (Stone, et al.): Greater Benefits for Families with Young Children
Assembly Bill 43, introduced by Assemblymember Mark Stone and several of his colleagues, would create a refundable state EITC set at:
- 35 percent of the federal credit for working families with children under age 5,
- 60 percent of the federal credit for working adults without dependent children, and
- 15 percent of the federal credit for all other eligible families.
Overall, the average state credit for households receiving a state EITC would range from $602 for families in the bottom fifth of the income distribution to $460 for families in the middle fifth. Families with children would receive, on average, a credit ranging from $522 for those in the bottom fifth to $274 for those in the middle fifth. Families with children under age five, however, would see a substantial boost as they would be eligible for a credit equal to 35 percent of the federal EITC. Under this provision, which is designed to provide a larger investment in children at a critical stage in their development, eligible families in the bottom fifth of the income distribution would receive, on average, a credit that is $733 more than what they would receive with a 15 percent EITC.
Workers without dependent children, on the other hand, would receive the smallest average benefits under this proposal, even though they would be eligible for a state credit set at a relatively large percentage (60 percent) of the federal EITC. A worker without dependent children would receive an average credit of $161 for those in the bottom fifth of the income distribution and $155 for those in the middle fifth. Workers without dependents would receive smaller state credits than would families with children because they are eligible for considerably smaller federal credits. (National data show that eligible childless workers receive an average federal EITC that is less than one-tenth the average credit received by families with children, as we point out in our recent report.)
In terms of cost, this proposal would have reduced California’s personal income tax revenue by $1.5 billion in 2014.
Senate Bill 38 (Liu): Enhancing Benefits for Workers Without Dependents
Senate Bill 38, introduced by Senator Carol Liu, would create a refundable state EITC set at:
- 30 percent of the federal credit for working families with dependent children, and
- 100 percent of the federal credit for working adults without dependent children.
Overall, the average state credit for households receiving a state EITC would range from $781 for families in the bottom fifth of the income distribution to $544 for families in the middle fifth. Like Assembly Bill 43, Senate Bill 38 would provide larger benefits to low- and moderate-income families with children, although the bill would not specifically target families with young children as Assembly Bill 43 would. For example, Senate Bill 38 would provide families in the bottom fifth of the income distribution with an average credit of $1,045, according to ITEP’s analysis. Workers without dependent children, on the other hand, would receive considerably larger benefits under Senate Bill 38 than they would under Assembly Bill 43. For example, childless workers in the bottom fifth would receive an average state credit of $268, much larger than the average credit ($161) that would be provided to these workers under Assembly Bill 43.
Senate Bill 38 would have reduced California’s personal income tax revenues in 2014 by more than Assembly Bill 43 would have, according to ITEP’s model – $1.9 billion compared to $1.5 billion.
Both Assembly Bill 43 and Senate Bill 38 Would Benefit a Large Share of California’s Households
The state EITCs created under both Assembly Bill 43 and Senate Bill 38 would benefit a large share of low- and moderate-income working households. Specifically, more than one in three households in the bottom fifth of the income distribution (35 percent), about 31 percent of those with incomes in the second fifth, and 11 percent of those in the middle fifth of the income distribution would receive a state tax credit under each proposal, according to ITEP’s analysis. Because the state credits proposed by both bills would follow the same income and eligibility rules as the federal credit, the same number of households would be eligible for benefits under each proposal.
Both Assembly Bill 43 and Senate Bill 38 Include “Best Practice” Provisions
Both state EITC proposals discussed here include provisions that experts consider to be best practices in designing state credits. For example, both would create credits that are fully refundable, a feature that’s necessary for the credit to reach those who need it the most. Only refundable tax credits provide benefits to the lowest-income households, as we blogged about earlier. In addition, both proposals aim to significantly supplement the benefits provided to childless workers under the federal EITC. Many experts argue that state credits ought to target low-income childless workers, because this group typically receives little or no support from other public benefits, including getting only limited benefits from the federal EITC.
It’s an Ideal Time to Create a State EITC
The time is right for California to establish a state EITC. Many low- and moderate-income working families are still struggling to rebound from the Great Recession, and the state’s poverty rate remains the highest in the nation. Investing in a state EITC could go a long way toward reducing economic hardship in our state by helping to move millions of hard-working families and individuals toward greater financial security.
— Alissa Anderson and Luke Reidenbach