March 2019 | By California Budget & Policy Center
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California Budget Perspective is the Budget Center’s annual “chartbook” publication that takes a wide-ranging look at the Governor’s proposed state budget.
California Budget Perspective 2019-20 examines the social, economic, and policy context for this year’s budget; discusses key elements of — and priorities reflected in — the Governor’s proposal; and highlights issues to watch in the coming months.
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The California Earned Income Tax Credit (CalEITC) is a refundable state tax credit that helps people who earn little from their jobs to pay for basic necessities. The CalEITC builds on the proven success of the federal earned income tax credit (EITC), which reduces poverty and boosts employment, and may even improve children’s health and educational attainment.
A new California Budget & Policy Center guide, Expanding the CalEITC: A Smart Investment to Broaden Economic Security in California, provides an overview of how EITCs support families, children, and communities; examines key features of the CalEITC; and shows how Governor Gavin Newsom’s 2019-20 budget proposal to significantly expand the credit will impact state residents with low incomes. The guide also highlights several ways that the CalEITC could be further strengthened, including by extending the credit to working immigrants who pay taxes and to unpaid family caregivers.
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View the Technical Appendix for this report.
View a presentation of this research.
Earlier estimates of this research were published in The Institute for College Access and Success’ (TICAS) compendium Designing Financial Aid for California’s Future.
Historically, the state paid most of the cost of higher education at California’s public institutions: the California Community Colleges (CCC), the California State University (CSU) and the University of California (UC). However, years of budget cuts and tuition hikes have shifted more of the cost to students and their families, especially at the state’s four-year institutions: the CSU and the UC. This cost-shift undermines California’s commitment — as outlined in the Master Plan for Higher Education — to ensuring that a quality higher education is accessible and affordable to all eligible Californians. It also means that more students are graduating with increasing amounts of student loan debt and working excessive hours that impact their ability to graduate on time while others are forgoing higher education altogether.[1] A well-educated workforce is critical to the state’s economic future. Yet, at current rates, California will not produce enough college graduates to meet the demands of the state’s economy in the years ahead.[2]
In order to meet the state’s workforce demands, reforms must be made to ensure all students have access to an affordable higher education that will prepare them to enter the workforce with the skills they need to be successful. One of the greatest challenges for students seeking a higher education, and one of the greatest opportunities for reform, is the design of the financial aid system. Most state and federal student financial aid is linked primarily to tuition and largely fails to assist students with other major costs of college attendance, including housing, food, and transportation. Understanding the full cost of college is essential for decision-makers, advocates, and others who seek to expand college opportunities for all Californians.
This analysis estimates the cost of implementing a state financial aid program designed to enable qualified Californians to pursue undergraduate study full time at any of the three public higher education sectors — the CCC, CSU and UC — eliminating the need for students to take out loans or work unmanageable hours. This analysis develops two models to estimate the cost of an affordable-college program in California. One model estimates the cost of a “shared responsibility” program, in which the state covers students’ remaining unmet financial need after taking into account selected federal grants, an expected parent contribution, an expected student contribution from work earnings, and any currently available state and institutional aid. The second model estimates the cost of a “government responsibility” program, in which the state covers students’ remaining unmet financial need after taking into account only selected federal grants and any currently available state and institutional aid, with no student or parent contribution.
These models are intended to show how the state might calculate the cost of reforms (see the “cost of college” and “paying for college” tables) as well as the total cost of any such changes (see the “total costs” tables). As a point of departure, both of these models assume that all qualified students — based on current estimated enrollment levels at the CCC, the CSU, and the UC during the 2018-19 academic year — would be eligible for new state assistance, regardless of family income. Of course, policymakers could pursue other options. For example, policymakers could choose to focus new state resources on low- and middle-income students, rather than all students, in which case total costs would be lower.
This analysis provides estimates on a per-student, per-sector, and statewide basis. The estimates regarding 1) the cost of college and 2) paying for college are based on the most recent data available from multiple sources. The “cost of college” category consists of institutional costs, such as tuition and fees, and living costs, such as housing and food. The “paying for college” category consists of financial aid as well as expected parent and student contributions (the latter of which are estimated only for the shared responsibility model). A full description of the methodology used to develop this analysis can be found in the Technical Appendix.
Students pursuing a college degree face two main costs: tuition and fees charged by the institution and student-related living expenses such as housing, food, transportation, and books and supplies (often referred to as “non-tuition and fees”). The following table estimates the per-student cost of attendance for each sector. These estimates are for California residents who attend full-time (12 units or more) as an undergraduate at one of the state’s public colleges. This analysis uses full-time enrollment to weight per-student costs by housing type (on-campus, off-campus, or with family), dependency status (dependent or independent), and income (low-income, middle-income, or high-income).
This analysis incorporates three financial resources that help students to cover the cost of college: an expected parent contribution, students’ earnings from work, and financial aid. Parent contribution refers to the amount a student’s parents are estimated to be able to contribute toward college expenses. Expected parent contributions vary by income level — the estimates displayed in the table below are average contributions weighted by family income level. The student earnings figures assume that all students work 15 hours per week at the California minimum wage ($11 per hour) during the academic year and 40 hours per week at the minimum wage during the summer, though some students may choose to make their contribution through borrowing or other means.[3]
The following table shows the average annual amount students and parents are estimated to contribute towards students’ total cost of attendance.
In addition to student and parent contributions, many students pay for college with assistance from federal financial aid. This analysis assumes that all eligible students receive some federal gift aid from the Pell Grant and the Federal Supplemental Educational Opportunity Grant (FSEOG). The following table shows average per-student federal award amounts.
California and its public institutions provide a generous amount of financial aid to students from families with low incomes, administering over $4 billion in need-based aid annually. However, most of this aid is targeted towards tuition and fees. Because the goal of this analysis is to estimate the cost of a new state financial aid program that covers any remaining unmet financial need for students’ total cost of attendance, state and institutional aid estimates are not provided on a per-student level.
This analysis provides detailed cost estimates for a new state program that allows full-time resident undergraduate Californians to receive an affordable college education at one of the state’s public higher education institutions. This section presents two models for achieving this goal. Each model displays the estimated costs and unmet financial need per sector, based on 2018-19 full-time resident enrollment (430,000 at CCC; 370,000 at CSU; and 180,000 at UC).
Option #1: Shared Responsibility Model
Option #1 estimates the total unmet financial need for qualified students after accounting for an expected parent contribution, an expected student contribution, and existing federal, state, and institutional aid.
Option #2: Government Responsibility Model
Option #2 estimates the total unmet financial need for qualified students after accounting for existing federal, state, and institutional aid, with no parent or student contribution.
Total Costs
The following table displays the total unmet financial need for all three sectors combined, after accounting for existing state and institutional aid, federal aid, and — where applicable — parent and student contributions. The total estimated unmet financial need for the shared responsibility model is $1.8 billion ($411 million at CCC, $939 million at CSU, and $475 million at UC). The total estimated unmet financial need for the government responsibility model is $15 billion ($4.5 billion at CCC, $7 billion at CSU, and $3.5 billion at UC). Both sets of estimates are on top of existing need-based state and institutional aid.
The program costs associated with these two models rely on several assumptions and the best available data regarding costs and enrollment. Actual program costs could vary considerably — increasing or decreasing the estimates presented here. Costs could be higher if enrollment increased significantly due to the availability of additional state-funded financial aid; living costs increased significantly (or were adjusted to reflect regional cost variations); more students lived off-campus; tuition increased; or federal and institutional aid decreased. Alternatively, costs could be lower if more students applied for and received federal financial aid due to increased outreach efforts; the minimum wage increased; more campuses participated in the FSEOG program; parents’ contributions exceeded expectations; federal or institutional aid increased significantly; or the program were limited to students from low-income families.
Ensuring that higher education is accessible and affordable for all Californians who wish to pursue a college degree is a widely shared goal among policymakers. Even with state and institutional aid, students experience significant unmet financial needs that create a barrier to success. Understanding how the current system falls short in helping students to afford a college education is essential to addressing California’s college affordability challenges. This analysis provides two estimates of what an affordable-college program might cost California if the state were to cover unmet financial need for qualified students. While the path forward requires significant investments, California’s students and economy cannot afford to wait.
[1] Estimate based on California’s 2018 minimum wage for employers with 26 employees or more. For more information, see the Technical Appendix.
[2] Michael Mitchell, et al., Unkept Promises: State Cuts to Higher Education Threaten Access and Equity (Center on Budget Priorities: October 2018); and Lauren Dundes and Jeff Marx, Balancing Work and Academics in College: Why Do Students Working 10-19 Hours per Week Excel? (Journal of College Student Retention: May 2006).
[3] Hans Johnson, Marisol Cuellar Mejia, and Sarah Bohn, Will California Run Out of College Graduates? (Public Policy Institute of California: October 2015).
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At the end of 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), passed with solely Republican support in Congress. As the Budget Center has previously noted, the TCJA — the most extensive revision of the tax code since 1986 — primarily cuts taxes for the wealthy and corporations while increasing the federal deficit by $1.9 trillion over 10 years, putting at risk funding for services that support low- and middle-income families.
Given the severe deficiencies of the TCJA, Californians may be surprised to learn that the new federal tax law has some potential benefits for our state — if our policymakers choose to act. There is much in the TCJA for advocates of tax fairness to dislike, including the large cut in the corporate tax rate (from 35% to 21%), the new deduction for income from “pass-through businesses,” and the reduction in the top personal income tax rate. All of these changes will lead to massive federal revenue losses. However, the new law also includes some reasonable changes that raise federal tax revenue in order to partially offset these losses, including limiting federal tax breaks that are costly, unfair, or economically inefficient. California now has the opportunity to increase state revenue by adopting (or “conforming to”) some of these provisions.
Unlike many other states, California does not automatically conform to changes in the federal tax code. Instead, it selectively conforms to the Internal Revenue Code as of a fixed date, which is currently January 1, 2015, meaning most of the changes made by the TCJA are not in effect for the purposes of calculating state taxes for California taxpayers. Conforming to federal tax law increases simplicity for tax filers, but there are many provisions of the federal code that don’t align with the state’s policy goals. California practices “selective conformity,” allowing policymakers to conform to some federal tax provisions, but not others. Since the state sets its own tax rates on personal and corporate income, the reductions in federal rates do not apply to state-level taxes. Thus, California can end up with more income tax revenue by conforming to those TCJA provisions that limit tax deductions and exclusions while maintaining current state tax rates.
Corporations that have profits in California currently pay significantly less in state income taxes as a portion of their state profits than they did in the 1980s, partly reflecting the increase in the number and generosity of state tax breaks that have been created over the past few decades. The state can narrow some of these tax breaks by selectively conforming to federal law. While the state’s fiscal situation is currently very positive (the Legislative Analyst’s Office estimates that over $20 billion in discretionary resources is available to allocate through the 2019-20 budget process), Governor Newsom has proposed ambitious new investments that will require new ongoing expenditures, such as more than doubling the total amount of credits provided under the state’s Earned Income Tax Credit (CalEITC). The Governor proposes to offset revenue losses from the CalEITC expansion by conforming to certain federal tax law changes mainly affecting businesses. These include “flexibility for small businesses; capital gains deferrals and exclusions for Opportunity Zones; and limitations on fringe benefit deductions, like-kind exchanges, and losses for non-corporate taxpayers; among others.”
The three revenue-raisers in the Governor’s proposed conformity package — the limitations on fringe benefit deductions, like-kind exchanges, and non-corporate losses — would increase state revenue by $1.2 billion, according to recently-released estimates. The other two provisions noted would cost the state revenue and reduce the net gain to closer to $1 billion. Not mentioned in the budget proposal are two other business-related TCJA provisions that could together bring in another $1.3 billion, according to Franchise Tax Board (FTB) estimates: limitations on Net Operating Losses (NOLs) and business interest deductions. If California were to conform to these two provisions in addition to the three revenue-raisers included in the Governor’s budget proposal, the state treasury could see approximately $2.5 billion in increased annual revenue, which could be used to support investments that improve economic security and opportunity for Californians.
The remainder of this post examines these five revenue-raisers, the two revenue-losing provisions proposed by the Governor, and other revenue-losers in the TCJA that California should avoid adopting.
