October 2017 | By Chris Hoene
Download Full PresentationFor the Bay Area Asset Funders Network’s “Public Policy Updates and the Implications on Asset Building for Low-Income Families,” Executive Director Chris Hoene delivered his presentation “The Implications of Federal Budget & Tax Proposals for California.”
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California’s 2017-18 budget agreement included a major advance for working families who struggle to get by on low incomes. A “trailer bill” included in the budget package significantly expands eligibility for California’s Earned Income Tax Credit, the CalEITC — a refundable state tax credit that helps people who earn little from their jobs to pay for basic necessities.[1] Specifically, this bill 1) allows previously ineligible self-employed workers to qualify for the CalEITC and 2) raises the credit’s income eligibility limits so that workers higher up the income scale can qualify for it. These changes could extend the credit to well over 1 million additional low-income working families beginning in tax year 2017.[2] This represents a significant expansion of the CalEITC given that around half a million families might have been eligible for it prior to the expansion and that roughly 360,000 have annually claimed the credit since it was established in 2015.[3]
This report provides an in-depth look at what the expanded CalEITC means for low-earning Californians. It finds that the higher income limits will allow many more workers living in or near poverty, including single parents working full-time minimum wage jobs, to become eligible for the credit. However, these newly eligible workers will qualify for very modest credits — less than roughly $230 for those with children and under about $84 for those without children. Thus, while the budget agreement makes an important advance for working families by greatly expanding access to the CalEITC, state policymakers could further strengthen this critical tax credit by increasing the benefit these newly eligible workers can receive in future years.
Prior to the expansion, the CalEITC was the only EITC in the nation that excluded many self-employed workers, such as small-business owners and independent contractors.[4] This exclusion undermined a fundamental purpose of the EITC: to encourage and reward work. The 2017-18 budget agreement ends this exclusion beginning in tax year 2017. As a result, all self-employed workers who meet all other requirements for the CalEITC will be able to benefit from the credit. This change better aligns California’s EITC with the federal EITC and ensures that the state credit incentivizes all types of paid work.
Prior to the expansion, many workers who struggled to get by were not eligible for the CalEITC because the income limits to qualify for the credit were extremely low. The budget agreement raises these limits in order to allow additional low-earning workers to qualify for the credit. For workers with qualifying children, the new income limit will be $22,300 beginning in tax year 2017 (Table 1). This is more than double the previous income limit for parents with one child and more than one-and-a-half times the previous limit for parents with two or more children. The budget agreement also more than doubles the income limit for workers without qualifying children, from about $6,700 in tax year 2016 to roughly $15,000 in tax year 2017.
The higher CalEITC income limits will allow more minimum wage workers to benefit from the credit. Prior to the expansion, many minimum wage workers earned too much to qualify for the credit, even though they earned too little to make ends meet given California’s high cost of living. For example, in tax year 2016, families with one child were not eligible for the CalEITC unless they earned less than about $10,000 a year, a salary that translates into working just 19 hours per week at the state minimum wage (Table 2).[5] Families with two or more children did not qualify for the credit unless they earned less than about $14,000 annually, equivalent to working 27 hours per week at the minimum wage. The CalEITC expansion will allow families to work up to 41 hours per week at the state minimum wage to benefit from the credit.[6] This means, for example, that the CalEITC will become available to single parents working full-time at the minimum wage (Figure 1).
For workers without qualifying children, the new CalEITC income limit will increase to $15,010. Since this is less than a full-time minimum wage salary, the credit will not be available to full-time minimum wage workers without qualifying children. Nevertheless, this higher threshold means that these workers will be able to work up to 27 hours per week at the minimum wage and still qualify for the credit, up from just 13 hours per week to qualify previously.[7]
Raising the income limits to qualify for the CalEITC will not only allow more minimum wage workers to benefit from the credit, but will also make the credit available to more workers living in or near poverty. Prior to the expansion, the CalEITC’s income limits fell well below the official federal poverty line. As a result, many workers living in poverty were not eligible for the credit. For example, single parents with one child had to earn less than about 62 percent of the poverty line to qualify for the credit. Beginning in tax year 2017, these parents can have incomes up to about 135 percent of the poverty line and still be eligible for the credit (Figure 2). Raising the income limits closer to or above the poverty line is important because many families with incomes this low struggle to afford basic expenses, particularly in high-cost areas of the state.
The size of the CalEITC for a particular family or individual depends on how much they earn and how many children they support. Specifically, the credit “phases in” (increases) for higher levels of earnings up to a certain maximum point, after which the credit “phases out” (decreases) for higher levels of earnings until it reaches $0. The budget agreement extends the CalEITC to workers higher up the income scale by phasing out the credit more slowly beginning at an income of $13,794 for workers with two qualifying children (Figure 3).[8] This is the income level at which these parents are estimated to qualify for a CalEITC of $250 in tax year 2017. For workers without qualifying children, the budget package phases out the CalEITC more gradually beginning at an income of $5,354 — the point at which these workers are estimated to qualify for a CalEITC of $100 in tax year 2017.
Most workers who previously qualified for the CalEITC will see no change in the size of the credit, while some will receive slightly larger credits. For example, there will be no change in the credit for parents with two qualifying children and earnings of up to $13,794 (Table 3). Those with incomes between $13,794 and $14,529 will qualify for slightly larger credits. For instance, a parent with two children and earnings of $14,000 will qualify for an estimated $244 from the CalEITC under the expansion, up from an estimated $180 if the credit had not been expanded. Workers with two children and incomes between $14,529 and about $22,300 will newly qualify for the CalEITC.
Workers who become eligible for the CalEITC because of the higher income limits will qualify for very modest credits. Those with qualifying children will be eligible for roughly $230 or less, depending on their earnings. For example, a worker with two children could qualify for about $214 if she earns $15,000 or $126 if she earns $18,000 (Figure 4). Workers without qualifying children who become eligible for the CalEITC under the expansion will be able to receive about $84 or less, depending on their earnings. For instance, these workers would be eligible for about $84 if they earn $7,000 annually or $52 if they earn $10,000 annually.
Viewed another way, families working a total of 30 hours per week in 2017 at the state minimum wage (earning an annual salary of $16,380) will be eligible for an estimated $115 from the CalEITC if they have one qualifying child, $174 if they have two qualifying children, or $176 if they have three or more qualifying children (Table 4).[9] If the CalEITC had not been expanded in this year’s budget agreement, these workers would not have qualified for the credit at all.
Creating the CalEITC was an important advance in how our state helps workers with low incomes to better afford basic necessities and move toward financial security. The 2017-18 budget agreement greatly strengthens this vital tax credit by extending it to well over 1 million additional low-income working families. Although many of the newly eligible workers will qualify for very modest credits, the budget deal lays the foundation for further strengthening the CalEITC, as state policymakers can build on these changes in coming years by increasing the size of the credit that newly eligible workers can receive.
[1] Senate Bill 106 (Committee on Budget and Fiscal Review, Chapter 96 of 2017).
