With Tax Day — the deadline for filing personal income taxes — coming up next Tuesday, it’s a good time to reflect on the purpose of our tax system. As we pointed out in Who Pays Taxes in California?, tax policy is not only a means to an end, allowing us to collectively generate the resources needed to create strong and vibrant communities, it also can be an end in itself, serving as a tool for broadening economic prosperity.
California’s state Earned Income Tax Credit (the CalEITC), created in 2015 and modeled after the federal EITC, is a perfect example of how tax policy can be used to this end. The CalEITC provides much-needed assistance to working families and individuals who are struggling to make ends meet. Parents with earnings under about $14,000 can receive up to $2,706 from this credit — a significant sum that can be used to pay down debt, put a deposit on an apartment, or cover the cost of daily living expenses. What’s more, the CalEITC may enhance the federal EITC’s well-documented benefits, as we explain here.
As California’s only refundable tax credit, the CalEITC also helps to make our tax system more fair. Refundable credits allow people who don’t owe state income taxes, but who do pay other taxes, like the sales tax, to benefit from a tax refund, helping to reduce their total taxes paid. This is important because California’s tax system as a whole is moderately regressive, meaning that lower-income families pay a larger share of their incomes in state and local taxes than do higher-income families.
Expanding the CalEITC Would Allow More Californians to Share in Our State’s Prosperity
There’s growing interest in the Legislature in expanding the CalEITC so that more Californians can share in our state’s prosperity (read our summary of current proposals). Here are three ways policymakers could build on the strong foundation established by the CalEITC and maximize the credit’s success:
- Raise the income limit to qualify for the credit so that more struggling workers can benefit. The income needed to qualify for the CalEITC is extremely low, which means that many workers who are struggling to get by don’t qualify for the credit. Parents with two children, for example, aren’t eligible for the credit unless their annual earnings are less than $14,161 (in 2016) — well below the official federal poverty line for a family of three ($19,096 in 2015). In fact, the CalEITC income limit is so low, full-time minimum wage workers can’t qualify for the credit, which means that the CalEITC doesn’t encourage full-time work. These facts make a strong case for raising the income limit. Policymakers could boost it up to the poverty line so that more workers in poverty can benefit from the credit, or they could raise the income limit up to a full-time minimum wage salary in order to incentivize full-time work. There are compelling reasons to increase the income limit even higher. Full-time minimum wage earnings fall far short of providing what families need to make ends meet in our high-cost state. Plus, substantially boosting the CalEITC income limit would better align our state EITC with the federal EITC (available to working families with annual incomes up to about $45,000).
- Expand the credit to self-employed workers who are currently excluded. California’s state EITC is the only one in the nation that excludes certain self-employed workers. This means that the CalEITC unfairly excludes many struggling workers, including people who face challenges finding traditional jobs. What’s more, this exclusion actually undermines the fundamental purpose of the EITC — to encourage and reward work. Policymakers could strengthen the CalEITC by allowing low-earning self-employed workers to share in the benefits of this credit.
- Bolster efforts to promote the CalEITC. Improving the CalEITC must go hand in hand with a robust effort to promote the new credit, as we discuss in our forthcoming report slated for publication next week. This report summarizes the findings of a survey we conducted last fall that found that very few people who were likely eligible for the CalEITC had heard of the credit. Our report recommends a series of strategies to maximize the success of the CalEITC including by: 1) bolstering state support for community-based efforts to promote the credit through a grant program created last year; 2) providing support to expand promotional efforts at county human services offices; and 3) investing in research to evaluate which outreach strategies are most effective. The report also recommends strengthening, expanding, and promoting free tax preparation services because many low-earning tax filers aren’t getting the full benefit of credits like the CalEITC due to the fact that they pay to have their taxes prepared.
Creating the CalEITC was an important advance in how our state helps workers with low incomes to afford basic necessities and move toward greater financial security. State policymakers can now choose to build on this progress by expanding the CalEITC so that more individuals and families benefit from it.
— Alissa Anderson