Limitations on Fringe Benefit Deductions
The TCJA places new restrictions on federal tax deductions employers may take for certain expenses, including entertainment-related activities, transportation benefits, and some meals. Under prior federal law, businesses could deduct 50% of the costs of activities “generally considered to constitute entertainment, amusement, or recreation” (for example, a sporting event or theater performance) as long as they were directly related to the active conduct of the taxpayer’s trade or business. The TCJA disallowed this deduction. The previous federal deduction for transportation-related fringe benefits, such as parking and commuter benefits, is also disallowed except to ensure an employee’s safety. Additionally, expenses related to meals provided to employees through certain on-site eating facilities or for the convenience of the employer, which were previously fully deductible, are now limited to 50% through 2025 and are not deductible in subsequent years. Taken together, conforming to these limitations would raise an estimated $160 million in state revenue.
Limitation on Like-Kind Exchanges
Generally, when taxpayers sell or exchange an asset and make a profit, they owe tax on that capital gain at the time of the transaction. Prior federal law (to which California currently conforms, with modifications) allowed taxpayers to defer taxes on gains from an exchange of a business or investment property (excluding inventory, stocks, bonds, and other securities, and other specified types of property) if it was exchanged for a similar (“like-kind”) property. The capital gain would only be recognized once the taxpayer sold or exchanged the new asset in a later taxable transaction. However, if the new asset was held until the taxpayer’s death and passed on to an heir, the capital gain would escape taxation completely. This is because the federal government and California do not levy capital gains taxes when an heir inherits property — the heir only owes tax on the increase in value between the time the property is inherited and the time it is sold.
Under post-TCJA federal tax law, only real estate properties are eligible for like-kind exchange deferrals. For instance, an exchange of a vehicle used in connection with a business is now taxable at the federal level, but not at the state level. If California conformed to this limitation, FTB estimates that the state could gain $200 million in revenue. FTB’s latest tax expenditure report estimates the total state cost of like-kind exchange deferrals (including real estate property) for 2019-20 to be nearly $1.2 billion, suggesting that the state could gain significantly more revenue by going beyond conforming to the new federal law and simply eliminating tax deferrals for all types of like-kind exchanges. As the FTB report notes, allowing tax deferral for exchanges of some types of property and not others can be economically inefficient because it may encourage unnecessary investment in properties eligible for favorable tax treatment. And let’s not forget that the real estate industry fared quite well in the TCJA (see here and here), being exempted from several restrictions in the new law.
Limitation on Business Interest Deductions
Prior to the TCJA, businesses were generally able to fully deduct business-related interest expense from their taxable income. The new law limits the federal deduction for net interest expense (that is, interest expense minus interest income) to 30% of the taxpayer’s “adjusted taxable income” in a given tax year. Adjusted taxable income is essentially defined as business-related income before taking into account interest expense, interest income, and certain other deductions. An exception is made for interest expense incurred by vehicle dealers who finance their inventory of vehicles held for sale, known as “floor plan financing interest,” which continues to be fully deductible. The TCJA also allows any federal business interest deduction that cannot be used in a taxable year to be carried forward indefinitely and used in future tax years. Special rules apply to partnerships and S corporations to prevent partners and shareholders from double-counting deductions. Businesses with less than $25 million in gross receipts (averaged over the previous three tax years) are exempt from the new limitations, as are certain public utilities. Additionally, real estate companies and farming businesses may opt out of the new limitation.
The major justification for limiting interest deductions is that doing so reduces the tax incentive for companies to take on excessive debt. Since deductions are allowed for interest expense but not for returns to equity (in the form of dividends and capital gains paid to shareholders), the tax code makes it more attractive for businesses to finance investments with debt rather than equity. Businesses that take on high levels of debt are more susceptible to bankruptcy, and this can have ripple effects throughout an entire economy. As discussed in an International Monetary Fund report, the bias toward debt financing likely exacerbated the global financial crisis of 2007-2008 by encouraging high debt levels. Although the TCJA’s limitation on interest deductions will not fully equalize the tax treatment of debt and equity, it will at least reduce the debt bias. Conforming to this provision can raise $650 million for California while further limiting the overall tax preference toward debt.
Limitation on Net Operating Loss Deductions
A net operating loss occurs when a taxpayer’s total tax deductions exceed total income for the tax year. NOLs can be claimed by both corporate and individual taxpayers, but are usually related to losses from operating a business. Pass-through businesses like S corporations and partnerships cannot claim NOLs at the entity level, but their shareholders or partners can claim NOLs based on their respective shares of the businesses’ income and deductions. Before the TCJA, taxpayers were permitted to carry back these NOLs to offset federal taxable income, dollar-for-dollar, for up to two years prior to the year the NOL was incurred. In addition, they were able to carry forward NOLs to offset taxable income for up to 20 years into the future. As a simple example, if a corporation had an NOL of $500,000 in tax year 2017 (prior to the passage of the TCJA) and taxable income of $250,000 in each of the two previous tax years, it could file amended tax returns to claim a deduction of $250,000 in tax years 2015 and 2016, zeroing out its federal tax liability in both years. The corporation would then get a refund for previously paid taxes for those years. If it had no taxable income in the two prior years or if the NOL exceeded the corporation’s aggregate taxable income for those years, it could carry the remainder forward to reduce its tax bill in future years.
Under the TCJA, corporations and other taxpayers are no longer able to carry back their NOLs (with the exception of certain disaster-related farm losses) to offset federal taxable income. Additionally, NOL carryforward deductions are now limited to 80% of taxable income in any given year, but the 20-year limit has been removed so losses can be carried forward indefinitely. California generally conforms to pre-TCJA federal law at present, but in past years has had its own rules concerning NOLs. Prior to 2013, California had not allowed NOL carrybacks, and in certain years had limited or suspended NOL carryforwards.
There is a legitimate rationale for allowing businesses to average income over several years for tax purposes, given that businesses often incur losses in early years and during economic downturns. However, allowing NOL carrybacks can exacerbate state fiscal challenges during a recession, since it requires that the state refund tax revenues that have likely already been spent. Without NOL carrybacks, businesses may still reap the benefits of income averaging by claiming NOL carryforwards. Limiting carryforwards to a percentage of taxable income reflects the concept that even if a business isn’t profitable, it still benefits from public services like education and infrastructure and should thus be expected to pay some level of taxes. The new federal 80% limitation on NOL carryforwards ensures that corporations cannot use NOLs to entirely wipe out their tax liability in a given tax year. If California conforms to the new limits on NOL carrybacks and carryforwards, the state could bring in an additional $650 million annually in revenue.
Limitation on Losses for Non-Corporate Taxpayers
For taxpayers that have interests in so-called “pass-through businesses” such as S corporations, partnerships, limited liability companies, and sole proprietorships, the TCJA limits the federal deduction for business losses that can offset other income, such as salary and investment income. Prior to the TCJA, business losses could be used to reduce or even zero out federal tax liability, even for individuals with significant income from non-business sources. As with any tax deduction for individuals, higher-income taxpayers receive a larger tax benefit per dollar deducted because they are in higher tax brackets. Federal law now only allows taxpayers to deduct up to $250,000 in “excess business losses” (defined as the amount by which business-related deductions exceed business-related income). The threshold amount is $500,000 for married taxpayers filing joint returns. Any excess business losses above the threshold would have to be carried forward to offset income in future tax years as part of the taxpayer’s NOL. This limitation is scheduled to sunset after 2025 for federal tax purposes. FTB estimates that conforming to the excess business loss limitation would generate $850 million for California.
The Governor also has indicated that he wants California to conform to two additional TCJA provisions that would result in state revenue losses – losses that would partially offset the increased revenues from the other conformity provisions. Specifically, the Governor is calling for “flexibility for small businesses,” which is likely a reference to the TCJA’s provision allowing more “small” businesses to use simplified accounting methods. Primarily, this provision increases the size threshold for small businesses that may use the cash method of accounting (rather than the accrual method) from $5 million in gross receipts to $25 million. Under the cash method, businesses recognize income when it is received and expenses when they are paid; under the accrual method, income and expenses are recognized when they are incurred. The cash method allows some businesses to defer taxes by recognizing more expenses in the current tax year and postponing income to the next year. As the Joint Committee on Taxation explains, the cash method is “administratively easy and provides the taxpayer flexibility in the timing of income recognition” while accrual methods “generally result in a more accurate measure of economic income.” Conforming to this provision would make filing taxes simpler for California businesses affected by the change in federal law, since it would be administratively burdensome to use different accounting methods for federal and state tax purposes. However, it would also reduce the revenue gains from enacting other conformity items by about $100 million (though this number would likely decrease over the next several years, consistent with the 10-year federal revenue estimates).
The Governor also proposes to conform — at least in part — to the new federal Opportunity Zone tax incentives, which allow individual and corporate investors to defer and reduce their capital gains taxes if they invest in economically distressed communities that meet certain federal criteria and have been designated by states as Opportunity Zones. The tax incentives are very generous to investors and come with few strings attached. Although the incentives may encourage increased investment in some underserved communities, there is also a risk that the subsidies may accelerate gentrification and displacement in some areas or be used for projects that have little benefit for current community residents. Conforming to these tax incentives would cost the state an estimated $37 million in the first year, rising to $70 million in the following year — but the long-term costs would be higher than suggested by the early year estimates since the tax incentives become more generous as Opportunity Zone investments are held longer. The Budget Center will explore these new incentives in more detail in future publications.
Beyond the items highlighted in the Governor’s budget, the TCJA contains some large new unnecessary federal tax breaks for businesses that would cost California significant revenue if the state were to adopt them. For instance, one set of provisions would repeal the federal corporate Alternative Minimum Tax (AMT) and temporarily allow corporations to claim a partially refundable tax credit for AMT paid in previous years. These provisions together would cost the state $300 million or more if adopted by California, according to FTB. Even more concerning is the new federal 20% deduction for pass-through business income, which would reduce state revenues by $2.6 billion per year if adopted. The pass-through deduction is as poorly designed as it is costly; an estimated three-fifths of the federal tax benefits will go to the richest 1%, and this tax break is vulnerable to myriad abuses by higher-income taxpayers. The Governor does not propose conforming to these poorly-conceived federal provisions, and the state should avoid adopting them as they would not enhance state tax fairness.
Over the next several months, the Newsom Administration and the Legislature will need to carefully consider the various tax conformity options in terms of their effects on the state budget as well as the fairness and efficiency of the tax code. Adopting any provision that increases taxes on any state taxpayer will likely require a two-thirds vote in each house of the Legislature, which could be an uphill battle politically. Conforming to selected portions of the recent federal tax law offers policymakers an opportunity to raise revenues for new investments by limiting inefficient or unnecessary business tax breaks while resisting pressures to adopt new tax breaks that are not needed. Doing so would make California’s tax code fairer, offset some of the harmful and inequitable aspects of the TCJA, and make significant funding available to support state policy goals and invest in the low- and moderate-income Californians who have benefitted less from recent federal tax cuts.
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On January 10, Governor Gavin Newsom released a proposed 2019-20 budget that calls for a series of bold and smart investments in broadening economic security and opportunity for Californians, while continuing to strengthen the state’s underlying fiscal health.
The Governor forecasts revenues that are $8.1 billion higher (over a three-year “budget window” from 2017-18 to 2019-20) than previously projected in the 2018-19 budget enacted last June, driven largely by continued economic growth.
The Governor’s proposal includes a range of significant expansions in support of low- and middle-income Californians who are struggling to make ends meet and access greater economic opportunity, including doubling the state’s Earned Income Tax Credit, working toward universal preschool for 4-year olds, investing in child care infrastructure, expanding health care to move closer to universal coverage, expanding paid family leave, boosting CalWORKs grants, and increasing investment in state higher education systems. Recognizing that high housing costs contribute to California’s high poverty rate, Governor Newsom also proposes a mix of policies and an expanded state role to address housing needs and homelessness. These policies would make California more affordable and more equitable for millions of Californians.
Many of the Governor’s proposals — such as child care and housing — use one-time investments in 2019-20 to lay a foundation for significant build-out of public supports over the next several years.
Confronted by federal challenges to Californians and their communities, the budget proposal calls for investments to support immigrants, improve state and local emergency preparedness, and ensure that the 2020 census is as accurate as possible.
Recognizing that California is experiencing a period of sustained economic growth and a positive revenue outlook, the budget proposal also calls for paying down debts and building up reserves. These proposals, in combination with one-time and ongoing investments, represent a balanced approach to managing the state’s fiscal health.
