In the next few weeks, state policymakers will decide whether to expand California’s Earned Income Tax Credit (CalEITC) — a refundable state tax credit that boosts the incomes of families and individuals who earn little from their jobs. Governor Newsom’s revised budget proposes to expand the credit beyond what he proposed in January, as we explain in our analysis of the May Revision. (For details on the Governor’s January proposal, see our chartbook.) Now all eyes turn to the Assembly and Senate budget committees, which will decide whether to adopt or revise this proposal as they develop their respective budgets in the coming days. On Tuesday, May 14, Assembly Budget Subcommittee 4 will hear the Governor’s proposal, and Senate Budget and Fiscal Review Subcommittee 4 is expected to hear it later in the week.
We at the Budget Center evaluate state policy choices based on research, and this is a case where the evidence is clear: expanding the CalEITC is a smart investment for California’s children. Decades of studies show that earned income tax credits help low-earning workers better provide for their families, while also improving children’s future prospects. Notably, while EITCs are not explicitly health or education policies, they appear to provide important health and educational benefits that likely contribute to a stronger future for children. For example, studies suggest that the EITC:
- Fosters better health for children, potentially improving their health and economic circumstances later in life. Babies born to mothers who likely received the largest increases in the federal EITC following an expansion of the credit had the greatest improvements in standard infant health measures, such as birth weight, which is highly predictive of health and economic well-being in adulthood. Also, the likelihood of having a low-birth-weight baby fell by more than four times as much for black mothers as for white mothers, suggesting that the EITC could be a tool for advancing health equity, as rates of low birth weight are much higher for black mothers. A recent study examining state EITCs found similar effects. Rates of low birth weight fell significantly more in states with more generous, refundable EITCs. In addition, black mothers experienced the largest percentage point decline in low-birth-weight rates.
- Boosts children’s school achievement and educational attainment, potentially improving their earnings prospects in adulthood. Children in families who received larger credits as a result of an expansion of the federal EITC scored better on reading and math tests, with higher scores among younger children. These children were also more likely to complete high school, attend college, be employed as young adults, and earn more. In addition, children whose families received larger credits from the federal EITC during the spring of their senior year in high school were more likely to enroll in college.
Although most research focuses on the federal EITC, it’s reasonable to think that the CalEITC amplifies the benefits of the federal credit, particularly given that California’s credit is the most generous, refundable state EITC in the nation for households with very low incomes. Furthermore, it’s likely that increasing the size and scope of the CalEITC, such as through the Governor’s expansion plan, which targets the largest increases to families with young children, would further enhance these benefits.
Hundreds of Thousands of California’s Children Could be Excluded From the Governor’s Proposal
As policymakers consider expanding the CalEITC, they should recognize that hundreds of thousands of California’s children whose parents earn little from their jobs can’t share in the benefits of the credit currently and won’t benefit from an expansion of the credit unless policymakers act. That’s because tax filers and all of the children they claim must have Social Security Numbers (SSNs) that are valid for work in order to qualify for the CalEITC. As a result, many California children who have immigrant parents — including US-born children — are excluded from the credit. And many more could lose access to the credit if they or their parents lose immigration relief, such as Deferred Action for Childhood Arrivals (DACA) or Temporary Protected Status (TPC), due to federal actions.
With a simple rule change California policymakers could make the CalEITC more inclusive of immigrant families and extend the credit’s benefits to their children. Specifically, policymakers could permit tax filers to claim the credit using a federally assigned Individual Taxpayer Identification Number (ITIN) or any federally assigned SSN. According to my colleague Sara Kimberlin’s estimates, more than two-thirds of the tax filers who’d benefit from this policy change live in households with children. Her estimates also show that this rule change would benefit 208,000 to 297,000 children if policymakers also approve the Governor’s expansion of the credit, at relatively little additional cost: around $117 million to $167 million. This is less than the cost of the Governor’s May Revision proposal to invest another $190 million in the CalEITC.
If policymakers allow tax filers to use ITINs or SSNs to claim the CalEITC but do not also approve the Governor’s expansion, Sara estimates that 158,000 to 226,000 children would benefit from the credit, at an added cost of just $40 million to $57 million. These estimates assume a 50% CalEITC take-up rate among tax filers who appear eligible to use ITINs. However, take up could be lower given that many immigrants fear using public benefits due to anti-immigrant actions by the federal government.
Allowing tax filers to use a federally assigned ITIN or SSN to claim the CalEITC would not only allow more of California’s children to enjoy the credit’s benefits, but also it would:
- Help to reduce the substantial disparities in economic hardship by race, ethnicity, and immigration status. The vast majority of children who could benefit from this policy change are children of color (97%) — primarily Latinx (90%) — and, by definition, all of them are children of immigrants. In California, Latinx children are more than twice as likely to live in poverty as white children. California children of immigrants in working families are also more than twice as likely to live in poverty as other children in working families.
- Reward workers who provide valuable contributions to our state. Immigrants, including those who are undocumented, contribute billions of dollars each year to California’s state and local revenues, helping to support services that benefit all of us. Immigrants and their children are also vital to the state’s labor force, comprising more than half of California’s workers. Undocumented immigrants’ labor alone contributes more than $180 billion each year to California’s economy, according to state Controller Betty Yee.
- Help to reduce economic instability due to low pay and immigration-related labor violations. The Californians who stand to benefit the most from a more inclusive CalEITC include farm workers, cooks, housekeeping cleaners, construction laborers, grounds maintenance workers, and janitors, according to our estimates. These workers are engaged in important, but low-paid — and often unstable — work. Compounding their economic challenges, some may be paid less than they are owed. Immigrant workers are far more likely to be victims of wage theft and other workplace violations, in spite of legal protections that cover workers regardless of their immigration status.
Making the CalEITC more inclusive of immigrant families would be a smart investment for California to make both from an equity perspective — given the valuable, but often under-valued, contributions immigrants make to our society — and from an economic perspective — given that the strength of our collective future depends on the investments we make in all of our state’s children today.
— Alissa Anderson