California is poised to become the 26th state in the nation with a state Earned Income Tax Credit (EITC), which is a proven strategy for reducing economic hardship among working families and individuals, as we’ve discussed in various publications and blog posts. Establishing California’s first-ever refundable EITC would be a significant advancement for our state at a time when many workers live in poverty. To help inform the debate over establishing a state EITC as policymakers finalize California’s 2015-16 budget, we take a closer look at how the Governor’s proposed credit would benefit low-wage workers.
The Governor’s proposed EITC, which we describe in more detail in our analysis of his revised 2015-16 budget, would provide a refundable credit targeted to workers with very low earnings, and it would provide a substantial income boost to a single parent raising two children (see chart below). If this parent earns just under $7,000 per year, for example, she would qualify for the maximum state EITC of $2,358 in 2015, under the Governor’s proposal. This means that the federal and state credits combined would boost this parent’s income by nearly three-quarters, assuming this family has no other income source, such as cash assistance through CalWORKs, California’s welfare-to-work program. In fact, the federal and state EITCs combined would be large enough to pull this family out of deep poverty — that is, above half the federal poverty line — but not out of poverty altogether. Without either credit, this family’s earnings from work amount to just 36 percent of the poverty line. The federal EITC would bring this family’s income up to exactly half the poverty line, while the federal and state EITC together would raise it to 62 percent of the poverty line.
The Governor’s proposed state EITC would be even more powerful in reducing the depth of poverty for very-low-income workers when combined with CalWORKs cash assistance. The parent in the example above could qualify for CalWORKs cash assistance totaling just over $6,300 annually in a high-cost county, such as Los Angeles. In addition, this parent could receive almost $2,800 from the federal EITC. Together these supports would more than double this parent’s low earnings, but they would not be sufficient to pull this family out of poverty. The CalWORKs grant would boost this parent’s income from 36 percent to 68 percent of the poverty line, while the additional earnings from the federal EITC would bring her income up to 83 percent of the poverty line. If the Governor’s proposed state EITC is approved, this parent could receive another boost of nearly $2,400, which would almost be enough to pull her family out of poverty. With her earnings from work supplemented by the combination of a CalWORKs grant and the federal and state EITCs, this parent’s income would reach 95 percent of the poverty line.
Including the Governor’s proposed EITC in California’s 2015-16 budget would represent an important first step toward helping reduce economic insecurity among working families and individuals in our state. Although the proposed credit would not be sufficient on its own to lift all eligible households out of poverty, it would provide a sizeable income boost that would reduce the depth of poverty among many of the state’s lowest earners. And once established, the credit could be strengthened in future years to lift even more Californians out of poverty.
— Alissa Anderson