The following sections summarize key provisions of the Governor’s proposed 2019-20 budget.
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Economic and Revenue Conditions
Children and Families
Economic Security
Health
Education
Other Key Priorities in the Proposed Budget
The Governor’s proposed budget assumes that the current economic expansion continues in the near-term, albeit at a more moderate pace than in recent years. Specifically, the Administration projects that national economic growth, as measured by the change in Gross Domestic Product (GDP), will begin to moderate this year and then gradually slow each subsequent year through 2022, the end of the forecast period. The Administration also expects economic growth to slow in California during this period.
In terms of California’s labor market, the Governor’s forecast assumes steady job growth that continues to increase the state’s labor force participation rate and maintains the state’s unemployment rate at historically low levels. The forecast notes that low unemployment in 2018 failed to translate into significant wage increases thus far, other than for high-income earners, but anticipates that more workers will begin to see real wage increases this year.
The proposed budget summary outlines several risks to the Governor’s projections for California’s economic growth. These include a number of national factors, such as a large drop in the stock market, which has been experiencing significant fluctuations since last year; a national recession, which could come at a time when many people have not yet recovered from the previous downturn and when the federal government is not well-positioned to ramp up spending to mitigate its damage; and the ongoing trade war with China, California’s third-largest trading partner. Additionally, the Governor’s forecast notes that California will need to address the aging population, declining birth rates, and insufficient housing supply in order for the state’s economic growth to continue.
The proposed budget assumes increases in revenues over the three-year “budget window,” from 2017-18 to 2019-20, while acknowledging that rising risks to the state’s economic outlook could affect the revenue forecast.
The Governor’s proposal projects General Fund revenues for the budget window to exceed the projections in the enacted 2018-19 budget package by $8.1 billion, before accounting for transfers such as deposits into the rainy day fund. This includes higher-than-expected revenues from the personal income tax (PIT) and the corporation tax (CT), partially offset by lower-than-expected revenues from the sales and use tax (SUT). Together, these three taxes are expected to comprise almost 97% of General Fund revenues in the proposed 2019-20 budget.
PIT revenues are projected to be $7.5 billion higher over the three-year budget window than estimated in the 2018-19 budget agreement, reflecting strong growth in wages and capital gains, particularly among high-income taxpayers. SUT revenues are expected to be $1.4 billion lower, primarily because a spike in business investment that was anticipated due to last year’s changes to federal tax law did not occur. Additionally, the lower SUT projection reflects consumer spending restraints due to high housing costs and the continued erosion of the state’s sales tax base. CT revenues are estimated to be $1.3 billion higher over the budget window, though the budget proposal warns this is expected to be a one-time increase largely resulting from shifts in the timing of corporate tax payments.
California voters approved Proposition 2 in November 2014, amending the California Constitution to revise the rules for the state’s Budget Stabilization Account (BSA), commonly referred to as the rainy day fund. Prop. 2 requires an annual set-aside equal to 1.5% of estimated General Fund revenues. An additional set-aside is required when capital gains revenues in a given year exceed 8% of General Fund tax revenues. For 15 years — from 2015-16 to 2029-30 — half of these funds must be deposited into the rainy day fund and the other half is to be used to reduce certain state liabilities (also known as “budgetary debt”).
The Governor’s proposed budget includes a transfer of $1.8 billion to the BSA for 2019-20, bringing the reserve’s balance to $15.3 billion by the end of the fiscal year. Prop. 2 requires that when the BSA balance has reached its constitutional maximum of 10% of General Fund tax revenues, any additional dollars that would otherwise go into the BSA must be spent on infrastructure, including spending on deferred maintenance. However, while the BSA has reached this maximum, the Governor’s budget assumes that constitutionally required deposits will continue to be made since the account’s maximum balance was achieved in part through supplemental payments in prior years. This assumption is based on an opinion by the Legislative Counsel, but could be subject to a legal challenge.
The BSA is not California’s only reserve fund. Each year, the state deposits additional funds into a “Special Fund for Economic Uncertainties” (SFEU). The Governor’s proposed budget assumes an SFEU balance of $2.3 billion. Additionally, the 2018-19 budget agreement created the Safety Net Reserve Fund, which holds funds that can be used to maintain benefits and services for CalWORKs and Medi-Cal participants in the event of an economic downturn. The Governor proposes depositing $700 million into the Safety Net Reserve, bringing the fund’s balance to $900 million. Taking into account the BSA, SFEU, and the Safety Net Reserve, the Governor’s proposal would build state reserves to a total of $18.5 billion in 2019-20.
The Governor’s proposed 2019-20 budget prioritizes paying down state and local unfunded pension liabilities and paying off outstanding budgetary debt incurred during the Great Recession and its aftermath.
The budget proposal includes required and supplemental contributions to two state-run retirement systems: the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). CalPERS and CalSTRS, like many retirement systems, are not funded at levels that will keep up with future benefits, resulting in the state needing to make higher annual contributions in order to pay down unfunded liabilities.
Beyond statutorily required contributions, the Governor’s proposed budget includes a $3 billion supplemental pension payment to CalPERS that would be made in the current fiscal year (2018-19). The budget proposal also devotes an additional $390 million to CalPERS in 2019-20 from Proposition 2 funds (see Reserves section) that are required to be set aside for reducing state liabilities.
In the case of CalSTRS, the budget proposal devotes an additional $1.1 billion, beyond statutory requirements, toward the state’s share of CalSTRS unfunded liabilities. The $1.1 billion comes from Prop. 2 funds (see Reserves section) that are required to be set aside for reducing state liabilities. The Governor’s proposal notes that the $1.1 billion is the “first installment of an estimated $2.9 billion to be paid to CalSTRS through 2022-23” using available Prop. 2 dollars.
In addition, the Governor’s proposal includes a one-time $3 billion non-Proposition 98 payment to CalSTRS to reduce the employers’ (local educational agencies and community colleges) share of unfunded liabilities in response to prior changes in contribution levels and pressures confronting employers. In 2014, the state enacted AB 1469, increasing the share of CalSTRS costs borne by all parties (the state, employers, and teachers), but particularly increasing the contribution rate of employers. Confronting a series of other pressures, including enrollment decline and increases in the costs of local services, some local educational agencies are in danger of not being able to meet their financial obligations. The Governor’s proposal would provide $2.3 billion toward the employers’ share of the unfunded liability for the CalSTRS Defined Benefit Program. The Governor proposes to use the remaining $700 million to reduce the required contributions by employers in 2019-20 and 2020-21. Overall, the proposed $3 billion supplemental payment would free up — in the short term as well as the long term — local dollars for investment in education or to allow employers to pay down retirement obligations.
The Governor’s proposed 2019-20 budget also includes more than $4 billion to pay off outstanding budgetary debts incurred during the Great Recession, including $2.4 billion to eliminate outstanding loans from special funds and transportation accounts and a total of $1.7 billion to eliminate a one-month deferral of payroll from nine years ago and a deferred payment to CalPERS from over a decade ago.
Subsidized child care allows parents with low and moderate incomes to find jobs and remain employed, feeling secure that their children have a safe space to learn and grow. These programs provide a critical service, keeping families across California afloat. Currently, subsidized child care programs serve far fewer children than they did ten years ago. While policymakers have made incremental investments in early care and education in recent years, investments to serve more children have been targeted to the California State Preschool Program, just one component of California’s subsidized child care and development system.
The Governor’s proposed budget signals a commitment to expand access to subsidized child care in future years by funding child care infrastructure in 2019-20. Specifically, the budget proposal:
The budget proposal signals a commitment to serve more families in future years, by setting aside hundreds of millions in one-time funding for subsidized child care infrastructure in the 2019-20 fiscal year. Yet, despite this historically large proposed increase, the proposal does not provide more low- and moderate-income families with access to subsidized child care, despite years-long waiting lists.
Paid family leave has the potential to benefit both children and parents, boosting health and well-being, while also providing savings for both businesses and the state. California leads the nation in paid family leave policy, but the state and the nation lag other wealthy countries in terms of the length of leave and the level of benefits. The California Paid Family Leave (PFL) program is funded entirely by workers’ contributions to the state’s Disability Insurance Program. These contributions are housed in a special fund that provides 60% to 70% of a worker’s weekly earnings based on income when a worker takes family leave. Caregivers can currently take up to six weeks of paid time off to care for a family member or bond with a newborn or adopted child. Birth mothers are generally allowed another 6 weeks to recover from the birth, for a total of 12 weeks.
The Governor’s proposed budget expresses a commitment to expand the PFL program to six months in future years. In the upcoming fiscal year, the proposed budget would adjust the reserve requirement for the special fund that pays PFL claims. As stated in the proposed budget, this would ensure that the fund’s reserves are not depleted when the PFL program is expanded in the future. The administration also plans to convene a task force to study different options for expanding the program, including for caregivers with low-incomes who may not be able to afford to take time off of work to care for their family.
Last year’s 2018-19 budget package instituted a new home visiting initiative in the California Work Opportunity and Responsibility to Kids (CalWORKs) program, beginning on January 1, 2019. The program will provide up to 24 months of evidence-based home visiting for CalWORKs parents who are either pregnant or parenting a child under age 2, with a priority for first-time parents. A total of $158.4 million in federal TANF and state General Fund dollars was set aside to fund home visiting for three years, after which the initiative will be subject to annual appropriation as an ongoing program. Of this total, $29.2 million was budgeted for the current 2018-19 state fiscal year (which began July 1, 2018). Governor Newsom’s budget proposal allocates $78.9 million of the remaining funds for the 2019-20 budget year, leaving $50.3 million reserved for 2020-21.
In addition, the Governor calls for $23 million General Fund to expand home visiting programs outside of the CalWORKs program. Currently, the Department of Public Health receives federal funding to administer home visiting programs for pregnant and newly parenting families who are at risk for adverse childhood experiences. The proposed $23 million represents the state’s first financial investment in home visiting for non-CalWORKs families.
The budget proposal also includes $7.5 million to increase participation in the Black Infant Health program, which aims to improve African-American infant and maternal health through group support services and case management.
A Child Savings Account (CSA) is an account established for children as early as birth that builds assets over time. CSAs are generally seeded with an initial deposit from a government agency or another sponsoring organization, then built with contributions from family, friends, or the child. Once the child reaches adulthood, the savings are typically used for higher education, though they can also support homeownership or other asset-building investments.
In the budget proposal, the Governor provides a one-time investment of $50 million General Fund “to support pilot projects and partnerships with First 5 California, local first 5 Commissions, local government, and philanthropy” to increase access to CSAs among incoming kindergarteners. The proposed budget suggests these accounts could be used for post-secondary education expenses, such as tuition, room and board, books, supplies and equipment, and mandatory fees.
The California Earned Income Tax Credit (CalEITC) is a refundable state tax credit that helps low-earning workers and their families make ends meet. The credit was established by the 2015-16 budget agreement and was modestly expanded twice in recent years. Currently, the CalEITC provides up to nearly $2,900 as a state tax refund, depending on how much families earn and how many children they support.
The Governor’s proposed budget would strengthen and expand the CalEITC. The Administration proposes extending the credit to a total of 2.4 million tax filers, up from 2.0 million tax filers who are expected to benefit from the credit this year (plus their spouses and dependents). The Governor also proposes to increase the size of the credit available to many families and individuals. These two changes combined are expected to more than double the total amount of credits provided from around $400 million this year to $1 billion next year. As part of this plan, the Administration also proposes renaming the CalEITC the “Working Families Tax Credit.” Specifically, the proposed budget:
These changes are projected to reduce state personal income tax revenue by $600 million, bringing the total cost of the credit to an estimated $1 billion. To offset this revenue loss, the Governor proposes that California conform to “several federal tax law changes mainly impacting business income.” When states conform to federal tax law provisions they adopt those provisions as part of the state tax code. California has the ability to choose which provisions of federal tax law the state will conform to, which gives state policymakers the ability to decide on a case-by-case basis which provisions of federal law they believe are sound tax policy and would benefit California if the state adopted them. The Administration proposes conforming to several provisions “that on either administrative burden or policy grounds are clearly beneficial to California.” These include “flexibility for small businesses; capital gains deferrals and exclusions for Opportunity Zones; and limitations on fringe benefit deductions, like-kind exchanges, and losses for non-corporate taxpayers; among others.” The Administration expects these conformity provisions to raise $1 billion in 2019-20.
