Promoting a State EITC Could Draw Millions of Federal Dollars Into California Communities

California appears to be on track to becoming the 26th state in the nation with a state Earned Income Tax Credit (EITC). A robust outreach effort will be critical to the state EITC’s success because the credit targets workers whose earnings are so low that they probably don’t have to file state taxes and may not be familiar with how filing works.

But it’s not only workers with very low earnings who stand to benefit from efforts to promote the new state credit. Communities throughout the state will benefit as well. By both maximizing the number of eligible workers who claim the state EITC and assisting these workers in claiming the federal EITC, California could draw millions of additional federal dollars into local communities.

Here’s how much: The Brown Administration assumes that 825,000 households will claim the state credit in 2015, and we estimate that increasing claims by just 55,000 households would inject around $30 million in additional federal funds into the state. These federal dollars would provide a substantial boost to local businesses, particularly in communities with high poverty rates, as low-earning workers spend their additional income on groceries, rent, and other necessities. The more California can boost federal EITC participation as it promotes a new state EITC, the greater the influx of federal dollars into our communities.

The prospect of drawing millions of federal dollars into local economies is one more reason to establish a state EITC. As policymakers work to finalize California’s budget for the upcoming fiscal year, they have a strong incentive to ensure that the state is well positioned to launch a robust EITC outreach effort that maximizes the benefits of the new credit not just for low-earning workers, but also for communities and businesses across the state.

— Alissa Anderson

 

About these estimates:

The Administration assumes that around three-quarters of California households that are eligible for the new state EITC – 825,000 households in total – would claim it in 2015, the first year of implementation. Additionally, the Administration estimates that these households would receive an average state credit of $460. Given that the state EITC is proposed to equal as much as 85 percent of the federal EITC in 2015, we estimate that households that claim the state credit could be eligible – on average – for a federal credit of $541 ($460 / 0.85). Using these estimates, we calculate that increasing state EITC claims by 55,000 households above the number assumed by the Governor – resulting in a participation rate of 80 percent – could bring roughly $30 million in additional federal funds into California communities. This calculation assumes that these 55,000 households would not claim the federal EITC absent the state’s efforts to promote the new state credit.