[2] Institute on Taxation and Economic Policy (ITEP). ITEP’s estimate is subject to some uncertainty. This estimate is largely based on Internal Revenue Service (IRS) data on California tax filers who claim the federal EITC. However, only around 75 percent of Californians who are eligible for the federal EITC are estimated to actually claim the credit each year. This means that California’s federal EITC participation rate is implicitly assumed in ITEP’s estimate. In other words, this estimate may be understated to the extent that expanding the CalEITC encourages workers who qualify for the federal EITC, but who do not typically file their taxes, to file in order to benefit from the state credit. On the other hand, ITEP’s estimate could be overstated given that the CalEITC appears to be undersubscribed. ITEP estimates that 553,000 tax units could have claimed the CalEITC in 2016, but actual claims were around 360,000. This suggests that ITEP’s estimate of the number of families who could benefit from the expanded CalEITC could be too high if many workers who are eligible for the credit continue to miss out on it in coming years.
[3] It is not known exactly how many families are eligible for the CalEITC. Estimates prior to the expansion ranged from around 400,000 to 600,000. Soon after the credit was signed into law, the Franchise Tax Board estimated that roughly 600,000 families would likely be eligible for it. (Personal communication with the Franchise Tax Board on September 22, 2015.) Similarly, a Stanford University analysis of US Census Bureau data estimated that approximately 600,000 families would have been eligible for the CalEITC if it had been in place in tax year 2013. (Christopher Wimer, et al., Using Tax Policy to Address Economic Need: An Assessment of California’s New State EITC (The Stanford Center on Poverty and Inequality: December 2016).) A more recent Budget Center analysis of US Census Bureau data estimated that around 416,000 families might have been eligible for the credit in tax year 2015. Additionally, ITEP’s analysis of IRS data suggests that about 550,000 families were likely eligible in tax year 2016. (Personal communication with the Institute on Taxation and Economic Policy on May 6, 2016.)
[4] Prior to the expansion, families and individuals who had self-employment income in addition to “earned income” qualified for the CalEITC if their federal adjusted gross income (AGI) was below the income limit. (“Earned income” was defined as annual wages, salaries, tips, and other employee compensation subject to wage withholding pursuant to the state Unemployment Insurance Code. Federal AGI includes both earned income and self-employment income, as well as several other types of income.) For these tax filers, the size of the CalEITC was based on their “earned income” if their federal AGI was below the income level needed to qualify for the maximum CalEITC. In contrast, if their federal AGI was at or above this threshold, then the size of the CalEITC was based on either their “earned income” or their federal AGI, whichever resulted in a smaller credit. Prior to the expansion, self-employed workers who had no “earned income” were not eligible for the CalEITC. These workers will qualify for the CalEITC beginning in tax year 2017, as long as they meet all other requirements for the credit.
[5] Earnings refer to annual earnings for the entire family.
[6] This means that in a family with one working parent, that parent can work up to 41 hours per week and still qualify for the credit. Families with two married working parents who file joint tax returns could work a combined total of up to 41 hours per week at the minimum wage and still qualify for the credit.
[7] This means that single workers without qualifying children can work up to 27 hours per week at the minimum wage and still qualify for the credit, while married workers without qualifying children can work a combined total of up to 27 hours per week and still qualify for the credit. Most state EITCs base their credits on the same eligibility rules as the federal EITC, which means that all workers who qualify for the federal credit also qualify for the state credit. In contrast, prior to the expansion, the CalEITC was available to just a fraction of those who qualified for the federal EITC because the income limits to qualify for the state credit were extremely low. Beginning in tax year 2017, the new CalEITC income limit for workers without children will match the federal EITC threshold that applies to these workers (Table 1). As a result, all Californians without qualifying children who are eligible for the federal EITC will also be eligible for the CalEITC. The new CalEITC income limits for parents will also be closer to the federal EITC thresholds, which range from about $39,600 to about $48,300 for single parents, depending on the number of children they are supporting.
[8] For workers with three or more qualifying children, the credit begins to phase out more slowly at an income of $13,875 and for workers with one qualifying child, the credit begins to phase out more slowly at an income of $9,484. These income levels do not reflect the income levels specified in SB 106 due to errors in the bill. These income levels will be corrected in a subsequent bill later this fall. (Personal communication with the Department of Finance (DOF) on July 24, 2017.)
[9] Eligibility for the CalEITC is based on annual earnings for the tax filer (for unmarried workers) or the combined annual earnings of the tax filer and his or her spouse (for married couples filing taxes jointly). In other words, families will be eligible for an estimated CalEITC of $115 if they have one working parent who earns $16,380 or two married working parents who earn a combined total of $16,380.
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Senate Bill 562 (Lara and Atkins), which would establish a single-payer health care system with universal coverage in California, was approved by the state Senate in early June, but has stalled in the Assembly. Although it appears that SB 562 will not move forward in 2017, a single-payer proposal could be revived in 2018. This post is the first in a series examining key issues related to SB 562 and, more generally, to efforts to create a universal, single-payer health care system in California. Future posts in this series will examine estimates of how much a single-payer system could cost, proposals for raising the state revenues needed to fund such a system, and other issues.
As envisioned in SB 562, all Californians could enroll in a new “Healthy California” program that would provide a broad range of services, including health, dental, vision, mental health, chiropractic, and hospice care. Under this system, private health insurers and health care service plans generally would be prohibited from providing coverage for services available through Healthy California, and enrollees would pay no premiums, co-pays, or deductibles. Instead, the state — as the “single payer” — would fund the full array of services using both state and federal tax revenues.
Implementing the single-payer system envisioned in SB 562 would require state tax increases exceeding $100 billion, and possibly as high as $200 billion. SB 562 does not contain the state tax increases that would be needed to fully finance its proposed Healthy California program. Instead, the bill assumes that these tax increases would be approved at a later date. SB 562 also specifies that the Healthy California program would not be implemented until the necessary financing was in place.
The new state taxes needed to fund a single-payer health care system as envisioned in SB 562 could be raised in various ways. For example, the Legislature could pass a bill that increases taxes, which would require a supermajority (two-thirds) vote of each house as well as the Governor’s signature. Alternatively, single-payer proponents could use the initiative process to qualify a tax measure for the statewide ballot. A ballot initiative would require only a simple majority of California voters in order to pass.
As outlined in SB 562, state and federal revenues needed to finance the Healthy California program would be deposited into a new state special fund called the “Healthy California Trust Fund.” In other words, these revenues — including those raised by new state taxes — would not go into the General Fund, which contains state revenues that are not designated for a specific purpose.
Any effort to boost taxes in California must take into account certain provisions in the state Constitution that affect the state’s ability to raise and spend revenues. One of these provisions was discussed above: the two-thirds vote requirement for passing tax increases in the Legislature, which sets a high bar for raising taxes through legislation. Two other key constitutional provisions are:
In short, in the view of the Senate’s fiscal experts, lawmakers and the Governor could unilaterally create a single-payer system, but they could not implement such a system without asking the voters to resolve some fundamental issues.