The proposed budget also includes $5 million one-time General Fund “to provide matching funds to nonprofits, community-based organizations, or governmental entities that provide increased awareness of the California Earned Income Tax Credit and free tax preparation assistance to eligible families and individuals.” The 2018-19 budget package included $10 million General Fund to support community based efforts to promote the CalEITC and evaluate those efforts as well as to support organizations that provide free tax preparation services.
The California Work Opportunity and Responsibility to Kids (CalWORKs) program provides modest cash assistance for over 775,000 low-income children while helping parents overcome barriers to employment and find jobs. The annualized maximum CalWORKs grant for a family of three has been well below the deep-poverty threshold (50% of the federal poverty line) for the past 11 years. In the 2018-19 budget package, the previous administration took the first of three proposed steps to raise the maximum grant to the deep-poverty threshold over three years, beginning with $90 million for a 10% grant increase beginning April 1, 2019. Governor Newsom’s 2019-20 proposal calls for an additional 13.1% increase, which would raise the maximum grant to 50% of the federal poverty line effective October 1, 2019. To fund this increase, the proposed budget allocates $347.6 million General Fund for the 2019-20 fiscal year (which begins July 1, 2019), with $455.4 million General Fund as the annual, full-year cost.
More than half of California renter households pay more than 30% of their income toward rent, making them housing cost-burdened, and high housing costs are a key driver of California’s high poverty rate. The Governor’s budget proposes a multi-pronged state-level approach to address California’s housing affordability crisis, including regulatory changes, one-time planning and incentive funding, and an ongoing expansion of tax credits that finance affordable housing development.
As a key regulatory proposal, the Administration proposes to “revamp” the current system used by the state to set housing production goals for regions and local jurisdictions, the Regional Housing Needs Assessment (RHNA) process. In place of the current process, the Department of Housing and Community Development (HCD) would develop two new sets of housing production goals: short-term goals and “more ambitious” long-term targets. The budget plan allocates funding to support these changes, including:
HCD would also play a more active role in reviewing local housing plans and enforcing housing goals and production. In addition, the Administration proposes “linking housing production to certain transportation funds and other applicable sources,” suggesting that some types of state funding would become available only to local jurisdictions that are demonstrating progress toward housing production goals.
The Governor’s budget also proposes expanding the state’s Low Income Housing Tax Credit (LIHTC) program. These state tax credits support affordable housing development, pairing with two types of federal housing tax credits to reduce housing developers’ project costs. The budget proposes increasing the state LIHTC program by up to $500 million in 2019-20 and up to $500 million annually ongoing. This total new authority would be allocated as follows:
The Administration also proposes a “redesign of the existing tax credit programs to promote cost containment and increase the construction of new units.”
The budget also includes $500 million General Fund one-time to support the construction of housing for moderate-income households through the existing Mixed-Income Loan Program, administered by the California Housing Finance Agency. As another strategy to increase housing production, the Administration proposes to make excess state property available for affordable housing demonstration projects, providing developers with low-cost, long-term ground leases for state-owned land on which they would build affordable and mixed-income housing using “creative and streamlined approaches,” such as modular construction.
Finally, the Governor’s budget plan proposes encouraging housing development by incentivizing the use of economic development tools including Enhanced Infrastructure Financing Districts (EIFDs) and Opportunity Zones (OZs). After the dissolution of redevelopment agencies in 2011-12, a newer state law allows cities and counties to create EIFDs to finance infrastructure, including affordable housing, with property tax revenue from consenting local taxing agencies, with the exception of school or community college districts. Under current law, EIFDs can issue bonds to fund projects but must get approval from 55% of voters. The Governor’s budget proposes to eliminate the 55% voter approval requirement to issue bonds to make the creation of EIFDs more attractive. In addition, the Governor proposes aligning EIFDs with OZs, which are primarily economically distressed census tracts that have been selected by the state pursuant to last year’s federal tax law. Taxpayers that make investments in these zones, which may include but are not limited to housing development or rehabilitation, qualify for deferred and reduced federal capital gains taxes. The Governor’s proposal would provide similar deferrals and reductions in state income taxes for investments in affordable housing in OZs.
California has nearly 25% of the nation’s population of homeless individuals, with an estimated 134,000 homeless residents as of January 2017. More than two-thirds of California’s homeless residents are unsheltered, sleeping in locations such as in a vehicle, in a park, or on the street. The Administration highlights homelessness as a key challenge facing California, and proposes several responses, focusing on the population of unsheltered homeless individuals and those with significant need for services. The budget proposal emphasizes expanding emergency shelters and homeless navigation centers, developing supportive housing units (or permanent housing coupled with supportive services), and investing in services targeted to homeless individuals who have disabilities or significant health or behavioral health challenges. In terms of funding, the budget proposal includes:
The Governor also proposes two regulatory changes to support the expansion of shelter and supportive housing capacity throughout the state, specifically:
Finally, the Governor proposes accelerating awards for housing development projects that qualify for funds from two bond measures approved by voters in November 2018 – the No Place Like Home Act (Proposition 2 of 2018), which provides funds to develop supportive housing for individuals with mental illness who are homeless or at risk of homelessness; and the Veterans and Affordable Housing Bond Act (Proposition 1 of 2018), which provides funds that can be used for development of supportive housing, among other types of housing projects.
Supplemental Security Income/State Supplementary Payment (SSI/SSP) grants help well over 1 million low-income seniors and people with disabilities to pay for housing, food, and other basic necessities. Grants are funded with both federal (SSI) and state (SSP) dollars. State policymakers made deep cuts to the SSP portion of these grants in order to help close budget shortfalls that emerged following the onset of the Great Recession in 2007. The SSP portions for couples and for individuals were reduced to federal minimums in 2009 and 2011, respectively. Moreover, the annual statutory state cost-of-living adjustment (COLA) for SSI/SSP grants was eliminated beginning in 2010-11. Since then, state policymakers have provided only one discretionary COLA for the state’s SSP portion of the grant — a 2.76% boost that took effect in January 2017, resulting in monthly state SSP grant levels of $160.72 for individuals and $407.14 for couples, which remain in effect today.
The Governor does not propose a state increase for the SSP portion of SSI/SSP grants in 2019-20. However, the Administration does project that the federal government will boost the SSI portion of the grant by 2.5% effective January 1, 2020. As a result of this projected federal increase:
In addition, the Governor proposes to make permanent a state-funded food benefit that will be provided to certain households with SSI/SSP recipients — households that would otherwise be harmed by a recently adopted state policy. Specifically, the budget package for the current fiscal year (2018-19) ended California’s SSI “cash-out” policy, which prohibits people enrolled in SSI/SSP from receiving federal food benefits provided through the Supplemental Nutrition Assistance Program (SNAP), which is called CalFresh in California. Under this new policy, SSI/SSP recipients will become eligible for CalFresh food assistance as soon as June 1, 2019, or no later than August 1, 2019, depending on how rapidly the state can implement this change.
Ending the SSI cash-out will primarily benefit households that consist solely of SSI/SSP recipients — and no one else — by allowing them to newly enroll in CalFresh. Certain other households will be harmed by this change. These households contain a mix of SSI/SSP recipients and other people with low incomes who 1) are not enrolled in SSI/SSP and 2) receive CalFresh benefits. Because of how CalFresh benefits are calculated, once SSI/SSP recipients become eligible for CalFresh, tens of thousands of mixed households will see their CalFresh benefits reduced or eliminated, according to state projections released in 2018. In order to hold these households harmless, the 2018-19 budget included temporary funding for a state-funded food benefit to replace the CalFresh assistance that these households will lose. Governor Newsom proposes to make this new state-funded food benefit permanent.
Building on the federal Affordable Care Act (ACA), California has substantially expanded access to health coverage in recent years. For example, more than 13 million Californians with modest incomes receive free or low-cost health care through Medi-Cal (California’s Medicaid program) — several million more than before the ACA took effect. Another 1.2 million Californians with incomes up to 400% of the federal poverty line — $48,560 for an individual in 2019 — receive federal premium subsidies to reduce the cost of coverage purchased through Covered California, our state’s health insurance marketplace. Despite these gains, around 3 million Californians remain uninsured, health care costs continue to rise, and many people face both high monthly premiums and excessive out-of-pocket costs — such as copays and deductibles — when they use health care services.
The Governor’s health policy agenda includes several 2019-20 budget proposals as well as an executive order related to prescription-drug pricing that was signed into law on January 7, 2019. Overall, the Governor’s approach aims to further reduce the number of uninsured Californians, lower the cost of health insurance purchased through the individual market, and curb the growth of prescription drug costs.The Governor’s proposed budget:
In addition, with a recently signed executive order, the Governor:
Approved by California voters in 2016, Proposition 56 raised the state’s excise tax on cigarettes by $2 per pack and triggered an equivalent increase in the state excise tax on other tobacco products. These increases took effect on April 1, 2017. Prop. 56 requires most of the revenues raised by the measure to go to Medi-Cal, which provides health care services to more than 13 million Californians with low or moderate incomes.
The Administration projects that Medi-Cal will receive $1.1 billion in Prop. 56 revenues in 2019-20. As in the current fiscal year (2018-19), most of these Prop. 56 dollars will support payment increases for doctors, dentists, and other providers. In addition, the Governor proposes to use Prop. 56 funds to support the following services in the Medi-Cal program in 2019-20:
Mental health services in California are primarily provided by counties, with funding largely coming from the state and federal governments. The Governor’s proposed budget highlights several “emerging challenges” to the mental health system, including a growing demand for mental health practitioners, rising homelessness (a substantial share of homeless individuals struggle with mental illness), and the need for new approaches to detect and treat mental illness as early as possible.
The proposed budget includes:
State policymakers have taken steps in recent years to expand access to full-day early learning opportunities for preschool-age children. Since 2013-14, the state has funded more than 37,000 full- and part-day California State Preschool Program (CSPP) slots for children in low- and moderate-income families. Nearly three-quarters of these slots were for full-day, full-year services. In addition, after passage of the Kindergarten Readiness Act of 2010 (SB 1381), which moved the kindergarten age cutoff from December to September, the state phased in a new Transitional Kindergarten (TK) program in the fall of 2012. Schools can offer either part-day or full-day programs. This new grade is not an expansion of services, but offers a two-year kindergarten experience for children that otherwise would have been very young for their grade. Eligibility for TK is not related to family income. Finally, in 2017 administrators released the results of an evaluation of kindergarten programs that provided much-needed data on the number of districts offering part-day or full-day classes across the state, revealing that about one in five districts only operate part-day kindergarten programs. Full-day kindergarten programs can benefit low-income working parents by providing care for more hours of the day, while potentially offering more educational opportunities for students.
The Governor’s budget proposal continues to expand early learning opportunities by proposing a one-time $750 million General Fund allocation to build new facilities or modernize existing facilities, specifically for full-day kindergarten programs. School districts reported a lack of facilities as the main constraint in offering full-day programs. The administration notes that these one-time dollars may also be used to “fund other activities that reduce barriers to providing full-day kindergarten.”
The 2019-20 proposal also includes a significant investment in the CSPP. Specifically, the Governor’s proposed budget:
Approved by voters in 1988, Proposition 98 constitutionally guarantees a minimum level of annual funding for K-12 schools, community colleges, and the state preschool program. The Governor’s proposed budget assumes a 2019-20 Prop. 98 funding level of $80.7 billion for K-14 education, $2.3 billion above the 2018-19 funding level of $78.4 billion estimated in the 2018-19 budget agreement. Based on projections in the Governor’s proposed budget, the 2018-19 Prop. 98 funding level dropped by $525.7 million to $77.9 billion from the estimated level in the 2018-19 budget agreement, and the 2017-18 Prop. 98 funding level dropped by $120.1 million to $75.5 billion.
Because some of the information needed to calculate the Prop. 98 guarantee is not available until after the close of a fiscal year, the state estimates the minimum funding level and reconciles differences between the Prop. 98 funding provided in the annual budget and the final minimum guarantee after the end of the fiscal year. The 2018-19 budget agreement required the Department of Finance (DOF) to certify the Prop. 98 guarantee for 2009-10 through 2016-17 and established a new process for finalizing prior-year Prop. 98 spending that included a so-called “cost allocation schedule,” which requires the state to credit dollars above the guarantee toward this new account in years when the Prop. 98 guarantee ends up lower than estimated. Conversely, in years when the Prop. 98 guarantee ends up higher than estimated, the state must use any dollars credited to the cost allocation schedule to meet the higher guarantee. Last year’s budget agreement also established a new process for how the state certifies the annual funding level guaranteed under Prop. 98 that required the DOF to issue a final certification of the minimum funding obligation and to publish this amount by August 15. (For example, the final certification for fiscal year 2017-18 must be published by August 15, 2019.)
