Modernizing Employer Payroll Taxes & Covering the True Costs of Unemployment Benefits for Workers

Unemployment benefits provide a critical safety net for many workers who lose their jobs, helping them to support their families while they search for new employment. Millions of Californians turned to unemployment benefits after losing work due to the economic effects of the COVID-19 pandemic. However, policymakers previously failed to require businesses to pay the true costs of unemployment benefits for their workers, leading California to borrow billions of dollars from the federal government to pay for benefits – a repeat of what happened during the Great Recession.

California is one of just four states that allow employers to pay unemployment insurance taxes on the smallest wage base permitted by federal law, despite the lessons of the last recession and the need for businesses to contribute more to support the workforce.

State unemployment benefits are financed through payroll taxes paid by employers, which generate revenues that are deposited into the state’s unemployment insurance trust fund. But California businesses don’t pay these taxes on their entire payroll — they pay based only on the first $7,000 of each employee’s annual pay. This low base limits the amount of revenue the state can generate for unemployment benefits. For example, a 4% payroll tax would raise just $280 per worker in California, compared to $2,500 per worker in Washington state, where the taxable wage base is $62,500. Even with the same payroll tax rate, Washington would generate almost nine times more revenue than California for each employee making at least $62,500.

California’s taxable wage base has been frozen at $7,000 since 1983, failing to increase with rising wages. Consequently, the state’s base amounts to just 8% of the average annual earnings for a year-round worker – the smallest share in the US. In contrast, the taxable wage bases in 13 states are at least half of average annual earnings. Most of these states paid for unemployment benefits during the pandemic without federal loans.

California’s leaders must ensure that businesses uphold their responsibility to pay the true cost of unemployment benefits for their workers by increasing the taxable wage base for employer payroll taxes. This would not only prevent future debt, but also make it possible for California to increase unemployment benefits so that workers can meet rising costs of living as they seek to reenter the workforce and provide for their families.

All young children go through critical developmental stages impacting their lifelong health and well-being. However, young children in poverty face greater barriers to receiving the nutrition, learning materials, safe housing, and other resources integral for successful development. Moreover, Black and Latinx families in California have been more likely to struggle to meet basic needs. This highlights racial inequities in young children’s access to necessities.¹Limitations with sample size prevented the analysis in this publication from disaggregating by racial/ethnic identity. Lawmakers should invest in better publicly accessible data so that analyses (such as this one) can reliably disaggregate data by racial/ethnic identity to better understand inequities. Understanding trends in poverty for young children in California is therefore important for assessing the strength of federal and state anti-poverty policies and shaping policies that will help California’s youngest children to thrive.

How has poverty among young children changed over recent years?

Using the supplemental poverty measure, the following chart shows poverty levels from 2019 to 2022 for Californians across key age groups:

• Ages 0-12: Includes children who are eligible for early learning and care programs through the California Department of Social Services.
• Ages 0-5: Includes children who are eligible for early learning and care programs through the California Department of Education, Head Start, and Early Head Start. 
• Ages 0-3: The ages before a child is eligible to enroll in transitional kindergarten. 
• All Californians: Reflects Californians of any age, for the purposes of comparing poverty among young children.

Poverty trends for all Californians show a decrease in poverty from 2019 to 2021 and an increase from 2021 to 2022 as pandemic-era policies ended. Focusing specifically on young children, the chart shows that poverty among young children increased at a higher rate, as compared with all Californians. Specifically, between 2021 and 2022, poverty rose by 49% for all Californians, but it rose by 143% for children 0-3, 166% for children 0-5, and 121% for children 0-12. This uptick in poverty marks a reversal of the historic drop in child poverty from 2019-2021, reflecting how federal policy decisions to end key pandemic-era supports, such as the enhanced child tax credit, have negatively impacted California’s youngest children.

What can policymakers do to lift young children out of poverty?

The dramatic and troubling trends in poverty for young children hold key implications for California and federal policymakers. While recent California policy reforms targeting young children with low incomes, such as family fee reform, will support their well-being and health, more is needed.

Young children in California deserve to live in a state that affords them the opportunity to grow and thrive without experiencing poverty. Federal and state policymakers have several tools to draw on to ensure that poverty for young children, particularly young children of color, decreases.