The primary proponent of SB 562 is the California Nurses Association (CNA). In a rebuttal to a recent article on the politics of SB 562, the CNA makes the following assertion: “There are ways in the bill to address the constitutional issues posed by both Prop. 98 and the Gann Limit….[W]e are developing these legislative approaches.” In other words, the CNA implies that there is a strictly legislative solution to the issues raised by the Gann Limit and Prop. 98, and that voters don’t necessarily need to weigh in. The CNA does not explain how it reaches this conclusion, although the association indicates that it is consulting with “constitutional legal experts.”
In addition, former state Senator Sheila Kuehl — a longtime single-payer advocate — recently “rejected suggestions that lawmakers could not find creative ways to work within existing constitutional limits.” Kuehl is quoted as saying: “That theory won’t fly…I don’t think [the constitutional limits] would actually be a problem.”
In short, in the view of key single-payer advocates, the Legislature could not only create a single-payer system and raise the taxes needed to fund it, but could also as part of the same legislation address the constitutional constraints posed by the Gann Limit and Prop. 98 without seeking voter approval.
The short answer:
It’s very unlikely that single-payer advocates could address the obstacles posed by the nearly four-decade-old state spending limit without going to the voters.
The long answer:
The Gann Limit aims to “keep [inflation-adjusted] per capita government spending under the 1978-79 level,” according to the nonpartisan Legislative Analyst’s Office (LAO), which provides fiscal and policy advice to the Legislature. This spending limit applies to “appropriations from proceeds of taxes,” the LAO explains. “Essentially, this means that appropriations from tax levies are subject to the limit,” although several types of expenditures are exempt from the limit. These include, but are not limited to, appropriations for debt service or court-mandated costs as well as from certain gas tax revenues.
As noted above, implementing a single-payer system in California would require tax increases exceeding $100 billion, and possibly as high as $200 billion. These revenues would be considered “proceeds of taxes,” all of which would be used to fund (i.e., would be appropriated for) health care and related services through the new Healthy California program. Moreover, expenditures for a single-payer system would not be exempt from the Gann Limit as it is currently structured. Consequently, a tax increase of $100 billion or more would push state expenditures well beyond the Gann Limit threshold. (Currently, the state has only a few billion dollars in “room” under the limit.) Barring the discovery of a previously unidentified loophole, the only way to avoid exceeding the Gann Limit would be to exempt from that limit the new revenues intended to fund a single-payer system. This would require amending the state Constitution – something that only California voters could do.
The short answer:
In theory, the Legislature could pass — and the Governor could sign — a bill that raises taxes by $100 billion or more, with none of the new state revenues going to K-12 schools and community colleges via the Prop. 98 minimum funding guarantee. However, such an approach would leave the state vulnerable to legal challenges, and any resulting litigation would jeopardize some or all of the new state revenues needed to finance a single-payer system.
The long answer:
The state Constitution refers to “General Fund revenues” and “General Fund proceeds of taxes” in describing the calculations that help to determine K-14 education’s share of the state budget each year. In other words, special fund revenues are not explicitly mentioned as a factor in calculating the Prop. 98 minimum funding guarantee. This is a critical point: As noted above, SB 562 would deposit the tax revenues needed to support a single-payer system into a special fund, rather than into the state’s General Fund.
However, there is disagreement regarding the relationship between Prop. 98 and state tax revenues. There appear to be at least two competing schools of thought.
One school of thought suggests that state policymakers could — without violating Prop. 98 — raise taxes and deposit all of the revenues into a special fund without any of the new dollars going to K-14 education. This view is clearly expressed in a legal argument drafted in 2012 by the Brown Administration in response to a lawsuit filed by K-12 school officials. (This lawsuit was rendered moot by the passage of Prop. 30 in November 2012 and was therefore dismissed by an appellate court before being resolved.)
This lawsuit stemmed from the state’s decision to redirect a portion of sales tax revenues to counties in order to fund an array of services that were transferred — or “realigned”— to counties beginning in 2011. State policymakers shifted these sales tax revenues out of the General Fund and into a new special fund dedicated solely to the realigned programs. In doing so, the state excluded these revenues from the calculation of the Prop. 98 minimum funding guarantee.
The Administration’s argument in this case included the following assertions:
These are strong arguments, but they’re not the end of the story. There’s at least one other school of thought regarding the relationship between Prop. 98 and state revenues. This view holds that the term “General Fund,” as used in the state Constitution, should be understood to encompass a broader range of revenues than those that are deposited into the “General Fund” established by state law. This perspective appears to be based on a particular understanding of the intent of Prop. 98, one goal of which was to take “school financing out of politics,” according to the 1988 ballot argument. This view also seems to reflect concerns about the long-term funding prospects for K-14 education if the Legislature were to use its discretion to direct more and more revenues into special funds that are separate from the General Fund — and seemingly outside the purview of Prop. 98.
To some degree, this line of thinking was expressed by K-12 school officials in the 2012 lawsuit described above and surfaces from time to time in the Legislature. For example, this view is evident in the Senate Appropriations Committee analysis of SB 562, which declares that: “In the context of Proposition 98, the term ‘General Fund’ revenue refers to state tax revenues, not simply revenues that are deposited in the state’s General Fund. Any taxes raised to support [a single-payer system under SB 562] would be considered the proceeds of taxes and would be subject to the requirements of Proposition 98.”
Given these two competing interpretations, the state could be vulnerable to a lawsuit if policymakers raised taxes by $100 billion or more and deposited these revenues into a special fund, with none of these dollars going to K-14 education. Lawmakers could attempt to dissuade potential litigants by adding a so-called “poison pill” to the bill. Such a provision would trigger a severe consequence — such as automatically repealing the new taxes – if a court ultimately found the state’s use of the revenues to be in conflict with Prop. 98. The Legislature included Prop. 98-related poison pills in four bills in the late 1980s and early 1990s. For example, policymakers in 1991 raised the state sales tax rate by a half-cent and directed all of the revenues into a new special fund dedicated to counties. These revenues were — and continue to be — excluded from the Prop. 98 calculation. The bill included a poison pill that would end this tax increase “if a court ruled that the revenues counted toward” the Prop. 98 minimum funding guarantee, according to the LAO. In all four cases, “none of the consequences set forth in the poison pill provisions ultimately occurred,” the LAO notes.
So yes, there may be a way for single-payer advocates to address any constitutional obstacles posed by Prop. 98 solely through the legislative process, without going to the voters. However, this path would leave the state vulnerable to a lawsuit that could put at risk the tax revenues needed to fully finance a single-payer system in California.
In any state, efforts to create a single-payer health care system would encounter a number of policy, fiscal, and political challenges. In California, these inherent difficulties are magnified by the complex rules that voters have added to the state Constitution — rules that restrict state policymakers’ ability to increase revenues and expenditures as well as to prioritize how new tax dollars should be spent.