The Governor’s proposal would change statutory language to specify that the state may not adjust Prop. 98 funding levels for any non-certified year outside of the current year or budget year (i.e. for the 2019-20 proposed budget, current year refers to 2018-19 and budget year refers to 2019-20). Moreover, after referencing legal challenges to changes in the certification process, the Governor’s budget summary states that to provide more certainty he proposes prohibiting the state from adjusting Prop. 98 funding levels for a prior fiscal year and eliminating the cost allocation schedule. Under this proposal, when the final Prop. 98 guarantee ends up lower than estimated the state would not be able to adjust the Prop. 98 funding level downward. However, in years when the final Prop. 98 guarantee ends up higher than estimated the state would be required to adjust the Prop. 98 funding level higher to meet the constitutional funding requirement. The overall effect of the Governor’s proposal would shift the risk associated with the uncertainty in the annual Prop. 98 guarantee from K-12 school and community college districts to the state.
The largest share of Prop. 98 funding goes to California’s school districts, charter schools, and county offices of education (COEs), which provide instruction to approximately 6.2 million students in grades kindergarten through 12. The Governor’s proposed budget increases funding for the state’s K-12 education funding formula — the Local Control Funding Formula (LCFF) — to support special education services, and to reduce school districts’ spending obligations for retirement costs (see Paying Down Debts section). Specifically, the Governor’s proposed budget:
A portion of Proposition 98 funding provides support for California’s community colleges (CCCs), which help prepare over 2 million students to transfer to four-year institutions as well as obtain training and employment skills. The 2019-20 budget proposal increases support for the community college’s Promise Program, revises the Student Centered Funding Formula implementation plan, and makes other investments. Specifically, the proposed spending plan:
California supports two public four-year higher education institutions: the California State University (CSU) and the University of California (UC). The CSU provides undergraduate and graduate education to roughly 481,000 students on 23 campuses, and the UC provides undergraduate, graduate, and professional education to about 273,000 students on 10 campuses.
The Governor’s proposed 2019-20 budget increases support for the CSU with the expectation that the institution will not raise tuition. Specifically, the proposed spending plan:
The Governor’s proposed 2019-20 budget includes funding increases for the UC with the expectation that the institution will not raise tuition. Specifically, the proposed spending plan:
Cal Grants are the foundation of California’s financial aid program for low- and middle-income students pursuing higher education in the state. Cal Grants provide aid for tuition and living expenses that do not have to be paid back. The Governor’s spending plan includes increased funding for nontraditional students and students with dependent children. Specifically, the plan:
Education data can be a powerful tool for policymakers, educators, parents, and other stakeholders in measuring outcomes and informing decision making. The Governor’s budget summary notes that California’s education data are currently housed in multiple databases operating under differing legal and regulatory requirements. The budget proposal provides $10 million one-time General Fund for a statewide longitudinal “cradle-to-career” data system for early education, K-12 education, and postsecondary education in California. This funding will support both the planning of the data system and initial implementation. The proposed budget would add California to the list of 16 states that currently have a data system that tracks students from preschool through their college degree.
Currently, more than 127,000 adults who have been convicted of a felony offense are serving their sentences at the state level — down from a peak of around 173,600 in 2007. Most of these individuals — about 114,200 — are housed in state prisons designed to hold slightly more than 85,000 people. This level of overcrowding is equal to 134.1% of the prison system’s “design capacity,” which is below the prison population cap — 137.5% of design capacity — established by a 2009 federal court order. (In other words, the state is in compliance with the court order.) In addition, California houses over 13,100 people in facilities that are not subject to the court-ordered cap, including fire camps, in-state “contract beds,” out-of-state prisons, and community-based facilities that provide rehabilitative services. The sizeable drop in incarceration has resulted largely from a series of policy changes adopted by state policymakers and the voters in the wake of the federal court order.
The proposed budget:
A small number of justice-involved youth — a projected 759 in 2019-20 — are housed in facilities overseen by the state’s Division of Juvenile Justice, which is part of the California Department of Corrections and Rehabilitation (CDCR). The Governor proposes “to move youth correctional facilities from the CDCR to a new department under the Health and Human Services Agency,” according to the Governor’s budget summary. The Administration suggests that this shift will better enable the state to provide justice-involved youth “with services needed to be successful when they are released.”
California has the largest share of immigrant residents of any state, and immigrants make up a third of the state’s workforce. The Administration notes that conditions in Central America together with “inadequate federal immigration policies” have caused a “humanitarian crisis” at California’s southern border. To address this challenge, the Governor proposes allocating $25 million (with $5 million available in the current 2018-19 fiscal year, and the remaining $20 million available over the next three fiscal years) for an “immigration rapid response program,” which would support the work of nonprofit and community-based service providers that are responding to immigration-related emergencies.
The Governor’s budget also allocates ongoing annual funding for legal services for immigrants to assist individuals with applications for Deferred Action for Childhood Arrivals (DACA), naturalization, deportation defense, and other immigration remedies. These funds include $58 million for the Department of Social Services, as well as $7 million for the California State University (CSU) and $10 million in Proposition 98 funds for community colleges to support legal services for undocumented immigrant students, staff, and faculty in each of these systems, maintaining the increased funding levels for these items adopted in the 2018-19 budget. The Administration notes that funding provided in the 2018-19 budget for similar services at the University of California (UC) is “sufficient to support the UC’s legal services program through the 2021-22 fiscal year,” and proposes allocating $1.3 million ongoing for these services at UC beginning in 2022-23.
As mentioned above, the Administration also proposes to extend Medi-Cal eligibility to undocumented immigrant young adults ages 19 to 25 (adopting a proposal put forth by the Legislature last year).
The decennial census is an important tool that provides indispensable social and economic data about the state and the country. The census count also determines how federal dollars are distributed to states and how many seats each state has in the House of Representatives. It is in California’s best interest to ensure that the 2020 Census is as accurate as possible, a goal reflected in the Governor’s proposed funding for census outreach, awareness, and coordination.
There are a number of issues that raise concerns about the 2020 Census. First, federal funding for the 2020 Census has not been adequate to fully prepare for the count. Second, the US Census Bureau has significantly changed the way in which it plans to administer the 2020 survey, and the agency will be hiring far fewer field workers to follow up with households who are late to respond. Third, the Trump Administration has announced that it will be adding a citizenship question to the Census, which could depress response rates given the administration’s virulent attitude toward immigrants.
The Governor’s proposed budget includes an additional $50 million to support statewide efforts to increase participation in the 2020 Census, bringing total state support for this effort to $140.3 million. Last year’s budget provided $90.3 million in state funding to support the California Complete Count Committee, which oversees census outreach, awareness, and coordination efforts — particularly for hard-to-count residents. The committee was created after the undercount of the state’s population in the 1990 decennial federal census. This undercount likely resulted in California losing a seat in the US House of Representatives as well as about $2 billion in federal funding over a 10-year period.
The proposed budget also includes $4 million for the California Housing and Population Sample Enumeration, which is a survey that will identify barriers to a complete census count and outreach strategies that can improve the count. This survey is intended to help inform recommendations for the 2030 Census.
After the unprecedented wildfires that devastated California communities in 2018 and other recent years, the Governor’s budget proposes several new investments to improve the ability of the state and local communities to prevent, prepare for, and respond to the natural disasters that are becoming ever more frequent.
The Governor’s proposed budget includes $172.3 million in additional funding for the Office of Emergency Services, including:
The budget proposal also includes a funding increase of $415.1 million for the Department of Forestry and Fire Protection (CAL FIRE) to improve fire prevention and firefighting capacity. The additional funding includes:
To offer relief to communities affected by wildfires, the proposed budget includes $31.3 million to compensate cities, counties, and special districts for property tax revenue losses incurred between 2019-20 and 2021-22 as a result of wildfires in 2018 and previous years. Property tax revenue losses to school districts, expected to total $19 million in 2019-20 from 2018 wildfire damage, will be backfilled through Proposition 98. The state would also waive the share of debris removal costs that local governments are generally responsible for and backfill whatever costs are not covered by the federal government; the Governor’s proposal estimates the local cost share for the November 2018 wildfires to be $155.2 million.
Finally, the Governor proposes to permanently authorize the Director of Finance to immediately access funds in the Special Fund for Economic Uncertainties (SFEU) for disaster response and recovery efforts, as the Director’s temporary authorization expired at the end of 2018.
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In California, the policy bill process is a key pathway for shaping state policy, and operates in tandem with the state budget process to move legislative proposals from concept to reality.
In an effort to build an understanding of how these two processes are related, the California Budget & Policy Center has created a new resource modeled on our popular guides to the state budget process and county budget process. Dollars and Democracy: Understanding How the State Budget Process Relates to the Policy Bill Process an overview of both processes, reviews key events and deadlines, and discusses the factors that help to determine whether a proposal moves through the Legislature on the policy bill “track” or the budget track (or both). This guide also highlights the differences between — and the unique advantages of — the state budget process and policy bill process.
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In the years since the 2007 Great Recession, economic commentary has veered between hailing the subsequent recovery and sounding the alarm about rising inequality. Income inequality is often identified as a sign of both the country’s underlying economic troubles and public policies that disproportionately benefit the wealthy. An alternative indicator of the nation’s social and economic health pertains to wealth, specifically the growing wealth gap among people of different races and ethnicities.[1] This report illuminates the racial wealth gap, explores its underlying historical context, discusses some key factors driving the wealth gap, and lays out a set of public policies that could put California and the nation as a whole on a better path to building wealth for millions of families.
Building wealth is a crucial factor in promoting generational economic mobility and opportunity. Commonly measured in terms of net worth — the difference between gross assets and debt — wealth provides families with financial security. The greater a family’s net worth, the more resources they have to weather costly unexpected events, pay for higher education, take risks on a business, purchase a home, and invest in other wealth-generating assets. Moreover, wealth can be transferred to the next generation through financial gifts or inheritances.
Income inequality has been extensively documented at both the state and national levels. Unfortunately, wealth inequality is even starker than income inequality. The top 1% of Americans took home 24% of all income, but they also had 39% of all wealth in 2016.[2] However, wealth is not only inequitably distributed across the income spectrum. It is also unfairly allocated among people of different races and ethnicities. For example, in 2016, the typical — or median — white family’s wealth nationally was $171,000 (Figure 1).[3] For black families, median wealth amounted to $17,600, or roughly 10% of that for white families. For Latinx families, median wealth was $20,700, or about 12% of that for white families. Put another way, the typical white household has $9.72 in wealth for every $1 that a typical black family has and $8.26 in wealth for every $1 that a typical Latinx family has.
National data show that this wealth disparity is not simply explained by racial and ethnic differences in income. Though one might expect that those with greater income would also have greater wealth, the data indicate that this is not the case. In 2014, black households in the middle of the income distribution had $22,150 in median net wealth, far less than did whites in the second lowest 20% of the distribution ($61,070) and only somewhat greater than that of whites in the bottom quintile ($18,361).[4]
Data specific to the Los Angeles area highlights wealth inequality at the local level in California (Figure 2).[5] In 2014 in Los Angeles and Orange counties, US-born whites had a much higher median household net worth ($355,000) than did most non-whites, including Latinx households ($46,000) and US-born blacks ($4,000). At the same time, among non-white groups, Japanese ($592,000), Asian Indian ($460,000), and Chinese ($408,200) households had greater median net worth than whites. The variation among Asian groups may reflect differing socioeconomic histories and migration patterns, and it echoes findings of substantial wealth inequality among Asian American communities in the United States.[6] These racial and ethnic differences reveal how some groups are better positioned to make the kinds of critical investments in their futures that benefit their families and the broader community.
