Congress Must Act to Save Critical Improvements to Tax Credits That Benefit Working Californians

Tomorrow in Washington, a Senate committee will consider permanently extending a set of expiring tax breaks for businesses. Federal policymakers should use this opportunity to save critical, temporary improvements to two tax credits — the federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) — that help millions of working Californians keep more of their earnings. Failing to extend these improvements, which are currently scheduled to expire at the end of 2017, would push millions of Californians into — or deeper into — poverty at a time when the economic recovery is leaving many workers behind. Local businesses and communities throughout the state would also suffer as working families had less to spend in their communities.

Federal Policymakers Made Critical – but Temporary – Improvements to the EITC and CTC

The federal EITC is a refundable tax credit that allows low- and moderate-income working families and individuals to keep more of their earnings, as we describe in our report. Families typically use their credits to pay bills, reduce debt, or cover the cost of major necessary expenses, such as repairing their car. The federal CTC offers additional support — up to $1,000 per eligible child — to help working families provide for their children. If the CTC exceeds the amount of personal income taxes owed, certain families can receive some or all of this credit as a refund.

During the Great Recession, federal policymakers made a number of temporary improvements to the federal EITC and CTC to help working families make ends meet, and these provisions were subsequently extended through 2017. Specifically, policymakers:

  • Increased the federal EITC for families with more than two children to reflect their higher living costs. These families are eligible for a maximum credit of $6,242 in 2015, compared to $5,548 for families with two children and $3,359 for families with one child.
  • Reduced the “marriage penalty” faced by certain families who claim the federal EITC. Some married couples qualify for a smaller federal EITC, based on their combined earnings, than they would if they could each claim the credit separately based on their individual earnings. Policymakers temporarily reduced this so-called “marriage penalty” by allowing joint tax filers to qualify for larger credits.
  • Expanded the reach of the CTC among low-income families. Federal policymakers significantly reduced the earnings needed to qualify for the refundable portion of the CTC from $10,000 (adjusted annually for inflation since 2001) to $3,000 (not adjusted for inflation), making this credit available to more low-income households. As a result of this change, a single mother who works 20 hours per week at the minimum wage can receive a tax refund of $954 in 2015, which would boost her earnings by more than 10 percent. (Specifically, families currently can receive 15 percent of their annual earnings over $3,000 as a refund, up to a maximum of $1,000 per eligible child.) Lowering the earnings threshold for the refundable portion of the CTC also lowered the earnings needed to qualify for the full CTC, making the full $1,000-per-child benefit available to a greater number of families.

Tax Credits for Workers Boost Economic Security, Provide Long-Term Benefits to Children

Policymakers have good reason to extend the temporary improvements to the federal EITC and CTC. These credits not only boost workers’ economic security, they also likely provide long-term benefits to children. Together, both credits lifted an average of nearly 1.4 million Californians, including 700,000 children, out of poverty each year between 2009 and 2012, according to an analysis by the Center on Budget and Policy Priorities. In fact, the federal EITC lifts more children out of poverty each year than any other federal policy. In addition, research suggests that the benefits of tax credits like the EITC and CTC extend to the next generation. Studies find that children whose families receive more income from refundable tax credits perform better in school, are more likely to attend college, and may earn more as adults.

Without Federal Action, Millions of Californians Will Face Greater Economic Hardship

If policymakers allow the temporary improvements to the federal EITC and CTC to expire, millions of working Californians would lose a critical source of income beginning in 2018. This would result in nearly 3.8 million Californians, including almost 1.7 million children, falling into — or deeper into — poverty. Local businesses would also likely suffer as working families and individuals curtailed their spending in response to lower incomes. In total, Californians stand to lose more than $1.6 billion in federal funds in 2018, which would mean less money spent in communities across the state.

Low-Income Californians Would Be Hit Especially Hard if the CTC Improvements Expire

Allowing the temporary provisions of the CTC to expire would hit low-income families especially hard. Working families with annual incomes between $3,000 and an estimated $14,700 would lose access to the credit entirely because the earnings needed to qualify for the refundable portion of the credit would increase to an estimated $14,700 in 2018. This means, for example, that single parents who work 28 hours or less per week at the minimum wage would no longer benefit from the credit. In fact, many families who qualify for California’s new state EITC as well as the CTC would likely lose access to the CTC, causing a significant loss of income that, in some cases, would entirely offset the additional support families gain through the state EITC.

Other families will see their CTC significantly reduced. For example, without federal action, the earnings needed to qualify for the full CTC — $1,000 per child — are expected to rise from around $16,300 in 2015 to more than $28,000 in 2018 for married couples with two children. As a result, the CTC would be cut by more than half, from $2,000 to $795, for families with two children earning $20,000.

The Earnings of Married Couples and Large Families Would Take a Hit if the EITC Enhancements Expire

Failing to extend the temporary enhancements to the federal EITC would reduce or eliminate the credit for certain married couples, due to the increase in the “marriage penalty,” discussed above. In addition, working families with more than two children would lose around $700 if the larger federal EITC for these families is allowed to expire in 2018. These families would also receive a smaller state EITC since California’s credit is set as a percentage of the federal credit.

To see how much income is at stake for working families if policymakers do not extend the enhancements to the federal EITC and CTC, see this interactive calculator.

Federal Policymakers Should Continue to Support Working Californians

Federal policymakers have an opportunity this year to continue to support hard-working families and individuals who’ve been left behind by the uneven recovery. Maintaining improvements to the EITC and CTC would allow millions of workers in California and across the US to keep more of their earnings and build a stronger future for them and their children.

—Alissa Anderson