Not everyone bears these challenges equally. Californians with the lowest incomes are hit the hardest when basic costs go up. More than 6 in 10 households in California earning less than $35,000 had difficulty paying for basic expenses such as food, housing, and medical costs from March to mid-July of this year.

Black, Latinx, and other Californians of color were more likely to struggle paying for basic expenses. Past racist policies and ongoing discrimination have made Californians of color more likely to have low incomes. For example, more than half (54%) of Black Californians reported facing difficulty paying for essential needs like food and housing. Additionally, LGBTQ+ individuals in the state disproportionately struggle to afford basic expenses.

Many California households with children are also struggling to pay for basic expenses. This is even more pronounced in households with low incomes. Overall, almost half of all California households with children (46%) struggled to pay for basic expenses between March and mid-July, compared to 35% of households without children. Among households with incomes under $35,000, over half (59%) of those without kids struggled paying for basic necessities. And while that share is very high, it’s even higher for households with low incomes and children — 71%, or 12 percentage points higher.

Millions of Californians are struggling to make ends meet every day. This is especially true for those with low incomes, Black, Latinx, and other Californians of color, and households with children. Pandemic-era supports that helped families and individuals pay for basic needs in recent years have expired. However, inflation and the high cost of living relative to workers’ earnings continue to strain families’ budgets. This points to the urgent need for policymakers to further invest in resources to ensure that all Californians can thrive. This includes affordable housing, affordable health care, and a strong safety net. In a state as wealthy as California, policymakers have the tools to build communities where all can share in our state’s prosperity.

Nearly six in 10 Californians say that price increases have caused hardship. Additionally, nearly half — including 63% of low-income Californians — say that their housing costs are placing a financial strain on them and their families. On top of this, the number of Californians living in poverty has likely risen because policymakers let pandemic supports expire. This includes emergency food assistance and expansions of the federal Earned Income Tax Credit (EITC) and Child Tax Credit.

A key and proven way policymakers can improve Californians’ economic security is by strengthening the state’s refundable income tax credits. These tax credits provide tax refunds to people with low incomes. California’s largest of such credits — the California Earned Income Tax Credit (CalEITC) — helps millions of Californians with low incomes meet basic needs each year.

Last year, the CalEITC put over $700 million back in the pockets of workers with low incomes and their families. So far this year, it’s provided well over $800 million. These dollars help families and individuals. Additionally, it supports local businesses, jobs, and economies by boosting the spending power of tax credit recipients. Research on the expanded federal Child Tax Credit as well as the federal EITC shows that the vast majority of families with low incomes spend their credits on basic household needs, with food being the most common expense.

Increasing the amount of cash provided through the CalEITC is a simple, effective way for state policymakers to help more Californians in working families make ends meet while also supporting local businesses and jobs. This investment is especially imperative now that federal pandemic supports have expired. This expiration makes it more difficult for many Californians to make ends meet. Tens of thousands of households in every legislative district across the state currently benefit from the CalEITC. Further investments in the credit could inject significant resources into their communities.

Assembly District Order

Notes: Number of households is rounded to the nearest hundred. It reflects those receiving the CalEITC in tax year 2021 as of 12/31/22. Just over 49,000 households that received the CalEITC (1.4%) filed taxes from zip codes outside of California. These households are not included in this analysis. Another 48,000 households that received the CalEITC & filed taxes from within California (1.3%) are not included in this analysis. They could not be matched to an Assembly or Senate district or because FTB did not report the zip code from which they filed in order to meet confidentiality standards. 

Source: Budget Center analysis of Franchise Tax Board data

Senate District Order

Notes: Number of households is rounded to the nearest hundred. This reflects those receiving the CalEITC in tax year 2021 as of 12/31/22. Just over 49,000 households that received the CalEITC (1.4%) filed taxes from zip codes outside of California. These households are not included in this analysis. Another 48,000 households that received the CalEITC and filed taxes from within California (1.3%) are not included in this analysis. They could not be matched to an Assembly or Senate district or because FTB did not report the zip code from which they filed in order to meet confidentiality standards.

Source: Budget Center analysis of Franchise Tax Board data

California should be a place where everyone — regardless of gender identity or sexual orientation — can afford to support themselves and their families. Many Californians struggle with the high costs of living in the state. They face uncertainty over whether they will be able to make their next housing payment, keep enough food on the table, and pay for their health expenses.