Weathering adverse events is more challenging for households that lack sufficient wealth. When families face financial setbacks such as job loss or unexpected expenses, liquid assets — which can be converted easily to cash, such as money in the bank — offer a needed financial cushion. Unfortunately, many black and Latinx families across the country do not have enough liquid wealth to absorb sudden shocks. Nationally, blacks in 2011 had only $25 in median liquid wealth, and Latinx residents had just $100.[7] In contrast, the typical white family had $3,000 in assets that they could quickly convert to cash if needed. In the Los Angeles area, the median value of liquid assets for white households in 2014 was $110,000, compared to $200 for US-born blacks, $0 and $7 for Mexican and non-Mexican Latinx households, respectively, $500 for Vietnamese, and $245,000 for Asian Indians.[8] Moreover, while the majority of American families own some wealth, too many have zero or negative net worth (indicating more debt than assets). This problem also varies by race and ethnicity, with far fewer white households nationally (9%) having no wealth in 2016 than did black (19%) or Latinx households (13%).[9]
Families with greater wealth are better positioned to be able to transfer resources to family or friends. In addition to having more wealth, whites generally are better able to rely on their social networks during hard times. In 2016, more than 7 in 10 white families expected that they could get $3,000 from friends or family during a financial emergency, with less than half of black and Latinx households reporting the same.[10]
These disparities are not a natural occurrence nor are they due to the individual failings of people of color. Rather, as the next section points out, there are structural problems deeply rooted in our nation’s long history of racism, which has infused every aspect of our economy and which our nation has failed to fully remedy.
The roots of the racial wealth divide can be found in racist policies and practices dating back to our nation’s early days. Under the institution of chattel slavery, enslaved Africans were valuable assets whose labor generated wealth for their white owners. After emancipation, blacks worked as landless tenant farmers and sharecroppers. They were also largely shut out of the Homestead Acts, through which the federal government gave approximately 246 million acres to homesteaders — land that was the original source of family wealth for about one-quarter of the US adult population by 2004.[11] Public land acquisition and private land ownership were often explicitly restricted by race. White expansion westward depended on the displacement of Native Americans from their territories and in many states — including California — land ownership was limited to citizens, precisely to discriminate against non-whites ineligible for citizenship.[12]
In the period following the Great Depression and World War II, US policy substantially restricted communities of color from benefiting from the wealth-building policies that helped grow the American middle class. Housing was a key area in which both public policy and private actions clearly advantaged whites. From 1934 to 1968, the Federal Housing Administration (FHA) financed mortgages to expand homeownership, but also deliberately created segregated white neighborhoods to keep out “incompatible racial element[s].”[13] Federal policies also harmed black neighborhoods by excluding many residents of these areas from eligibility for government-backed loans and mortgages and discouraging lending to people of color by designating their neighborhoods as bad credit risks. Nationally, due to the FHA’s underwriting practices, just 2% of government-backed mortgages during this period (1934 to 1968) went to homebuyers of color.[14] These practices helped whites build assets, reduced home values in non-white neighborhoods, and pushed would-be homebuyers of color into predatory land contracts that systematically stripped wealth from their communities.[15] While the Fair Housing Act of 1968 banned racial discrimination in housing rentals and sales, it initially carried no real federal enforcement mechanism for discrimination claims, light penalties for violators, and high burdens for victims of discrimination.[16] Additionally, due to political resistance to desegregation, the Department of Housing and Urban Development often avoided exercising or outright obstructed its legal mandate to affirmatively promote integration, thus entrenching these inequalities.[17] Today, housing discrimination remains a barrier for people of color, who are recommended and shown fewer housing units than are equally qualified whites.[18]
Due to a long history of discrimination, the racial wealth gap has been an ever-present feature of American economic life. Yet over the past several decades, this disparity has worsened. Although black and Latinx households saw their net worth rise incrementally, albeit fitfully, from 1983 to 2007, the net worth of white households was still steadily outpacing these gains.[19] Unfortunately, the Great Recession and the housing crisis reversed the gains made by black and Latinx families, rolling back a generation’s worth of progress.
The recession hit Americans hard; from 2007 to 2010, median net worth for all racial and ethnic groups dropped by about 30%.[20] However, for people of color, the pain did not end there. While white families’ net worth stabilized in the immediate aftermath of the downturn (2010 to 2013), black and Latinx families continued to see their wealth decline by an additional 20%.[21] Latinx and Asian American households were disproportionately hurt by the foreclosure crisis, as they were far more likely to live in one of the five states that were hardest hit, including California.[22] Though median net worth has since risen for all groups, the racial wealth divide has continued to increase. From 2013 to 2016, median net worth for Latinx and black families rose 30% to 50%, respectively, compared to an increase of 17% for white families.[23] Despite these gains, the white-black wealth gap still increased by 16% and the white-Latinx gap rose by 14% during the same period.
Exacerbating the racial wealth divide is the nation’s current wealth-building incentive structure. The federal government subsidizes savings and investment through certain tax benefits — including tax credits, deductions, exclusions, and preferential rates — which do not show up on the federal government’s balance sheet but still count as public spending.[24] These subsidies perpetuate inequality by favoring those who are already wealthy, with the top 20% of earners receiving most of the benefits.[25] With the exception of tax credits, these tax breaks are more likely to benefit white households, which disproportionately belong to the top 20%.
Just as wealth is distributed unevenly, so are practices that strip wealth from communities. In the years leading up to the foreclosure crisis, predatory lenders made subprime mortgage loans — which have higher interest rates, fees, and penalties — irrespective of borrowers’ ability to repay. People of color, especially women, were particularly targeted by subprime lenders for bad mortgages even when they qualified for better loans, with black, Latinx, and Asian Pacific Islander women more likely to receive subprime mortgages than whites.[26] When the mortgage market crashed, these households lost substantial wealth. Payday lenders, which offer short-term, high-cost loans with excessive interest rates that borrowers must repay quickly, present another obstacle to wealth-building for communities of color.[27] Lenders tend to be concentrated in neighborhoods of color, and 60% of borrowers are women, particularly Latinx and black women.[28] These borrowers are often living paycheck to paycheck and use these loans to cover basic needs. They can become trapped by debt, taking out new loans with increasing fees to pay the previous loan. As a result of this “loan churn,” only 14% of borrowers can repay their loans within the short-term window and half of all loans are extended over 10 times.[29] In California, 83% of the total payday loan transactions in 2016 were for subsequent transactions by the same borrower and 79% of these subsequent loans were made within a week of the previous loan, the majority on the same day.[30]
Many factors are driving the growth of the racial wealth gap. This section examines three key causes: housing, unemployment and the labor market, and higher education.[31]
Throughout the US as well as in California, housing has become unaffordable for many families, whether they own or rent their homes. In 2015, more than 4 in 10 California households had unaffordable housing costs, meaning these costs exceeded 30% of household income.[32] More than 1 in 5 households statewide faced severe housing cost burdens, spending more than half of their income on housing. This affordability crisis predominantly affects Californians of color. Among all of the state’s renters paying more than 30% of their income toward rent, more than two-thirds (68%) were people of color and nearly half (46%) were Latinx.[33]
For those who own their homes, a house is often a family’s greatest investment, and it represents the largest single segment of their wealth portfolio. Among all homeowners, housing comprised about 30% to 40% of their assets in 2016.[34] Historically less able to access homeownership, black and Latinx Americans have lower homeownership rates than whites. Nationally, more than 7 in 10 white households (73%) own their homes, compared to less than half of Latinx and black households.[35] In California, where homeownership rates are lower than the national average, more than 6 in 10 whites (63%) own their homes, while only one-third of blacks and about 4 in 10 Latinx Californians (42%) are homeowners (Figure 3).[36] In Los Angeles and Orange counties specifically, over two-thirds of whites were homeowners in 2014, which was significantly greater than the homeownership rate for most other racial and ethnic groups.[37]
Racial disparities in housing wealth account for a substantial share of the wealth divide. According to one study, the number of years a household owned their home explained 27% of the growth in the racial wealth gap between blacks and whites from 1984 to 2009.[38] Whites are more likely to receive family assistance in making a down payment on a home and generate housing wealth years earlier than black and Latinx families. Even among homeowners, a substantial racial wealth gap exists: black and Latinx homeowners still see lower returns to homeownership. In 2016, net housing wealth among homeowners was $215,800 for white families, compared to only $94,400 for blacks and $129,800 for Latinx families.[39] Greater access to assistance from family means that white buyers are more likely to be able to make a down payment earlier in their lives as well as to make more sizable down payments, which leads to lower interest rates and lending costs.[40] Additionally, because of the legacy of residential segregation, blacks tend to own homes in majority black neighborhoods, and these homes do not appreciate at the same rate as those in largely white neighborhoods.[41]
Given these deep disparities, some researchers argue that in order to help people of color build housing wealth on par with whites, increasing both homeownership rates and returns is key.[42] If black and Latinx families owned their homes at the same rates as whites, the wealth gap would decrease by 31% and 28%, respectively.[43] Separately, equalizing returns to homeownership would reduce the black-white wealth gap by 16% and the Latinx-white gap by 41%.
Earned income and employer-provided benefits are an important source of economic security for many American households. Taken together, unemployment and household income explain almost 30% of the growth in the white-black wealth gap.[44]
Across all levels of education, the unemployment rate for blacks is higher than for whites.[45] Equal rates of employment would not be enough to eliminate the racial wealth divide, as white families with an unemployed head of household possess five times the wealth of black families headed by a person who works full-time.[46] Clearly, people of color remain at a disadvantage in the labor market even when they are employed. Furthermore, black and Latinx workers are less likely to hold higher-paying jobs that offer key benefits like retirement plans, health coverage, or paid leave, all of which are important for wealth-building.[47] This insecurity may affect women of color to an even greater extent. They face a “larger wage gap, greater job segregation, higher rates of unemployment, and primary caregiving responsibility” than do white women.[48] Latinx and black women are less likely than white women to have employers who offer retirement plans, and women in general are more likely than men to work part-time or low-wage jobs that restrict access to wealth-building benefits.[49]
Having at least a college degree is increasingly tied to greater economic security. Workers with a college degree have higher lifetime earnings than those with only a high school diploma and are more likely to be stably employed in a job with benefits.[50] Californians with a bachelor’s degree can expect more than double the average annual earnings of those with only a high school diploma.[51] Increasing access to higher education is also beneficial for the state. Some research suggests that the lifetime return to the state per graduate with a bachelor’s degree is over $200,000.[52] However, state investments in public higher education lag far below pre-recession levels.[53] Over the years, spending cuts have shifted the cost of higher education from the state to students and their families through increased tuition and fees.
Yet not all families can support their children’s education equally. In 2013, whites were more than twice as likely as blacks to receive financial help from their parents for higher education.[54] This disparity in financial support is not due to a difference in parents’ supportiveness of their children’s postsecondary education. Indeed, research indicates that black parents are more likely to spend a larger share of their resources on their children’s education.[55] Those black parents who support their children financially have less wealth and income than white parents who provide no financial support. However, in general, black families simply have less wealth to leverage toward the cost of an education.
Families may consider financial aid, but that assistance is not always available or sufficient. In California, low- and middle-income students turn to Cal Grants, which are the foundation of California’s financial aid program.[56] Only 16% and 25% of very low-income black and Latinx students in California, respectively, receive a Cal Grant award.[57] The vast majority of black and Latinx students who do receive state financial aid get the Cal Grant B access award, which is intended to help low-income students pay for basic expenses yet has not kept pace with the state’s rising housing costs.[58] The federal Pell Grant has also eroded in value, failing to keep up with rising costs of college attendance.[59]
Disproportionately burdened by rising tuition and fees, facing insufficient financial aid, and less able to rely on family resources, low-income students as well as students of color are more likely to face economic barriers to completing their degrees. These students often have to employ a range of coping strategies that impede their academic progress, including enrolling part-time, dropping courses, skipping semesters, or taking a job to cover expenses.[60] They also are more likely to take on debt to finance their education. Among all households, black families are more burdened by student debt than are white families. Over half (54%) of all black households headed by those ages 25 to 40 have student debt, compared to 39% of their white counterparts.[61] For Latinx households, just over 1 in 5 (21%) have student debt, likely due to lower rates of college attendance and attainment. Black borrowers also tend to owe more than white borrowers and both black and Latinx borrowers are more likely to take out riskier private loans.[62] This debt burden can be an obstacle to attaining a degree, as black and Latinx student borrowers are more likely to drop out.[63] As a result, they lack access to the relative labor market stability and asset-building opportunities that come with a college degree.
