Every Californian deserves to be able to put food on the table, pay the rent, and support their families. But millions of people across California struggle to make ends meet every day. The recent rapid rising cost of goods, food, and fuel coupled with continued increases in housing costs further strain family budgets.
Having a job does not guarantee economic security for Californians. Low pay relative to the high cost of living, particularly high housing costs, prevents many Californians from being able to support themselves and their families. This is especially true for LGBTQ+ Californians, for whom workplace discrimination is common, and for young people just entering the workforce, as well as for Latinx Californians and other workers of color, women, and immigrants, who face discrimination and continue to be segregated into low-paying jobs.1 The acronym “LGBTQ+” is a collective acronym for lesbian, gay, bisexual, transgender, queer or questioning, and other sexual and gender identities. The addition of the “+” indicates inclusion of other identities not encompassed by “LGBTQ,” including but not limited to those who identify as intersex, nonbinary, and asexual.
State leaders can build an inclusive California where all people have the resources they need to pay for basic needs by adopting policies that:
- increase low wages
- improve jobs
- expand worker bargaining power
- address workplace and other discrimination
- invest in public supports that target cash and other resources to people with low incomes.
A key and proven way to improve people’s and families’ economic security is by strengthening California’s refundable income tax credits. California’s largest of such credits — the California Earned Income Tax Credit, commonly known as the CalEITC — helps around 4 million workers put food on the table and pay for other necessities for themselves and their families. Increasing the amount of cash provided through the CalEITC is one simple, effective way state policymakers could help more Californians in working families meet basic needs and thrive.
- Increasing the CalEITC would help more Californians in Working Families Meet Basic Needs
- Investing in the CalEITC Would Promote Racial and Gender Equity
- Investing in the CalEITC Complements the Minimum Wage and Existing Public Supports
- Increasing the Amount Californians Receive Through the CalEITC Would Increase Economic Security
- Increasing the Minimum CalEITC Would Provide a More Meaningful Credit to Many Californians
1. Increasing the CalEITC Would Help More Californians in Working Families Meet Basic Needs
State leaders can ensure that all Californians have the resources they need to pay for basic needs through policies that boost workers’ wages and improve jobs, as well as by investing in public supports that help families and individuals make ends meet. California’s Earned Income Tax Credit — the CalEITC — is one promising tool that policymakers can use to help achieve this vision. This credit targets cash payments to millions of workers who earn little from their jobs, helping them to pay for basic needs like food, clothing, and diapers for themselves and their families.
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California’s credit benefited around 4 million workers in recent years, plus their children and other family members, across all regions of the state.
California’s EITC is modeled after the federal EITC, which has increased families’ financial security for decades, and is linked to long-term benefits for children, including:
- better health and school achievement
- higher educational attainment, and
- increased employment and earnings when children become adults.
More broadly, cash payments targeted to people with low incomes — whether delivered through tax credits or other forms — reduce poverty, help families afford their basic expenses, increase the number of households getting enough food, and are linked to other benefits, such as improved mental health.2For example, rates of material hardship, food insufficiency, and adverse mental health symptoms fell in the months following passage of the American Rescue Plan Act in March 2021, which included large cash payments to most US households. See Patrick Cooney and H. Luke Shaefer, Material Hardship and Mental Health Following the COVID-19 Relief Bill and American Rescue Plan Act (University of Michigan, May 2021). In addition, the US poverty rate, as measured by the Supplemental Poverty Measure, declined in 2021 for children and working-age adults largely because of cash payments provided through the federal EITC, Child Tax Credit, and Economic Impact Payments. See John Creamer, Poverty in the United States: 2021 (US Census Bureau, September 2022), 16, and Sara Kimberlin and Mauricio Torres, Q & A: How Did Public Supports Lower Poverty in 2021? What the Latest Census Data Reveal About Ending Poverty in California (California Budget & Policy Center, September 2022).
