Every Californian deserves affordable housing, health care, child care, well-paying jobs, and the resources to build a secure future — and sustained public investment is how we get there. Recent experience shows that such investments are possible with progressive reforms that strengthen California’s tax base, even when federal leaders push for the opposite.
In 2019, state leaders passed a budget that cleverly conformed to — adopted as part of state tax law — select provisions of the federal Tax Cuts and Jobs Act (TCJA), signed by President Trump in 2017. This federal tax package primarily slashed taxes for the wealthy and corporations, while cutting vital funding for food assistance and health care. California smartly chose to conform to only certain provisions that limited tax breaks for high-income households and businesses, thereby taking a step toward making the state’s tax system more fair and raising well over $1 billion in new, ongoing revenue each year.
key impact
Over $1 billion in new ongoing annual revenue, boosting K-14 education and expanding tax credits for working families
What Investments Did the Changes Make Possible?
This new revenue boosted funding for K-14 education and funded a significant ongoing investment in state refundable tax credits. Specifically, this new revenue allowed state leaders to fund the largest expansion of California’s Earned Income Tax Credit (the CalEITC) and the creation of the Young Child Tax Credit, both of which continue to provide hundreds or even thousands of dollars in tax refunds to families and individuals with very low incomes each year, helping them better meet basic needs.
CalEITC Expansion
The largest-ever expansion of the California Earned Income Tax Credit, putting hundreds to thousands of dollars back in the pockets of working families with the lowest incomes.
Young Child Tax Credit
A refundable tax credit, made possible by federal conformity, was created to provide direct financial support to families with young children and their futures.
How Did California Do It?
When the Republican-controlled Congress passed major federal tax legislation in 2017 — a package that largely benefited corporations and high-income households — California did not conform wholesale to federal law. Instead, state leaders, in collaboration with tax experts and advocates, carefully reviewed the changes and selectively adopted the provisions that scaled back tax breaks for wealthy households and corporations. Since these groups received generous federal tax giveaways, including tax rate cuts, many likely saw an overall decrease in taxes when considering both federal and state taxes.
By choosing which federal changes to incorporate into state law, California generated substantial new revenue without raising tax rates — making the tax system fairer while investing in communities.
What’s Next?
On the heels of another round of massive federal tax cuts for large corporations and the wealthy, state leaders should consider how they can recapture some of those revenues to sustain investments in health care, child care, affordable housing, and other assistance Californians need.
