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Gavin Newsom, the newly inaugurated governor of California, has a big proposal for low-income people in his first budget: more than doubling the state’s Earned Income Tax Credit, or EITC. It’s a change that will put hundreds or thousands of extra dollars in the pockets of millions of poor and working-class Californians.
You might have heard of the federal EITC. It’s the largest dedicated anti-poverty program in the federal budget; in 2016, it kept an estimated 5.8 million people out of poverty, and made another 18.7 million people less poor. But most states (29 plus DC, to be precise) also have state EITCs, to offer additional support.
California’s state EITC is relatively recent, coming into effect in 2015. And unlike the federal credit, it’s specifically targeted at the very lowest-income Californians. If you’re a single parent of two, for instance, you can claim the federal EITC if you make as much as $45,802. In California, though, only parents making under $24,950 (or nearly half the federal maximum) would qualify. Until an expansion in 2017, the maximum income was less than $15,000.
That means that for very low-income people — say, a single mom of two who only makes $7,300 a year — the California EITC can be nearly as valuable as its federal version. This interactive from the California Budget and Policy Center offers a good illustration:
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But it also means that slightly less poor — but still very much poor! — families have been left out. The credit has been gradually expanded in a variety of ways since its introduction (getting rid of a maximum age of 65, lowering the minimum age of 25 to 18), but Newsom’s budget proposal suggests the biggest increase to date, by far.
Newsom’s budget, per the summary his team released, would increase the program’s size from its current level of $400 million to $1 billion annually, more than doubling it. The EITC would be renamed the “Working Families Tax Credit” and include an additional $500 for families with young kids under 6. The maximum income threshold would grow “so that workers working up to full-time at the 2022 minimum wage of $15 per hour will be eligible for the credit, and changes the phaseout formula so that taxpayers earning income at the upper end of the credit structure will receive significantly higher credit amounts.”
Because of California’s sheer size, the credit has a large pool of beneficiaries. “About 1.5 million tax filers benefited from CalEITC last year,” Alissa Anderson, a senior policy analyst at the California Budget and Policy Center, tells me. Anderson argues that the best way to evaluate the credit isn’t how much it reduces poverty, but how much it reduces the depth of poverty.
What’s unusual about California’s EITC
When the California credit was created, its main legislative champion — then-House Speaker Toni Atkins — opted to push for an option offered by the state’s Legislative Analyst’s Office that targeted very low-income people. “So the credit is really designed to reduce the depth of poverty for working families and individuals living, in many cases, well below the poverty line,” Anderson says. And the effect can be quite profound. For the single mom in the above scenario, the California EITC increases her annual take-home income by over 33 percent.
Without more specifics from Newsom, it’s hard to model precisely how many more people will be lifted out of poverty, or experience reduced poverty, as a result of the plan. And it’s worth noting that some economists argue there is a cost of EITCs like this for low-income workers. In theory, giving money premised on work to low-income people should enable employers to capture some of that money by lowering wages, relying on the new tax credits to make up the difference for their workers. A study by economist Andrew Leigh found that states with more generous state EITCs saw lower wages for less-educated workers, suggesting that this effect happens to some degree.
For families with kids, the size of the credit more than offsets the wage drop, so it’s still very beneficial on net. But low-income workers without kids, who get a much smaller credit, might be left worse off.
California is in the process of raising its minimum wage to $15 an hour, which should limit employer capture by setting a floor below which they can’t lower wages in response to the credit. Joe Sanberg, a tech startup founder and founder of the advocacy group CalEITC 4 Me, tells me he wants to increase the minimum wage to $25 per hour to help deal with this matter, which is significantly above California’s median hourly earnings and is a high enough figure to make even minimum-wage increase supporters like me queasy.
But even granting its flaws, a bigger EITC is still a substantial improvement on the status quo, and one that’s likely to pass given that Democrats control over 70 percent of the seats in both the State House and State Assembly. And it’s a good early sign that the Newsom administration plans to focus on expanding cash support for low-income people.
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