2. Investing in the CalEITC Would Promote Racial and Gender Equity
Investing in the CalEITC would help to promote racial and gender equity in California by targeting cash to Californians of color, immigrants, and women. Californians of color, immigrants, and women experience workplace discrimination, are blocked from economic and career advancement opportunities, and are frequently forced into low-paying jobs that fail to provide economic security.3See Marina Zhavoronkova, Rose Khattar, and Mathew Brady, Occupational Segregation in America (Center for American Progress, March 29, 2022) and Danyelle Solomon, Connor Maxwell, and Abril Castro, Systematic Inequality and Economic Opportunity (Center for American Progress, August 7, 2019). About 3 out of 4 California workers who are likely eligible for the CalEITC are people of color, including about half who are Latinx, 11% who are Asian, and 7% who are Black.4Budget Center analysis of US Census Bureau, American Community Survey public-use microdata, using an income tax simulation model developed for the California Poverty Measure, a joint project of the Stanford Center on Poverty and Inequality and the Public Policy Institute of California. Microdata were downloaded from IPUMS-USA (University of Minnesota, www.ipums.org). Based on CalEITC in tax year 2019, adding ITIN filers, who became eligible for CalEITC in tax year 2020. In addition, about 35% of California workers who likely qualify for the credit are immigrants and 52% are women.
Viewed another way, about one-quarter or more of Latinx, Black, and American Indian or Alaska Native workers are likely eligible for the CalEITC, as well as about one-fifth of Pacific Islander workers. In addition, about one-fifth of immigrant workers are likely eligible for the credit and about half (54%) of Californians who are likely eligible for the credit live in families that include immigrants. This means that a large investment in the CalEITC would especially benefit these workers, helping to narrow racial and ethnic income inequities.
Although estimates of CalEITC eligibility among LGBTQ+ Californians are not available, investments in the CalEITC would likely benefit LGBTQ+ individuals. National and California data show that transgender people have particularly high poverty rates.5M. V. Lee Badgett, Soon Kyu Choi, and Bianca D.M. Wilson, LGBT Poverty in the United States: A Study of Differences Between Sexual Orientation and Gender Identity Groups (UCLA School of Law Williams Institute, October 2019).The analysis is based on data from 35 states. The study also finds that for nearly all sexual orientation and gender identity groups, people of color had significantly higher poverty rates than white people. See also Soon Kyu Choi, M. V. Lee Badgett, and Bianca D. M. Wilson, State Profiles of LGBT Poverty in the United States (UCLA School of Law Williams Institute, December 2019). Recent California data also show that LGBTQ+ individuals overall have been more likely to struggle to pay for basic expenses during the pandemic than cisgender straight Californians.6Budget Center analysis of US Census Bureau, Household Pulse Survey data collected July 21, 2021 to August 8, 2022. One factor that contributes to economic hardship among LGBTQ+ individuals is workplace discrimination, which is a common experience for LGBTQ+ workers.7A recent study found that about 1 in 10 had experienced discrimination in the past year and nearly half had experienced unfair treatment at work at some point in their careers. Brad Sears, et al. LGBT People’s Experiences of Workplace Discrimination and Harassment (UCLA School of Law Williams Institute, September 2021).
3. Investing in the CalEITC Complements the Minimum Wage and Existing Public Supports
Further investments in the CalEITC would help supplement the earnings of Californians working in occupations and industries that typically pay at or around the state’s minimum wage. The most common occupations among workers likely eligible for the CalEITC include but are not limited to:
- personal care aides
- retail salespeople
- manual laborers
- farm workers
- housekeeping cleaners
- restaurant wait staff
- customer service representatives
- construction workers.
The median hourly pay for these occupations ranged from a low of $14.72 for farmworkers, $15.21 for personal care aides, and $15.34 for retail salespeople to a high of $23.56 for construction workers. Even full-time, year-round work at these hourly pay rates would provide an annual income well below what many families and individuals need to afford basic living costs throughout California, necessitating additional investments in public supports to boost workers’ incomes.
Investing in the CalEITC would also complement the minimum wage by increasing the incomes of workers earning less than a full-time, year-round minimum wage salary.8California’s minimum wage in 2022 is $15 per hour for workers employed at businesses with 26 employees or more. For smaller businesses it is $14 per hour. Several cities and counties throughout California set a higher local minimum wage. These Californians include workers who cannot find full-time jobs, as well as those working part-time while attending school or because of childcare problems or caregiving obligations.
Providing increased support to workers with low incomes through a refundable tax credit like the CalEITC also complements other important public supports available to help individuals and families meet their basic needs, like CalFresh food assistance and Medi-Cal health coverage. Support received through tax credits generally does not interfere with eligibility for other types of public supports, helping to ensure that boosted investments in the CalEITC would result in an overall increase in resources available to families to meet basic needs.