LGBTQ+ Californians — who make up about 1 in 10 adults in the state — are more likely than other Californians to have a hard time covering the basics. Around 2 in 5 LGBTQ+ adults in the state had difficulty paying for usual household expenses, according to data from the US Census Bureau’s Household Pulse Survey collected between July 2021 and June 2023.¹Based on Budget Center analysis of Household Pulse Survey data. These data likely exclude some LGBTQ+ Californians since they do not allow for the clear identification of other non-cisgender, non-straight identities such as nonbinary, two-spirit, pansexual, and asexual. See notes on the limitations of the Household Pulse Survey data in Kayla Kitson and Adriana Ramos-Yamamoto, State Leaders Should Prioritize LGBTQ+ Californians’ Mental Health (California Budget & Policy Center: May 2022). Broken down by gender identity and sexual orientation, about 47% of transgender Californians and 38% of lesbian, gay, or bisexual Californians had difficulty covering their expenses.²Note that LGBTQ+ gender identity and sexual orientation categories are not mutually exclusive; for example, transgender individuals may identify as lesbian, gay, bisexual, or straight.

Barriers to Economic Stability

Many LGBTQ+ people face barriers to economic stability, including employment and housing discrimination, a lack of family support, and mental health concerns.³Harvard T.H. Chan School of Public Health, Robert Wood Johnson Foundation, and National Public Radio, Discrimination in America: Experiences and Views of LGBTQ Americans (November 2017), 1; Kitson and Ramos-Yamamoto, State Leaders Should Prioritize LGBTQ+ Californians’ Mental Health. And while California is far ahead of many other states in enacting legal protections for LGBTQ+ individuals and families, the degree of social acceptance of LGBTQ+ people varies across the state, which likely impacts their economic as well as social well-being.⁴“Snapshot: LGBTQ Equality By State,” Movement Advancement Project (webpage), accessed March 31, 2023 ; The Williams Institute, The LGBT Divide in California: A look at the socioeconomic well-being of LGBT people in California (June 2015).

Other intersecting identities — such as race and ethnicity, age, and ability — may make some LGBTQ+ people more susceptible to financial insecurity. For example, LGBTQ+ Californians of color are more likely to face barriers to economic security than both white LGBTQ+ Californians and non-LGBTQ+ Californians of color. LGBTQ+ youth and young adults are more likely to experience homelessness due to an unaccepting family environment, which can result in lasting adverse health, educational, and economic outcomes.⁵“LGBTQ+,” youth.gov (webpage), accessed March 31, 2023.

Inclusive Policies for LGBTQ+ Californians

State leaders should ensure that policies aiming to reduce economic hardship take into account the unique challenges faced by LGBTQ+ Californians and that supports are available and accessible to address the needs of these communities. Policymakers at all levels of government should also take steps to improve data collection methods to make sure that LGBTQ+ individuals — and the many identities underneath the LGBTQ+ umbrella — are represented. Having reliable and accurate data on the challenges that different LGBTQ+ communities are facing is vital in order to inform the most effective policy solutions to address these challenges.

California state law only requires employers to provide up to 24 hours of paid sick leave, depending on how many hours the employee worked. That results in many workers —especially those with low wages who are disproportionately women, Black, and Latinx —only having three days of paid sick leave for an entire year.

Some cities in California have recognized the need Californians have for more paid sick time. Seven cities in the state — Oakland, San Francisco, Berkeley, Santa Monica, Emeryville, Los Angeles, and San Diego —  have their own paid sick leave laws that provide workers with more than the state’s 24 hours of paid sick leave.

While these cities have taken an important step in providing workers with necessary benefits so they can adequately care for themselves and their loved ones, it is not enough. Only 17% of Californians are covered by these more generous paid sick leave laws. That leaves 83% of California workers subject to the state’s paid sick leave law, which is inadequate, especially compared to other states. Three days of paid sick leave for an entire year does not allow Californians sufficient time to take care of themselves or their families when they are sick.

COVID-19 demonstrated the critical importance of paid sick leave. Unfortunately, the supplemental paid sick leave put in place during the early days of the pandemic has expired, leaving all workers — especially people of color and workers with low wages — vulnerable to inadequate paid sick leave. Workers need more paid time off when they or their family members are sick. It’s time for California to catch up to these seven cities, as well as other states around the country, and provide workers with more paid sick time.

Paid Sick Leave Policies in Effect in California, 2023