In the context of recent attempts to establish a single-payer system in California, there are two fundamental constitutional constraints: 1) the state spending limit known as the Gann Limit and 2) the Prop. 98 minimum funding guarantee for K-14 education. Some single-payer advocates have asserted that these obstacles could be overcome solely through the legislative process without consulting the voters. This is highly unlikely with respect to the Gann Limit, barring the discovery of some as-yet-unidentified loophole. The story is somewhat more complicated with respect to Prop. 98. In theory, state legislators and the Governor could raise taxes by $100 billion or more to support a single-payer system, with none of these revenues going to K-12 schools and community colleges. Yet, this approach would be highly vulnerable to legal challenges that would put at risk some or all of the new state revenues needed to finance a single-payer system.
Addressing these constitutional constraints without seeking voter approval would likely create an extremely shaky legal foundation for a new single-payer system. Even under the best of circumstances, implementing a single-payer model would be a highly complex undertaking. Restructuring California’s current health care system — which comprises one-seventh of the state’s economy — would involve many moving pieces and uncertainties, and the transition would likely need to be phased in over time. Unnecessarily exposing a single-payer system to litigation in its infancy would hamper efforts to ensure a smooth transition and could undercut the long-term success of this new, state-based health care financing model.
In short, rather than trying to devise a clever — and likely counterproductive — way to avoid going to the ballot, single-payer advocates would be well-advised to ask California voters to remove the key constitutional obstacles to the implementation of a single-payer system.
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The 2017-18 state budget package negotiated by Governor Brown and legislative leaders resolves a months-long disagreement over how to spend new Proposition 56 tobacco-tax revenues that go to Medi-Cal, which provides health coverage for more than 13 million Californians. Approved by voters last November, Prop. 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, which took effect on April 1, will generate nearly $1.3 billion in new funding for Medi-Cal in 2017-18, according to state projections.
At the moment, the Prop. 56 compromise is included in two bills: Assembly Bill 120 and Senate Bill 105. The Legislature will approve — likely later today — one of these bills as part of the state’s overall spending plan for the 2017-18 fiscal year, which begins on July 1. The Prop. 56 compromise includes the following elements:
What comes next? On the state front, once the Prop. 56 compromise is signed into law, attention will turn to DHCS as it moves swiftly to develop the rules that will apply to supplemental payments. Medi-Cal provider payment increases that are funded with Prop. 56 dollars must be based — according to the measure — on criteria that include 1) ensuring timely access to care, 2) bolstering the quality of care, and 3) addressing provider shortages in various parts of the state. By seeking input from key stakeholders, DHCS can help to ensure that supplemental payments are structured in a way that will actually achieve these important goals, thereby improving Medi-Cal for the millions of children, seniors, people with disabilities, and other Californians who rely on it.
At the same time, however, anyone who cares about the future of Medi-Cal, and health care in our state in general, will be keeping an eye on federal deliberations and the actions of California’s congressional delegation. If President Trump and Republicans in Congress succeed in scaling back federal support for Medicaid, California would lose billions of dollars that fund Medi-Cal each year. This massive cost-shift would force state policymakers to make difficult choices regarding Medi-Cal coverage and benefits — and would almost certainly undo any progress on provider payments afforded by Prop. 56 revenues.
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Does California need significant new investments in its transportation infrastructure? Given our state’s deteriorating highways, roads, bridges, and other transportation infrastructure, not to mention billions of dollars in deferred maintenance, the answer should clearly be “yes.”
Governor Brown and state legislative leaders agree. They recently enacted Senate Bill 1, the Road Repair and Accountability Act of 2017, allocating $54 billion over the next 10 years in a transportation package that is split equally between state and local investments. This transportation package provides funding for highway and road maintenance and rehabilitation, public transit, improving conditions for pedestrians and bicyclists, and facilitating goods movement. The revenue to pay for these investments comes from a 12-cent increase in the state excise tax on gasoline (the “gas tax”), increased diesel fuel taxes, and new transportation improvement fees.
The new transportation package seeks to address billions of dollars in deferred maintenance and represents the culmination of deliberations that started in 2015, with an initial proposal from the Governor and a special legislative session on transportation funding that ran from June 2015 to December 2016.
While the overriding question should be whether California needs these transportation investments and improvements, much of the attention leading up to and following the enactment of the package has focused on questions about the fairness of the gas tax, whether the funds actually will be spent on transportation improvements, and whether the package was hastily passed without sufficient debate. After briefly recapping what the package actually includes — on both the spending and revenue sides — we examine each of these questions, in part by adding some much-needed context.
The funds from the $54 billion package will be split equally between state and local transportation programs.
Major state-level allocations include:
Major local-level allocations include:
The package generates $54 billion in new revenues over 10 years from a series of tax and fee increases:
In addition, the base gas and diesel fuel excise taxes, the new transportation improvement fee, and the new zero emissions vehicle fee will be annually adjusted for inflation starting in 2020-21. Further, the base gas and diesel fuel excise taxes and new transportation improvement fee will be annually adjusted for inflation starting on July 1, 2020. The new road improvement fee will be annually adjusted for inflation starting on July 1, 2021.
Whenever increases in the gas tax are considered, issues are raised about the fairness of the tax. As noted in our primer on California’s tax system, there are different ways to assess the fairness of taxes. Most people agree that a fair tax system asks taxpayers to contribute to the cost of public services based on their ability to pay. When lower-income households spend a larger share of their budgets on taxes than higher-income people do, we refer to those taxes as regressive. Conversely, taxes that require higher-income people to spend a larger share of their budgets on taxes are considered progressive. Lower-income households spend more of their incomes on daily necessities, such as basic transportation. In this respect, gas taxes are regressive.
However, this critique of the gas tax as a way to fund transportation improvements would be more concerning if we had other, more progressive ways of funding these improvements. The reality is that transportation funding in California, and nationally, primarily relies on a set of usage-based excise taxes and fees — taxes and fees that people pay to use highways, roads, transit facilities, ports and airports, and so on. While usage-based taxes and fees may be mostly regressive, they are fair in that they are paid as the cost of using the service. Even alternatives in transportation funding — toll roads and charges based on vehicle miles traveled (VMT), for instance — still raise revenues based on people’s use of highways and roads, and not with regard to users’ incomes. Another potential alternative, the carbon tax — a tax imposed on the burning of carbon-based fuels such as coal, oil, and gas — would still generate revenues based on the demand for and use of those fuels.
Some people contend that transportation should be funded from the state’s General Fund, or by general obligation (GO) bonds where the service on the debt is paid out of the General Fund, because the General Fund in California is largely reliant upon the state’s progressive income tax. However, this raises a major concern: Using General Fund dollars would put transportation investments in competition with other vital programs and services for limited state funding. General Fund dollars should be reserved for services for which lower-income households are especially burdened by the cost of the service (e.g., health insurance) or programs from which the entire society benefits and which we want to encourage (e.g., K-12 education).
Usage-based taxes and fees also make sense as a source of transportation funding because they can be structured in ways that meet other policy goals. For instance, because driving creates emissions that are harmful to the environment, taxes and fees can be designed to encourage alternative forms of transportation. Further, concerns about the impacts on lower-income individuals can be addressed by providing offsets. For instance, California could expand its Earned Income Tax Credit (EITC) — a refundable credit for low-income Californians — as a means of offsetting increased gas costs.