Yet while higher education is associated with greater earning potential, boosting the number of black and Latinx students who attain a degree in and of itself will not eliminate the wealth divide. In part due to debt payments, higher risk of default, and disparate experiences in the labor market, black and Latinx graduates do not see returns to their education that are equal to those of their white peers. At every level of educational attainment, black and Latinx families have less median wealth than their white peers. Not only do white college graduates hold more than five times the wealth of black and Latinx graduates, but even whites without a degree are wealthier (Figures 4 and 5).[64] Nor does the disparity disappear for those who received parental financial support for a degree, which is associated with degree completion but does little to reduce racial gaps in income or net worth.[65] In short, attaining a degree does not necessarily protect graduates of color from debt burdens or the discriminatory policies and practices that contribute to the racial wealth gap over the course of a lifetime.
The research on wealth overwhelmingly concludes that individual achievement is not sufficient to overcome growing racial and ethnic wealth inequalities. Given the important role of public policy in fostering both an American middle class and the racial wealth divide, closing the wealth gap will require a new approach to public policy at both the state and national levels. This section suggests some state-level policy changes that could increase wealth for communities of color and decrease the disparity between whites and other groups.
1. Create a state-level estate tax
An estate tax is levied on large accumulations of wealth that are transferred from the estate of people who have died to their beneficiaries.[66] Ideally, the US would have a robust estate tax that would reduce wealth accumulation, with the proceeds invested in wealth-building strategies designed to level the playing field for all Americans. However, the federal estate tax has been weakened dramatically since the late 1990s to the point that nearly all estates are exempt from this tax.[67] Most recently, the Tax Cuts and Jobs Act of 2017 raised the exemption from the federal estate tax to more than $10 million per person.[68] This change will further concentrate wealth among families that are already highly advantaged. California should create its own estate tax, joining 18 other states and the District of Columbia that tax inherited wealth.[69] With such a tax, California could both reduce wealth disparities and use the resulting revenues — potentially in the billions per year — to fund wealth-building policies or other public investments that would benefit the vast majority of Californians.[70]
2. Support homeownership for low-income Californians
To ease the burdensome housing costs and help Californians build wealth, state policymakers can further help low-income Californians become homeowners, which could benefit Californians of color. One option is to invest in shared equity programs, which offer subsidies to lower the initial costs of a home for new buyers.[71] When homeowners sell their home, a portion of the proceeds is reinvested in the program, allowing future low-income buyers to afford a home and keeping the program sustainable. California could significantly invest in affordable homeownership by providing funding for shared equity housing for those otherwise priced out of the housing market and tie funds to long-term affordability requirements. Local governments and nonprofits could be responsible for monitoring units and resales, and offering support to homeowners.
To help fund this investment, California should consider eliminating the state mortgage interest tax deduction. The deduction allows households to reduce their taxable incomes by the value of qualified mortgage interest expenses paid on up to $1 million in debt and primarily benefits wealthy homeowners.[72] This tax break exacerbates racial and ethnic disparities, with white families not only more likely to own homes, but also to have more valuable homes.[73] Eliminating the deduction would both make California’s tax code more equitable and yield substantial revenue for shared equity programs.[74]
3. Create debt-free public higher education for low- and middle-income households
California policymakers should take steps to substantially deepen the state’s investment in higher education, with a particular focus on subsidizing the full cost of attendance for low- and middle-income households. Targeting students with lower incomes would reduce the racial wealth divide by eliminating borrowing for many students of color, thus removing one barrier to completion and increasing the return on a college degree by allowing students to avoid wealth-stripping student debt.[75] To this end, policymakers should increase the supply of competitive Cal Grants and raise the value of the Cal Grant B access award for living expenses.
4. Boost investments in children through Children’s Savings Accounts (CSAs).
CSAs are savings accounts for children that have the potential to reduce generational inequities in wealth-building. Seeded with an initial deposit from the state that would accrue interest throughout childhood, a CSA could be automatically opened for each child at birth (with greater endowments for children from less wealthy families) or applied only to children from low-wealth households. Contributions from family and friends could receive a public match, the size of which could increase for families with less wealth. Once the child reaches adulthood, the savings could be used for higher education, homeownership, or other investments throughout their lifetime. Such a program could substantially reduce the racial wealth gap and increase asset security.[76]
The rise of a strong American middle class did not happen accidentally. It required a healthy economy supported by large and intentional public investments. These actions were largely structured to benefit whites to the exclusion of communities of color, and that decision bears serious moral and economic consequences for our future well-being. Nationally, whites are projected to become a racial minority by 2045.[77] In California, people of color already constitute the majority of the state’s population, and their share is projected to rise to more than two-thirds (68%) by 2045.[78] As a result, the economic welfare of people of color will increasingly determine the welfare of our state and of the larger society. Californians and all Americans need to decide which future we want. One option is to continue down our current path, disproportionately concentrating wealth and opportunity with a handful of whites, while locking out people of color. A better option is to improve public policies at the state and federal levels in order to ensure equitable investments in all of our people and create a strong and inclusive economy.
Researchers primarily use three surveys to explore the distribution of wealth in the US: the US Census Bureau’s Survey of Income and Program Participation (SIPP), the Federal Reserve Board’s Survey of Consumer Finances (SCF), and the Panel Study of Income Dynamics (PSID) conducted by University of Michigan faculty. While all three of these surveys allow for comparisons by race and ethnicity, these categories tend to be limited. For example, due to sample size constraints, Asians, Native Americans, Pacific Islanders, and those who report more than one race are grouped into a single “Other” category, as in the SCF.[79] Wealth-related data by race and ethnicity is available for certain localities — including the Los Angeles area — from The National Asset Scorecard and Communities of Color survey (NASCC).[80] Due to these data limitations, The Racial Wealth Gap: What We Can Do About a Long-Standing Obstacle to Shared Prosperity focuses on the national differences in wealth between white, black, and Latinx households and reports local data when available.
[1] In this report, the term “racial wealth gap” is used to refer to an economic problem that affects various races and ethnicities.
[2] Jesse Bricker, et al., Changes in US Family Finances From 2013 to 2016: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 2017), p. 10.
[3] Though these gaps decrease when accounting for other demographic and economic factors associated with wealth, sizable disparities remain. See Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[4] William Darity Jr., et al., What We Get Wrong About Closing the Racial Wealth Gap (Samuel DuBois Cook Center on Social Equity and Insight Center for Community Economic Development: April 2018), p. 9.
[5] Data are from the 2014 National Asset Scorecard and Communities of Color survey and are for Los Angeles and Orange counties. The authors do not account for nativity status, with the exception of distinguishing between US-born blacks and African blacks. Median net worth for African blacks was $72,000. See Melany De La Cruz-Viesca, et al., The Color of Wealth in Los Angeles (Duke University, The New School, the University of California, Los Angeles, and the Insight Center for Community Economic Development: March 2016), p. 40.
[6] Christian E. Weller and Jeffrey Thompson, Wealth Inequality Among Asian Americans Greater Than Among Whites (Center for American Progress: December 20, 2016).
[7] This analysis excludes retirement savings. Including retirement savings, black and Latinx Americans had $200 and $340 in median liquid wealth, respectively, while whites had $23,000. See Rebecca Tippett, et al., Beyond Broke: Why Closing the Racial Wealth Gap Is a Priority for National Economic Security (Center for Global Policy Solutions and Duke Research Network on Racial and Ethnic Inequality at the Social Science Research Institute: May 2014), p. 2.
[8] Data are from the 2014 National Asset Scorecard and Communities of Color survey and are for Los Angeles and Orange counties. The authors do not account for nativity status, with the exception of distinguishing between US-born blacks and African blacks. See Melany De La Cruz-Viesca, et al., The Color of Wealth in Los Angeles (Duke University, The New School, the University of California, Los Angeles, and the Insight Center for Community Economic Development: March 2016), p. 38.
[9] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[10] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[11] Thomas M. Shapiro, The Hidden Cost of Being African American: How Wealth Perpetuates Inequality (New York: Oxford University Press, 2004), p. 190.
[12] Office of the Historian, United States Department of State, Indian Treaties and the Removal Act of 1830; Gregory P. Downs and Kate Masur, The Era of Reconstruction: 1861-1900 (National Park Service, US Department of the Interior: 2017), p. 70; and Masao Suzuki, “Important or Impotent? Taking Another Look at the 1920 California Alien Land Law,” The Journal of Economic History 64 (2004), pp. 125-130.
[13] Richard Rothstein, The Racial Achievement Gap, Segregated Schools, and Segregated Neighborhoods: A Constitutional Insult (Economic Policy Institute: November 12, 2014).
[14] Dedrick Asante-Muhammad, et al., The Road to Zero Wealth: How the Racial Wealth Divide Is Hollowing Out America’s Middle Class (Institute for Policy Studies and Prosperity Now: September 2017), p. 15.
[15] Jeremiah Battle, Jr., et al., Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color (National Consumer Law Center: July 2016), pp. 3-4.
[16] Under the 1968 Fair Housing Act, the Department of Housing and Urban Development (HUD) had to investigate complaints of discrimination within 30 days. If HUD pursued the claim, it could only seek voluntary settlements with noncompliant parties or advise complainants to file private lawsuits, for which penalties were capped at $1,000. In 1988, Congress updated the Act to provide administrative enforcement of the law, extend HUD’s investigation time to 100 days, and increase the maximum civil penalties, which currently range from $20,111 for a first offense to $100,554 for those with a history of offenses. See Douglas S. Massey, “The Legacy of the 1968 Fair Housing Act” Sociological Forum 30 (2015), pp. 571-588; Administrative Conference of the United States, Enforcement Procedures Under the Fair Housing Act (June 18, 1992); and 82 Federal Register 24523 (2017).
[17] Douglas S. Massey, “The Legacy of the 1968 Fair Housing Act” Sociological Forum 30 (2015), pp. 571-588; Nikole Hannah-Jones, “Living Apart: How the Government Betrayed a Landmark Civil Rights Law,” ProPublica (June 25, 2015).
[18] US Department of Housing and Urban Development, Housing Discrimination Against Racial and Ethnic Minorities 2012: Executive Summary, (June 2013), p. 1.
[19] This analysis excludes durable goods. Dedrick Asante-Muhammad, et al., The Road to Zero Wealth: How the Racial Wealth Divide Is Hollowing Out America’s Middle Class (Institute for Policy Studies and Prosperity Now: September 2017), p. 8.
[20] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[21] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[22] Rebecca Tippett, et al., Beyond Broke: Why Closing the Racial Wealth Gap Is a Priority for National Economic Security (Center for Global Policy Solutions and Duke Research Network on Racial and Ethnic Inequality at the Social Science Research Institute: May 2014), p. 4.
[23] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[24] Refundable tax credits are the exception, as they are recorded in the federal budget. See Lewis Brown Jr. and Heather McCulloch, Building an Equitable Tax Code: A Primer for Advocates (PolicyLink: 2014), p. 3.
[25] Lewis Brown Jr. and Heather McCulloch, Building an Equitable Tax Code: A Primer for Advocates (PolicyLink: 2014), p. 7.
[26] Heather McCulloch, Closing the Women’s Wealth Gap: What It Is, Why It Matters, and What Can Be Done About It (Closing the Women’s Wealth Gap Initiative: updated January 2017), p. 9; Suparna Bhaskaran, Pinklining: How Wall Street’s Predatory Products Pillage Women’s Wealth, Opportunities, and Futures (June 2016), p. 16.
[27] Scott Graves and Alissa Anderson, Payday Loans: Taking the Pay Out of Payday (California Budget & Policy Center: September 2008), p. 7.
[28] Suparna Bhaskaran, Pinklining: How Wall Street’s Predatory Products Pillage Women’s Wealth, Opportunities, and Futures (June 2016), p. 18-19.
[29] Suparna Bhaskaran, Pinklining: How Wall Street’s Predatory Products Pillage Women’s Wealth, Opportunities, and Futures (June 2016), p. 17.
[30] California Department of Business Oversight, Summary Report: California Deferred Deposit Transaction Law—Annual Report and Industry Survey (May 31, 2017), p. 8.
[31] In a 2013 analysis, these areas explained 61% of the ongoing racial wealth divide between whites and blacks. See Thomas Shapiro, Tatjana Meschede, and Sam Osoro, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy: February 2013), pp. 2-3.
[32] Sara Kimberlin, Californians in All Parts of the State Pay More Than They Can Afford for Housing (California Budget & Policy Center: September 2017).
