Tax Credit for Low-Income Workers (EITC)

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Budget Package Includes a Refundable Tax Credit for Low-Income Workers

The 2015-16 budget package establishes a refundable state Earned Income Tax Credit (EITC) beginning in tax year 2015, making California the 26th state in the nation (and 27th jurisdiction, counting the District of Columbia) with such a credit. Unlike most other state EITCs, California’s new credit will reach only a portion of workers who are eligible for the federal EITC. Specifically, the state credit will be available to households with annual earnings below about $7,000 to $14,000, depending on family size. Additionally, only workers with earnings subject to wage withholding will qualify for the credit; those with self-employment income alone will not be eligible. According to the Administration, about 2 million Californians are expected to benefit from the state credit – roughly one-fifth the number who benefit from the federal credit. Nevertheless, California’s EITC will substantially increase the incomes of very-low-earning households. For example, it will raise by over one-third the incomes of two-child households earning less than about $7,000. In fact, the state and federal credits combined will boost these families’ incomes by nearly 75 percent.

California’s EITC includes another feature that sets it apart from other state EITCs: policymakers must specify in each year’s state budget how large a credit to provide. Specifically, they must set the state credit at a particular percentage of the federal EITC. This percentage, referred to as the “adjustment factor,” will determine the size of the credit for workers with earnings below certain levels that are specified in state statute. If policymakers do not specify the adjustment factor in the budget, then no state EITC will be provided that year. The 2015-16 budget sets the state EITC adjustment factor at 85 percent. Additionally, the state credit will only be provided in years in which the budget provides resources to the Franchise Tax Board (FTB) to oversee administration of the state EITC and audit tax returns that claim the credit.

The 2015-16 budget agreement also includes $22.0 million for the FTB to implement the credit and conduct public outreach efforts to promote it. 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 likely do not have to file state taxes and may not be familiar with how filing works. The budget agreement includes supplemental report language requiring the FTB to provide an update on their implementation efforts by January 10, 2016.


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