There is another factor to consider as to the wisdom of the recently enacted increase in California’s gas tax: our state’s gas taxes have not been increased in 23 years. Since the state last increased the rate, the real (inflation-adjusted) buying power of the gas tax per mile driven has dropped significantly. (Miles driven is a good proxy for the deterioration of roads.) There are a few reasons for this. One is that the tax is not indexed to inflation. Second, it is imposed as a fixed amount per gallon, not a percentage of the sales price of gasoline, so it does not increase as gasoline prices increase. Finally, because cars are more fuel-efficient than years ago, drivers pay less per mile driven than they did in 1994, when the gas tax last rose. When gas tax revenues fail to keep up with both inflation and wear and tear, less money is available to maintain and build streets and highways, and a backlog of deferred maintenance accumulates. The cost of addressing the deferred maintenance on the state’s transportation assets (not even including local roads) is now $57 billion. The relatively large 12-cent-per-gallon increase in the gas tax, which represents an approximate 4 percent increase in the overall cost of gasoline, is partly the result of 23 years of no increases. Furthermore, since the new package starts to adjust the gas tax rate for inflation in 2020, it will result in much more gradual annual changes in the rate, in turn helping ensure that revenues keep up with ongoing needs.
Lastly, it is important to put the gas tax in the broader context of the transportation package overall. State leaders structured the transportation improvement fee on vehicles — another key piece of the package’s revenue mix — so that it is based more on people’s abilities to pay, with the fee increasing relative to the value of the vehicle.
One of the other critiques offered about the new package is that the funds are not assured to go toward transportation improvements.
This critique is simply not based in fact. As noted in our quick summary above, the funds are all earmarked for state and local transportation investments. In addition, the package includes a set of accountability provisions designed to ensure that the revenues are spent as intended. Among these is a constitutional amendment (ACA 5) that will require voter approval on the June 2018 ballot. ACA 5 would 1) prohibit spending the funds on anything other than transportation and 2) create a state transportation inspector general within the California Department of Transportation (Caltrans) to ensure both that funds are spent as intended and that this spending complies with state and federal requirements.
Opponents of the package have also charged that the package was “rammed through,” without enough opportunity for deliberation.
This simply is not the case. Governor Brown initially proposed a similar package in early 2015 and called a special legislative session that ran from June 2015 through the end of 2016, without resolution. The Governor then outlined the contours of a new package in his proposed budget for 2017-18, released in January, and state legislative leaders crafted alternative proposals in the weeks that followed. So, at a minimum, the new transportation package represents deliberations that had been underway for more than two years. And, given that the state has not increased the gas tax in 23 years, while billions of dollars in deferred maintenance has mounted, enacting a new transportation funding package was long overdue.
Ultimately, the most important question is whether California needs to invest more in its transportation infrastructure, improving its highways, roads, public transit and other alternative transportation options, and its ability to move people and goods efficiently. Years of neglect and billions of dollars in deferred maintenance, exacerbated by a lack of political will to increase taxes and fees, mean that the answer to that question is clearly “yes,” and that the recently enacted transportation package is a significant advance for California.
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The California Earned Income Tax Credit (CalEITC), established in 2015, is a refundable state tax credit that helps low-earning workers and their families make ends meet and build toward economic security.[1] Yet, fewer than 1 in 5 visitors to county human services offices who were likely eligible for this new tax credit had heard of it, according to a Budget Center survey.[2] (County office visitors were surveyed because many would likely be eligible for the CalEITC or know people who are eligible for it.) In addition, only half of respondents who were likely eligible for the CalEITC filed their taxes for tax year 2015. These findings suggest that California needs to do more to raise awareness of the credit in order to boost participation.[3] The survey also found that most people who were likely eligible for the CalEITC and did file their taxes paid a tax preparer even though they would have qualified for free tax assistance. This means that many people did not get the full benefit of the CalEITC because they paid tax preparation fees. This report recommends strategies to maximize the success of the CalEITC, including by supporting research to better assess CalEITC utilization gaps and determine which outreach strategies are most effective, bolstering efforts by community organizations and county offices to promote the credit, and expanding and promoting free tax preparation services.
The CalEITC is a refundable state tax credit, modeled after the federal EITC, that helps working families who earn very little to better afford the basics. (Refundable credits allow people whose credit is larger than the amount of income taxes they owe to get the difference in a tax refund. This means that people who do not owe state income taxes, but who do pay other taxes, like the sales tax, can benefit from the credit.)
People qualify for the CalEITC based largely on how much they earn and how many qualifying children they are supporting. Families with multiple children qualify for the credit for tax year 2016 if they have earnings that do not exceed $14,161, while those with just one child qualify if their earnings do not exceed $10,087. Individuals without qualifying children can benefit from the CalEITC if their earnings do not exceed $6,717.
The size of the credit people can receive from the CalEITC also depends on how much they earn and how many children they are supporting. Working families with three or more qualifying children can receive up to $2,706 for tax year 2016, those with two children can receive as much as $2,406, and those with one child can receive up to $1,452. Individuals who do not have qualifying children are eligible for a much smaller credit — a maximum of $217.
The CalEITC is designed to build on federal working-family tax credits. Families with three or more children who qualify for the maximum CalEITC, for example, can see their incomes rise by as much as 92 percent from the CalEITC, in combination with the federal EITC and federal child tax credit. In this way, the CalEITC may enhance the federal EITC’s well-documented benefits to children, families, and communities.
Promoting the CalEITC will be key to its success because this new tax credit targets workers who — due to their very low earnings — are not required to file state personal income taxes and may not realize that they can receive cash back if they do.[4] However, a Budget Center survey of visitors to county human services offices found that:
Findings from the Budget Center’s survey suggest that California needs to do more to raise awareness of the CalEITC and to connect tax filers to free tax preparation services so that they can get the full benefit of their tax refunds. Such efforts could also increase federal EITC claims, drawing additional federal dollars into the state that would both help working families make ends meet and boost California-based businesses and the state economy.[19] Specifically, state policymakers could:
The Budget Center surveyed 938 visitors to county human services offices in eight counties during the fall of 2016. The primary purpose of the survey was to determine whether the visitors had heard of the CalEITC, since many would likely be eligible for the credit or know people who are eligible for it.
Budget Center staff designed the survey in consultation with academic researchers and other experts, and whenever possible utilized questions from long-standing national surveys. Initial drafts of the survey were pilot-tested in the late summer of 2016, and several questions were revised based on this testing.
Thirteen counties volunteered for the survey and, of these, the Budget Center selected the following eight to participate: Contra Costa, Los Angeles, Merced, Orange, San Bernardino, Stanislaus, Tehama, and Yolo. These counties were chosen in order to include communities in most major regions of the state as well as ensure a mix of urban and rural locations.
