Key Investments for Low-Income Californians in 2019-20 Budget Bill, CalEITC Still Unresolved

With the Legislature scheduled to start voting today on a final 2019-20 state budget, the Budget Center team is sharing an update on the five key issues we have been watching that affect the health and well-being of millions of low- and middle-income children, families, and adults. And with Governor Newsom signaling his approval of the budget bill earlier this week, it’s anticipated significant investments will move forward for Californians.

Read on to learn more about how the 2019-20 budget bill:

  • helps children and parents in need of subsidized child care;
  • promotes financial stability for CalWORKs parents;
  • better supports students on Competitive CalGrants; and
  • sets in motion the extension of the managed care organization tax.

Plus, we break down what remains to be worked out on an expansion of the CalEITC.

1. Expansion of California’s Earned Income Tax Credit – CalEITC

Governor Newsom and state legislators have yet to reach agreement on an expansion of the CalEITC. The Senate Budget Committee proposed to spend somewhat more on the expansion than the Governor, while the Assembly Budget Committee proposed to spend slightly less. Also, the budget committees in both houses proposed extending the credit to immigrant communities who are currently excluded — a proposal not included in the Governor’s expansion plan. Another significant sticking point in the negotiations pertains to the Governor’s tax conformity proposal. Since January, the Governor has proposed offsetting the cost of an expanded CalEITC by conforming to several federal tax law provisions mainly affecting business income that would, on net, increase state revenue. These changes would require a two-thirds vote of each house of the Legislature. Budget committees in both houses resisted linking tax conformity to the expansion of the CalEITC and proposed deferring action on the Governor’s tax conformity proposal. The budget bill that will be voted on today assumes a revenue loss from a CalEITC expansion and a revenue gain from tax conformity. However, the specific policy changes behind these assumed revenues appear to still be in negotiation.

What’s at stake for California children and families:

In our recent piece — Expanding the CalEITC Is an Effective Way to Invest in California’s Children, But Hundreds of Thousands of Children of Immigrants Won’t Benefit Unless Policymakers Act — we argued that making the CalEITC more inclusive of immigrant families would be a smart investment for California, particularly given that it would increase economic security for up to around 300,000 children at relatively little additional cost (an estimated $167 million). More broadly, our March chartbook — Expanding the CalEITC: A Smart Investment to Broaden Economic Security in California showed that expanding the CalEITC would help low-earning workers and their families who are struggling to afford California’s high cost of living. We also suggested that it could serve as an investment in California’s children given research linking earned income tax credits to improvements in children’s health, educational attainment, and adult earnings.

Regarding tax conformity, our piece — California Can Raise Revenue for New Investments in an Unexpected Way — By Adopting Parts of Last Year’s Federal Tax Giveaway, plus a fact sheet on the the Governor’s Proposed Tax Conformity Package — show that conforming to selected portions of federal tax law would raise revenues for new investments while also making California’s tax code fairer. One component of the original tax conformity package that the Budget Center has expressed concerns about is the Governor’s proposal to provide state-level tax incentives for investments in Opportunity Zones (OZs). Learn more about what the OZ Program is and how it may affect California’s communities in our report, The Federal Opportunity Zones Program and Its Implications for California Communities.

2. Additional Spaces for Children in Subsidized Child Care Programs

The Legislature’s negotiated budget agreement includes funding that could serve roughly 21,000 additional children from low- and moderate-income families in California. The increased investment breaks down to $80.5 million Prop. 64 for the Alternative Payment Program, $50 million General Fund for the General Child Care program, and $31 million General Fund for full-day slots in the California State Preschool Program. Funding to serve more children is in addition to hundreds of millions in other investments for the state’s subsidized child care and development system that were included in the administration’s and the legislature’s budget plans.

What this means for children and families:

As our recent series of fact sheets show, 1 out of 3 children in California are eligible for subsidized child care and development programs, yet 1.8 million children are unable to access care. A substantial investment in the state’s system must always include additional spaces for children in order to provide relief for hard-working families that are struggling to make ends meet. While there is much work to be done, the budget agreement is a positive step forward for low- and moderate-income families in California.

3. Increasing Investments in CalWORKs

The Legislature has agreed to two significant increases in CalWORKs. First, they are expected to raise the CalWORKs asset limit under the budget agreement. Under current law, families are ineligible for CalWORKs if they have more than $2,250 in assets (such as in a checking or savings account) or own a vehicle worth more than $9,500. This restriction can prevent families from saving for unexpected emergencies and keeps them vulnerable to economic shocks. The Legislature proposes increasing the asset limit to $10,000 and allowing a car’s value to reach $25,000.  

Second, the Legislature has also decided to increase the value of the earned-income disregard (EID). The EID is the amount of a CalWORKs recipient’s gross monthly earnings that is overlooked when their grant levels are calculated. State law exempts the first $225 of monthly earnings, then 50% of the remainder. Unfortunately, the value of the EID has remained stagnant for over two decades, falling behind the rising cost of goods and services, as well as a growing minimum wage. State legislators have now agreed to increase the EID to $500, which would allow CalWORKs parents to keep more of their earnings. However, they have decided against ensuring that the EID will keep pace with inflation.

What this means for CalWORKs families:

The Legislature’s actions are a welcome addition in their renewed support for families receiving CalWORKs support. Though legislators did not approve eliminating the asset test entirely, raising the limit still promotes financial stability for struggling families. Additionally, raising the value of the EID allows CalWORKs parents to retain more of their earnings so they can better meet their basic needs. In future years, policymakers should tie the EID to inflation, so that its value does not decline. To learn more about the disregard, see the Budget Center’s analysis: The Earned-Income Disregard Falls Short of Supporting Working Families in CalWORKs.

4. Increasing the Number of Competitive Cal Grants

State leaders have agreed to increase the number of available Competitive Cal Grant awards by over 15,000. Nontraditional students, such as those who attend college more than a year after high school, are not guaranteed state financial aid. Instead, they must apply for a Competitive Cal Grant. There are nearly 350,000 students eligible for competitive cal grants and only 25,700 awards are available. The budget agreement increases the number of awards available to 41,000.

What this means for students:

As our previous analysis noted, increasing the number of Competitive Cal Grant awards would help ensure college is affordable for a larger share of nontraditional students. The budget agreement makes a step in the right direction. However, even with the increased number of awards, over 300,000 eligible students will not receive financial aid.

5. The Pending Expiration of the Managed Care Organization (MCO) Tax

Governor Newsom dropped his initial reluctance to ask the federal government to approve an extension of California’s tax on health insurance plans — or MCOs — that expires on July 1. The 2019-20 budget package will authorize a new MCO tax, which presumably would be in effect for at least three fiscal years (2019-20 to 2021-22) assuming a new tax wins federal approval in the coming months, which is highly likely. Currently, the MCO tax generates a net state General Fund benefit of well over $1 billion per year, and this benefit would continue if the tax is extended beyond July 1. However, Governor Newsom and state legislators agreed that the 2019-20 state budget should not reflect this General Fund benefit until California receives federal approval for the MCO tax extension. In other words, these General Fund dollars will not be recognized in the 2019-20 budget because they are not yet in hand.

What this means for low- and middle-income Californians:

By creating a substantial General Fund benefit, the MCO tax increases the capacity of the state budget to support public services and systems, including health care. Without an extension of this tax, California would lose a major opportunity to create or expand investments that can improve the lives of low- and middle-income Californians. For more information on the MCO tax and why an extension is essential, read: Five Key Facts About California’s Soon-to-Expire “MCO Tax.”

Support for this piece was provided by First 5 California.