[33] Sara Kimberlin, Californians in All Parts of the State Pay More Than They Can Afford for Housing (California Budget & Policy Center: September 2017).
[34] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[35] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[36] California Budget & Policy Center analysis of US Census Bureau, American Community Survey data. Data are for household heads age 18 and older in 2016.
[37] Melany De La Cruz-Viesca, et al., The Color of Wealth in Los Angeles (Duke University, The New School, the University of California, Los Angeles, and the Insight Center for Community Economic Development: March 2016), p. 33.
[38] Thomas Shapiro, Tatjana Meschede, and Sam Osoro, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy: February 2013), p. 2.
[39] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[40] Thomas Shapiro, Tatjana Meschede, and Sam Osoro, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy: February 2013), p. 3.
[41] Thomas Shapiro, Tatjana Meschede, and Sam Osoro, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy: February 2013), p. 3.
[42] Laura Sullivan, et al., The Racial Wealth Gap: Why Policy Matters (Institute for Assets and Social Policy and Demos: 2015), p. 1.
[43] If black families owned their homes at the same rate as whites, the median black household’s wealth would increase by over $32,000 (451%). For Latinx families, equalizing homeownership rates would increase the median household wealth by over $29,000 (350%). Laura Sullivan, et al., The Racial Wealth Gap: Why Policy Matters (Institute for Assets and Social Policy and Demos: 2015), pp. 11-13.
[44] Thomas Shapiro, Tatjana Meschede, and Sam Osoro, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy: February 2013), pp. 2-3.
[45] William Darity Jr., et al., What We Get Wrong About Closing the Racial Wealth Gap (Samuel DuBois Cook Center on Social Equity and Insight Center for Community Economic Development: April 2018), p. 7.
[46] William Darity Jr., et al., What We Get Wrong About Closing the Racial Wealth Gap (Samuel DuBois Cook Center on Social Equity and Insight Center for Community Economic Development: April 2018), p. 8.
[47] Laura Sullivan, et al., The Racial Wealth Gap: Why Policy Matters (Institute for Assets and Social Policy and Demos: 2015), p. 25.
[48] Heather McCulloch, Closing the Women’s Wealth Gap: What It Is, Why It Matters, and What Can Be Done About It (Closing the Women’s Wealth Gap Initiative: updated January 2017), p. 7.
[49] The data refers specifically to defined contribution plans. See Heather McCulloch, Closing the Women’s Wealth Gap: What It Is, Why It Matters, and What Can Be Done About It (Closing the Women’s Wealth Gap Initiative: updated January 2017), p. 12.
[50] Tatjana Meschede, et al., “‘Family Achievements’? How a College Degree Accumulates Wealth for Whites and Not for Blacks,” Federal Reserve Bank of St. Louis Review 99 (2017), p. 123.
[51] Hans Johnson, Testimony: The Need for College Graduates in California’s Future Economy (The Public Policy Institute of California: November 1, 2017).
[52] Jon Stiles, Michael Hout, and Henry Brady, California’s Economic Payoff: Investing in College Access and Completion (The Campaign for College Opportunity: April 2012), p.13.
[53] Amy Rose, State Spending Per Student at CSU and UC Remains Well Below Pre-Recession Levels, Despite Recent Increases (California Budget & Policy Center: March 2018).
[54] Yunju Nam, et al., Bootstraps Are for Black Kids: Race, Wealth, and the Impact of Intergenerational Transfers on Adult Outcomes (Insight Center for Community Economic Development: September 2015), p. 8.
[55] Tatjana Meschede, et al., “’Family Achievements?’ How a College Degree Accumulates Wealth for Whites and Not for Blacks,” Federal Reserve Bank of St. Louis Review 99 (2017), p. 124.
[56] There are three types of Cal Grant awards: Cal Grant A is used for tuition and fees; Cal Grant B provides an allowance for living costs known as an “access award” (in addition to tuition and fee assistance after the first year); and Cal Grant C is for students who attend occupational or career colleges. See California Student Aid Commission, What Is a Cal Grant Award?
[57] Data are from 2008. See The Campaign for College Opportunity, The State of Higher Education in California: Latinos (April 2015), p. 18 and The Campaign for College Opportunity, The State of Higher Education in California: Blacks (May 2015), p. 29.
[58] The Campaign for College Opportunity, The State of Higher Education in California: Latinos (April 2015), p.19; The Campaign for College Opportunity, The State of Higher Education in California: Blacks (May 2015), p. 29; and Amy Rose, Barriers to Higher Education Attainment: Students’ Unmet Basic Needs (California Budget & Policy Center: May 2018).
[59] Spiros Protopsaltis and Sharon Parrott, Pell Grants — a Key Tool for Expanding College Access and Economic Opportunity — Need Strengthening, Not Cuts (Center on Budget and Policy Priorities: July 27, 2017).
[60] Amy Rose, Barriers to Higher Education Attainment: Students’ Unmet Basic Needs (California Budget & Policy Center: May 2018).
[61] Mark Huelsman, et al., Less Debt, More Equity: Lowering Student Debt While Closing the Black-White Wealth Gap (Demos and Institute on Assets and Social Policy: 2015), pp. 16-17.
[62] Latinx students tend to borrow smaller amounts than both blacks and whites at public institutions but may borrow greater amounts at private for-profit institutions. See Mark Huelsman, The Debt Divide: The Racial and Class Bias Behind the “New Normal” of Student Borrowing (Demos: May 19, 2015), pp. 7-8.
[63] Mark Huelsman, The Debt Divide: The Racial and Class Bias Behind the “New Normal” of Student Borrowing (Demos: May 19, 2015), pp. 14-16.
[64] For a white household whose head does not have a bachelor’s degree, median net worth is $98,100. For a black household whose head does have a college degree, median net worth is $68,200. For Latinx households, the equivalent figure is $77,900. See Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[65] Yunju Nam, et al., Bootstraps Are for Black Kids: Race, Wealth, and the Impact of Intergenerational Transfers on Adult Outcomes (The Insight Center for Community Economic Development: September 2015), p. 12.
[66] Jonathan Kaplan, Repeal of the Estate Tax Would Reduce Federal Resources While Key Public Services Are on the Chopping Block (California Budget & Policy Center: October 26, 2017).
[67] Even before the passage of the Tax Cuts and Jobs Act of 2017, which further scaled back the national estate tax, only 2 out of every 1,000 estates were subject to the tax. Jonathan Kaplan, Repeal of the Estate Tax Would Reduce Federal Resources While Key Public Services Are on the Chopping Block (California Budget & Policy Center: October 26, 2017).
[68] Steven Bliss and Chris Hoene, Final GOP Tax Plan Is a Big Gift to the Wealthy, but Would Harm Most Households and Our Economy (California Budget & Policy Center: December 18, 2017).
[69] In order to establish a state estate tax, the Legislature would have to ask voters to repeal or amend Proposition 6 of 1982, which prohibits the state from imposing an estate, inheritance, or wealth tax. See California Budget & Policy Center, Principles and Policy: A Guide to California’s Tax System (April 2013), p. 21. For more information about state estate taxes, see Elizabeth McNichol, State Estate Taxes: A Key Tool for Broad Prosperity (Center on Budget and Policy Priorities: May 11, 2016).
[70] For estimates on the amount of revenue an estate tax could raise, see Elizabeth McNichol, State Estate Taxes: A Key Tool for Broad Prosperity (Center on Budget and Policy Priorities: May 11, 2016) and Legislative Analyst’s Office, A.G. File No. 2017-038 (November 30, 2017).
[71] Brett Theodos, et al., Affordable Homeownership: An Evaluation of Shared Equity Programs (Urban Institute: March 2017), p. 1.
[72] William Chen, Spending Through California’s Tax Code (California Budget & Policy Center: August 2016).
[73] In 2016, the average net housing wealth in the US was $215,800 for white homeowners versus $94,400 for black homeowners and $129,800 for Latinx homeowners. See Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[74] The Department of Finance estimates that California will lose $4 billion in revenue due to the mortgage interest deduction in state fiscal year 2018-19. See California Department of Finance, Tax Expenditure Report: 2018-19, p. 5.
[75] Mark Huelsman, et al., Less Debt, More Equity: Lowering Student Debt While Closing the Black-White Wealth Gap (Demos and Institute on Assets and Social Policy: 2015), pp. 18-20.
[76] Laura Sullivan,, et al., Equitable Investments in the Next Generation: Designing Policies to Close the Racial Wealth Gap (Institute on Assets and Social Policy and CFED: 2016), pp. 9-11.
[77] William H. Frey, The US Will Become “Minority White” in 2045, Census Projects (The Brookings Institution: Updated September 10, 2018).
[78] California Budget & Policy Center analysis of Department of Finance data.
[79] This report uses the terms “Asian” and “Asian American” depending on the cited source. For more on the SCF’s racial and ethnic categories, see Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).
[80] Melany De La Cruz-Viesca, et al., The Color of Wealth in Los Angeles (Duke University, The New School, the University of California, Los Angeles, and the Insight Center for Community Economic Development: March 2016), pp. 19-20.
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California has one of the most generous state financial aid programs in the country. In addition to receiving federal financial aid such as the Pell Grant, many California resident students also attend college tuition-free through various state and institutional grants at the California Community Colleges (CCCs), the California State University (CSU), and the University of California (UC). For California’s undocumented students, the road to higher education is a bit rockier. Extending financial resources to “Dreamers” (undocumented immigrants brought to the US as children) would boost their opportunities and produce long-term economic benefits to the state.
California has an estimated undocumented immigrant population of 2.6 million, more than 6% of the state’s population. Immigrants, including those without permanent legal status, play a vital role in our state’s economy and local communities, contributing billions in federal, state, and local tax contributions annually. Since higher education attainment is closely linked with higher earnings, ensuring that undocumented students have the support they need to succeed in college is vital to California’s economic well-being.
Undocumented students must navigate a complex set of challenges in pursuing higher education, complicated by their legal status. A study from the University of California at Los Angeles found that undocumented students reported significantly elevated levels of anxiety and constant concerns over deportation.
In addition to social stressors, one of the greatest barriers Dreamers face in pursuing higher education is accessing financial aid support. Undocumented students come from families with lower average incomes than other families, which means paying for college is out of reach for many without financial assistance. Undocumented students do not qualify for federal financial aid such as the Pell Grant, which provides low-income students with up to $6,095 to help pay for college. They are also unable to receive federal student loans or participate in work-study programs that provide part-time jobs for students with financial need. In addition to being barred from federal financial support, undocumented students are at the bottom of the eligibility pool for Competitive Cal Grants, the state’s primary grant that provides aid for tuition and living expenses for nontraditional students (e.g., those who do not attend college immediately after graduating from high school).
Without proper legal documentation, many Dreamers struggle to find meaningful work opportunities and build their professional skills. They also experience job insecurity, low wages, and labor-intensive work. The documentation status of other family members creates additional financial hardship and stress, even for students with citizenship. The constant social, financial, and legal challenges Dreamers face impede on their well-being and ability to succeed academically.
In 2012, the Deferred Action for Childhood Arrivals (DACA) program provided Dreamers with temporary protection from deportation and legal permission to work. This federal program enabled thousands of students to work legally in the United States. As of 2017, more than a quarter of active DACA recipients live in California. While the Trump administration continues its attempts to dismantle DACA, many states, including California, have taken an inclusive approach by passing policies that strengthen and expand support for undocumented students.
Specifically, California has adopted the following policies:
The absence of any meaningful federal support for Dreamers and the inability for Congress to pass the federal DREAM Act leaves states to shoulder the responsibility to assist undocumented students in pursuing their higher education goals. There are several ways California can strengthen support for Dreamers, such as:
California’s economy is increasingly dependent on a highly educated workforce. Ensuring higher education is accessible and affordable for all students is imperative to meeting workforce demands and strengthening our economy over the long run. California has already established several policies that increase access to financial support for undocumented students, safeguard against immigration enforcement activities on campuses, and provide other resources for Dreamers attending the state’s higher education institutions. California already educates a large number of undocumented students in our K-12 system; ensuring their access to and success in postsecondary education continues that investment. As the new year approaches, California’s new governor has an opportunity to work with state legislative leaders to continue the state’s legacy of protecting undocumented students and can further advance the progress that has been made by enacting policies that support Dreamers’ journey towards a college degree and greater economic opportunity.
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