Surveys were administered between August and November 2016 on days that the counties identified as likely to have a high volume of walk-in traffic. All people who visited the county offices on those days were asked to participate in the survey. (It was not possible for the counties to identify in advance which of their clients were most likely to be eligible for the CalEITC. Therefore, eligibility had to be estimated through the survey using respondents’ self-reported earnings and family characteristics.)
Participation in the survey was voluntary and, when feasible, respondents were given a $5 gift card for their time. Most surveys were completed online using computers in the county offices. In a few counties that could not accommodate an online survey, Budget Center staff and volunteers distributed paper surveys to county visitors. Respondents could choose to take the survey in either English or Spanish.
While the number of survey respondents is large, and large samples increase the reliability of the survey results, the survey was not designed to be representative of all county human services clients or of all people who are eligible for the CalEITC. Also, many of the analyses reported are based on small subsets of the respondents. For example, just over one-quarter of the respondents (266 out of 938) appeared to be eligible for the CalEITC.
An estimated 28 percent of survey respondents were likely eligible for the CalEITC for tax year 2015. This determination was based on respondents’ estimated annual earnings from work and the number of children they were living with and financially supporting, which are two key factors that determine eligibility for the credit. Respondents who reported that they lived with their spouse and that someone else in the household worked in 2015 were assumed to not be eligible for the CalEITC in case their spouses had earnings that would have disqualified them for the credit.[41] In addition, a small number of respondents who reported hourly wages below the 2015 statewide minimum wage were assumed to not be eligible for the CalEITC in case these respondents were being paid under the table. (To qualify for the CalEITC, workers must have earnings subject to wage withholding.) The survey did not collect any information about the immigration status of respondents or their family members, and therefore it is not possible to determine whether some of those who otherwise appeared to be eligible for the CalEITC did not actually qualify for the credit. (To qualify for the CalEITC, all family members reported on the tax form must have valid Social Security numbers.) Also, in order to keep the survey short and simple, respondents were not asked to report how much of their earnings came from self-employment, and since self-employment earnings are not counted in determining eligibility for the CalEITC, it is possible that some respondents’ assumed eligibility status is incorrect.
The survey asked respondents whether they had heard of the federal EITC, child tax credit, CalEITC, and a fictitious tax credit, the Family Support Tax Credit (FSTC). The share of people who reported that they had heard of the CalEITC and the federal EITC excludes all of those who reported having heard of the FSTC. This fictitious credit was included on the survey in order to identify potential “false positive” responses. (Respondents may report having heard of a credit when they actually had not because, for example, they believe that an affirmative answer is the response that researchers are looking for.)
Respondents were not asked whether they actually received the CalEITC or other tax credits. According to experts who have conducted similar surveys, such questions do not tend to provide accurate information because tax filers often do not know exactly which tax credits they received.
The survey also collected information regarding how people learned about the CalEITC. However, so few respondents had heard of the CalEITC that it was not possible to reliably report the most common ways that clients learned about the credit.
Three-quarters of the survey respondents were women (75 percent) and the majority of all respondents were living with and financially supporting children (76 percent). The majority of respondents had worked in 2015 (58 percent), and these respondents had median annual earnings of $13,173.[42] Four in 10 of the respondents (40 percent) were the only workers in their household, and another 19 percent reported that they and others in their household worked.[43] Nearly half of the respondents (47 percent) were Latino, close to one-quarter (23 percent) were white, and 11 percent were black. The remaining 19 percent were of another race or ethnicity or reported multiple races or ethnicities. Respondents’ ages ranged from 17 to 80, with an average age of 35.
[1] This new credit is modeled after the federal EITC, which has provided extensive benefits to families, children, and communities, according to decades of research. For a summary of this research, see Alissa Anderson, State Earned Income Tax Credits (EITCs) Build on the Well-Documented Success of the Federal EITC (California Budget and Policy Center: March 9, 2017).
[2] The Budget Center surveyed 938 people who visited county human services offices in eight counties during the fall of 2016 to gauge awareness of the CalEITC. Of these individuals, just over one-quarter (266) appeared to be eligible for the CalEITC based on their estimated annual earnings from work as well as the number of children they were living with and financially supporting (see survey methodology for more information). Most people who participated in the survey reported that they visited the county office to apply for or renew benefits or to access employment services. The vast majority of respondents reported that they and/or their spouse and/or children currently participate in a major public program, such as Medi-Cal, CalFresh, or CalWORKs.
[3] CalEITC claims also suggest that many people who were eligible for the credit did not claim it. About 385,000 tax filers benefited from the CalEITC for tax year 2015. It is not possible to determine a precise participation rate because it is not known how many “tax units” (families) are eligible for the credit. In 2015, the Franchise Tax Board estimated that around 600,000 families would be eligible. (Personal communication with the Franchise Tax Board on September 22, 2015.) Similarly, a Stanford University analysis of US Census Bureau data also estimated that roughly 600,000 families would be eligible. (Christopher Wimer, et al., Using Tax Policy to Address Economic Need: An Assessment of California’s New State EITC (The Stanford Center on Poverty and Inequality: December 2016).) However, other estimates suggest that only about 466,000 families would be eligible. (Personal communication with the Institute on Taxation and Economic Policy on May 6, 2016.) This suggests that between 64 percent and 83 percent of those who were eligible for the CalEITC claimed it in tax year 2015. By comparison, around 75 percent of California families that are eligible for the federal EITC are estimated to claim it each year. However, EITC eligibility estimates have limitations. For more information, see Alan Berube, Earned Income Credit Participation: What We (Don’t) Know (Brookings Institution: February 15, 2005) and Dean Plueger, Earned Income Tax Credit Participation Rate for Tax Year 2005 (Internal Revenue Service: no date).
[4] It is likely that the majority of people who are eligible for the CalEITC are not required to file state personal income taxes. Personal communication with the Franchise Tax Board on April 7, 2017.
[5] Just over one-quarter of the people surveyed were likely eligible for the CalEITC. See survey methodology for more information.
[6] Since few respondents who were likely eligible for the CalEITC had heard of the credit, it is not possible to reliably report demographic information for this group. Therefore, these figures refer to the share of all people surveyed who had heard of the CalEITC, regardless of whether they were likely eligible for the credit. In this report, white respondents and Latino respondents are mutually exclusive groups and refer to people who said that they identify with only one race or ethnicity. Data for other race and ethnic groups could not be reported individually due to the small number of respondents in each of those groups.
[7] For simplicity, the survey asked, “Did you or your spouse file income taxes this year?” without asking respondents to specify the tax year, or whether they filed state or federal income taxes or both.
[8] By comparison, 65 percent of Californians who claimed the federal EITC paid a tax preparer in tax year 2014, according to Internal Revenue Service data compiled by the Brookings Institution. Brookings Institution, Earned Income Tax Credit (EITC) Interactive and Resources (December 21, 2016).
[9] US Government Accountability Office, Paid Tax Return Preparers: In a Limited Study, Preparers Made Significant Errors, testimony presented to the US Senate Committee on Finance (April 2014).
[10] National Society of Accountants, 2016-2017 Income & Fees of Accountants and Tax Preparers in Public Practice Survey Report (no date). Some tax preparers charge tax filers per form, which means that fees would be higher for people who claim credits like the federal EITC and CalEITC because claiming these credits requires additional paperwork.
[11] Personal communication with the Franchise Tax Board on November 15, 2016.
[12] Surprisingly, awareness of free tax preparation services did not always translate into use of those services. More than one-third of all tax filers surveyed who knew of a free tax preparation service in their community (37 percent) paid a tax preparer when they filed for tax year 2015.
[13] VITA sites offer free tax assistance to people who generally make $54,000 or less annually. Only 2.3 percent of California tax filers who claimed the federal EITC filed their taxes at a free tax preparation site such as VITA in 2014. Brookings Institution, Earned Income Tax Credit (EITC) Interactive and Resources (December 21, 2016).
[14] Personal communication with United Ways of California on March 8, 2017.
[15] For example, United Ways of California, which supports member United Ways that operate many VITA sites, reports that the majority of California VITA sites offer services for limited hours during the week, many lack enough volunteers to meet the demand for services, and that few sites have full-time, paid coordinators who can help the sites run more efficiently. In addition, some sites report that appointments often fill up quickly, limiting their ability to accept additional clients. Personal communication with United Ways of California on March 22, 2017 and April 5, 2017.
[16] A slightly smaller share of all people surveyed (37 percent) had heard of the federal EITC.
[17] Percentages refer to parents with incomes below half of the official federal poverty line (FPL) and those with incomes between 50 percent and 100 percent of the FPL, respectively. See Katherine Ross Phillips, Who Knows About the Earned Income Tax Credit? (The Urban Institute: January 2001), Table 1. Another national survey found that around 58 percent of low-income parents had heard of the federal EITC. See Elaine Maag, Disparities in Knowledge of the EITC (Urban Institute and Brookings Institution Tax Policy Center: March 14, 2005).
[18] Katherine Ross Phillips, Who Knows About the Earned Income Tax Credit? (The Urban Institute: January 2001).
[19] Estimates suggest that roughly 1 in 4 eligible California families or individuals do not claim the federal EITC each year, depriving California of more than $1 billion in federal funds annually. See Internal Revenue Service, EITC Participation Rate by States, downloaded from https://www.eitc.irs.gov/EITC-Central/Participation-Rate on March 1, 2017 and Antonio Avalos, The Costs of Unclaimed Earned Income Tax Credits to California’s Economy: Update of the “Left on the Table” Report (Commissioned by the California Department of Community Services and Development: March 2015). Studies suggest that workers who are eligible for, but do not claim, the federal EITC tend to have lower incomes than eligible workers who do claim this credit. Since the CalEITC is available only to workers with extremely low incomes, this group likely includes people who are missing out on the federal EITC. In other words, promoting the CalEITC provides an ideal opportunity to raise awareness of the federal EITC.
[20] See endnote 3.
[21] See Erik Beecroft, EITC Take-Up by Recipients of Public Assistance in Virginia, and Results of a Low-Cost Experiment to Increase EITC Claims (Virginia Department of Social Services: May 2012) and Erik Beecroft, To What Extent Do VDSS Clients Claim the Federal Earned Income Credit? (Virginia Department of Social Services: January 31, 2008).
[22] Indeed, national estimates suggest that almost two-thirds of people who were likely eligible for the federal EITC, but who did not claim it, did not file federal income taxes, underscoring the need to target outreach strategies to “nonfilers.” Dean Plueger, Earned Income Tax Credit Participation Rate for Tax Year 2005 (Internal Revenue Service: no date), Table 8.
[23] Specifically, Virginia’s social services department conducted a “random assignment” study to test whether mailers and automated phone calls boosted EITC claims. Researchers, sometimes in collaboration with the Internal Revenue Service, have conducted similar studies to evaluate EITC outreach efforts nationwide. See, for example, work by Day Manoli at http://www.daymanoli.com/researchpapers/ .
[24] Specifically, California could explore the possibility of linking MEDS, a database of people participating in major public programs, to wage withholding data from the EDD in order to identify public benefits recipients who are potentially eligible for the CalEITC based on their earnings from work. This information could then be shared with the FTB to determine which of these individuals did not file state income taxes in the prior year. These “nonfilers” who are potentially eligible for the CalEITC could then be targeted for direct outreach on the credit, and the effectiveness of this outreach could be evaluated by tracking whether these individuals eventually filed their state taxes and claimed the CalEITC. See endnotes 38 and 40 for information about researchers who have conducted, or are currently conducting, such evaluations.
[25] Currently, these grants support CalEITC promotional efforts for a limited time, from November 2016 through May 2017. For more information about this grant program, see Department of Community Services and Development, Notice of Funding Availability (NOFA) California Earned Income Tax Credit Education and Outreach Grant: 2016 Cal EITC NOFA (August 15, 2016).
[26] Research shows that many people at the low-end of the income scale experience large swings in their incomes from year to year. See, for example, Andrew Stettner, Michael Cassidy, and George Wentworth, A New Safety Net for an Era of Unstable Earnings (The Century Foundation: December 15, 2016). In addition, studies find that a sizeable share of the US population falls into poverty for short periods of time. See Bernadette D. Proctor, Jessica L. Semega, and Melissa A. Kollar, Income and Poverty in the United States: 2015 (US Census Bureau: September 2016), p. 3 and Robin J. Anderson, Dynamics of Economic Well-Being: Poverty, 2004-2006 (US Census Bureau: March 2011).
[27] The Legislature could direct the Department of Community Services and Development, which administers the current grant program, to contract with an independent, research-based institution with expertise in program evaluation. The Legislature has required such evaluations in the past. See, for example, SB 1041 (Committee on Budget and Fiscal Review, Chapter 47 of 2012), which required the Department of Social Services to contract with a research organization to evaluate changes in the California Work Opportunity and Responsibility to Kids (CalWORKs) program.
[28] There are many free online filing programs that could be used in these workshops, including: MyFreeTaxes.org, which is operated by United Ways of California; Free File (freefilealliance.org), a nonprofit coalition of tax software companies in partnership with the IRS; and CalFile (https://www.ftb.ca.gov/online/calfile/), a free, online filing program operated by the Franchise Tax Board that allows tax filers to automatically import information from their W-2 forms, which summarize workers’ annual wages and the amount of taxes withheld from their paychecks.
[29] Self-filing workshops would not require as many volunteers as VITA sites require, and the volunteers would not necessarily need to be as highly trained. VITA sites typically provide one-on-one tax preparation services by volunteers who must be certified by the IRS after completion of a tax-training course and passage of an exam.
[30] Research suggests that “a substantial majority of [federal] EITC filers have such limited literacy as to seriously compromise their capacity to prepare their own tax return.” See Michael I. O’Conner, Tax Preparation Services for Lower-Income Filers: A Glass Half Full, or Half Empty? (Tax Notes: January 8, 2001), p. 8. An estimated 40 million to 80 million Americans lack the skills necessary to fill out IRS forms. Edward E. Gordon and Elaine H. Gordon, Literacy in America cited in Joseph Bankman, Simple Filing for Average Citizens: The California ReadyReturn (State Tax Notes: June 13, 2005). Also, more than one-quarter of adults living in households with annual incomes below $10,000 lack basic literacy skills. Mark Kutner, et al., Literacy in Everyday Life: Results From the 2003 National Assessment of Adult Literacy (US Department of Education: April 2007), p. 32.
[31] The majority of Californians who claim the federal EITC pay to have their taxes prepared in spite of their modest incomes (see endnote 8), and many people who claimed the CalEITC in 2015 also appear to have paid to file.
[32] VITA sites offer free tax assistance to people who generally make $54,000 or less annually. According to United Ways of California, the majority of California VITA sites offer services for limited hours during the week, many sites lack enough volunteers to meet the demand for services, and few have full-time, paid coordinators who can help them run more efficiently. Also, as noted earlier, many communities where large shares of households are likely eligible for the CalEITC lack VITA sites altogether.
[33] State support could allow VITA sites to hire a full-time coordinator, train additional volunteers, and expand their hours of service. Iowa and Virginia have provided state funds to support EITC outreach and expand free tax preparation services. For more information, see National Conference of State Legislatures, Tax Credits for Working Families: Earned Income Tax Credit (EITC) (February 21, 2017).
[34] Tax preparation fees are rarely transparent, as discussed earlier. Therefore, it would also be useful for California to require tax preparers that charge for their services to specify their fees before tax filers begin the process of preparing their taxes. For example, preparers could be required to display their fees for each tax form and service they provide. See Chi Chi Wu, It’s a Wild World: Consumers at Risk From Tax-Time Financial Products and Unregulated Preparers (National Consumer Law Center: February 2014), pp. 18-19.
[35] These services could be provided at various community locations, such as schools, libraries, food banks, and one-stop centers, which offer employment-related services to people who are searching for work.
[36] VITA sites typically provide one-on-one tax preparation by volunteers who must complete a tax-training course, pass an exam, and be certified by the IRS. Communities that have difficulty establishing or expanding these services could consider establishing self-filing assistance programs, in which volunteers help clients file their taxes on their own using free, online tax filing software. Some VITA sites provide such self-filing services, called Facilitated Self-Assistance (FSA), in order to expand their capacity without having to recruit additional IRS-certified volunteers. See Shervan Sebastian, Ezra Levin, and David Newville, Strengthening VITA to Boost Financial Security at Tax Time & Beyond (CFED: June 2016) and Rebecca Thompson, Learn More About Facilitated Self Assistance for Your Clients! (CFED: February 22, 2017).
[37] Free tax filing programs are underutilized, suggesting a need to better promote these services. For example, less than 2 percent of the nation’s tax returns in 2016 were filed through Free File (freefilealliance.org), a nonprofit coalition of tax software companies in partnership with the IRS, even though this service is available to 70 percent of tax filers. See Jessica Huseman, “Filing Taxes Could Be Free and Simple. But H&R Block and Intuit Are Still Lobbying Against It,” ProPublica (March 20, 2017).
[38] These two projects are being conducted by Jacob Goldin, an assistant professor of law at Stanford University. The first study, which is being conducted in Colorado in collaboration with the Colorado United Way Network, is testing the effect of sending postcards promoting United Way’s free, online tax service, MyFreeTaxes, to a random sample of households in low-income neighborhoods. The second study, which is being conducted in collaboration with the US Treasury Department and the IRS, is testing the effect of sending postcards promoting various types of free tax preparation services to people who are likely to qualify for these services and who prepared their own tax returns in the prior year. The preliminary results of this research should be available in the late spring or early summer of 2017.
[39] The data-sharing project discussed earlier would make it possible to identify “nonfilers” who are likely eligible for the CalEITC. Notices about free tax preparation services could also be mailed to a broader group of individuals with low incomes — not just those who qualify for the CalEITC — given that use of paid preparers is high among this group. The Employment Development Department (EDD), for example, could mail such notices to workers with low earnings based on their wage withholding statements or to people who apply for unemployment insurance. The EDD is currently required by law to notify unemployment insurance claimants that they may be eligible for the CalEITC and federal EITC, but the notification does not have to include information about free tax preparation services.
[40] AB 650 (Lieu, Chapter 606 of 2007) requires most employers to notify their employees that they may be eligible for the federal EITC. This notification must occur within one week of providing an annual wage statement, such as a W-2 or 1099 form. (The specific statement employers are required to provide is posted on this website: http://www.edd.ca.gov/Payroll_Taxes/Year-End_Notification_Requirements.htm.) AB 1847 (Stone, Chapter 294 of 2016) requires this notification to include information about the new CalEITC. However, the current notification is not required to include information about how to access free tax filing assistance. Providing this information could help encourage people who do not have a filing requirement to file. California could also consider simplifying the information that employers are required to provide. A recent study tested the impact of mailing various types of notifications to more than 35,000 California tax filers who appeared to be eligible for, but did not claim, the federal EITC in tax year 2009. The study found that simple notices that included how much tax filers might receive from the EITC were most effective in boosting EITC claims. Examples of these notifications can be found in Saurabh Bhargava and Dayanand Manoli, “Psychological Frictions and the Incomplete Take-Up of Social Benefits: Evidence From an IRS Field Experiment,” American Economic Review 105:11 (2015), pp. 3489-3529.
[41] In order to keep the survey short and simple, the survey did not ask respondents to report earnings from spouses or anyone else in their household. This means that some respondents’ estimated eligibility for the CalEITC could be incorrect. For example, some respondents who did not work, and therefore were assumed to be ineligible for the credit, may actually have been eligible if their spouse had earnings that would have qualified the family for the credit.
[42] Respondents were considered to have worked in 2015 if they reported a positive number for at least one of two questions: the number of months they worked in 2015 and/or the number of hours they usually worked per week during those months. Due to incomplete information, annual earnings could be estimated for only 80 percent of respondents who worked in 2015. Annual earnings were estimated based on respondents’ hourly pay, usual hours worked per week, and total months worked in 2015. Respondents’ estimated annual earnings ranged widely, from $6,890 at the 25th percentile to $22,741 at the 75th percentile.
[43] Another 13 percent reported that they did not work, but someone else in their household did, while 28 percent of respondents reported that no one in their household worked.
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The Department of Community Services and Development (CSD) joined the State Franchise Tax Board, CalEITC4Me, and United Ways of California in hosting a stakeholder event to promote awareness of the California Earned Income Tax Credit (CalEITC). As part of this event, California Budget & Policy Center Senior Policy Analyst Alissa Anderson presented on the importance of the CalEITC and the federal EITC.
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Spending on K-12 schools is one of the most critical public investments we make. California voters’ approval of Proposition 30 in November 2012 has provided more dollars for the state to support schools and helped the state gain on the rest of the US in K-12 spending per student.
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