4. Increasing the Amount Californians Receive Through the CalEITC Will Improve Economic Security
California led the nation in establishing a unique state earned income tax credit in 2015, and California leaders have made important investments in the CalEITC in recent years, extending the credit to many Californians who were originally excluded from it.9The CalEITC was innovative from the very beginning. Unlike other state EITCs, the CalEITC was designed to target the most support to Californians with incomes well below the federal poverty line, specifically by providing larger credits to workers with extremely low earnings. In addition, California was one of the first states in the nation to expand its state EITC to people excluded from the federal EITC, such as workers who file taxes with Individual Taxpayer Identification Numbers (ITINs) and workers ages 18 to 24 or over 64 who are not supporting children. Policymakers could further strengthen the credit by increasing the amount of money individuals and families receive. A larger, more meaningful CalEITC would help millions of Californians who earn little from work better meet basic needs.
California has the potential to deliver sizable cash payments via the CalEITC to Californians with low incomes. But currently most people who receive the credit get very small payments. Nearly 8 in 10 CalEITC recipients — about 2.7 million workers in total — got less than $200 in 2021. This included about 1.5 million workers (43%) who got less than $100 from the credit.10Such small credits are especially problematic given that the majority of Californians who benefit from the CalEITC are not likely eligible for the federal EITC currently. CalEITC recipients who are excluded from the federal credit are 1) workers ages 18 to 24 or over age 64 who are not supporting children in their homes, 2) immigrants who file their taxes with ITINs, and 3) workers who are not supporting children in their homes and who earn $16,480 or more if filing as single or $22,610 or more if filing as married, joint return. In tax year 2021, policymakers expanded the federal EITC to many previously excluded individuals ages 19 to 24 and over age 64, but only for one year. See Chuck Mar, Another Tax Day Message for Congress: Time to Expand EITC for Adults Without Children (Center on Budget and Policy Priorities, April 12, 2022).
5. Increasing the Minimum CalEITC Would Provide a More Meaningful Credit to Many Californians
California has always been at the forefront of efforts to innovate how a state EITC can help workers better meet basic needs, and state leaders can continue to build on this progress by increasing the amount of money the CalEITC provides.
One effective way to do this would be to increase the minimum CalEITC — currently just $1 — so that it guarantees a much larger credit to eligible Californians. Raising the minimum credit to $300 would benefit the majority of CalEITC recipients — 88% of whom currently receive credits under $300. If state leaders increased the minimum credit to $500 it would benefit nearly all CalEITC recipients — 94% of whom currently receive credits less than that amount.
Increasing the minimum credit would also start to “flatten” the CalEITC, making it more like a guaranteed income and like California’s Young Child Tax Credit and the new Foster Youth Tax Credit, both of which provide a $1,000 payment to nearly all eligible tax filers.
A key advantage of flattening the CalEITC, aside from guaranteeing a larger credit for many workers, is that it would make the credit easier to administer and open the door to opportunities to simplify claiming of the credit and potentially to provide it to some Californians automatically. For example, if the minimum CalEITC were set at $500, then nearly all workers with very low incomes would be guaranteed a $500 credit, as previously noted.11Nearly all workers with low incomes who are not supporting dependents would qualify for the $500 credit since this exceeds the current maximum CalEITC of $276 for these workers. The only workers who would qualify for less than $500 would be those with earnings close to $30,000, assuming that the minimum CalEITC would be structured like the Young Child Tax Credit and Foster Youth Tax Credit. This would make it much easier for the Franchise Tax Board (FTB) to use Employment Development Department earnings data from W-2 forms to identify many workers who would likely qualify for a credit of exactly $500. Once identified, these workers could be contacted to ensure they claim the credit, or perhaps in some cases they could be automatically sent the credit without having to file a complete tax return.12For example, FTB could explore whether it’s feasible to automatically send the minimum CalEITC to people who filed their state taxes and appeared eligible for the minimum CalEITC based on EDD earnings data but didn’t claim it. This might be simplest to do for workers without dependents, who comprise the majority of people eligible for the credit. FTB estimates that nearly 1 million recent tax filers who appeared eligible for the CalEITC did not claim it, highlighting the need to directly reach out to these filers to boost take-up of the CalEITC. See Franchise Tax Board, Report On the Study to Increase the Number of Claims for the California and Federal EITC (January 2022), 41. Currently, it would be difficult for FTB to automatically provide workers with the exact credit they qualify for based on EDD earnings data because the size of the CalEITC credit varies significantly depending on workers’ earnings. In a study conducted in 2021, FTB found that out of 755,000 households participating in a Department of Social Services program that could be matched to EDD W-2 earnings data, 28% of the time EDD earnings data were more than $500 above or below the wage income reported on tax returns. (EDD does not have complete earnings information for all workers. For example, it does not have information about earnings from self-employment.) This means that FTB would significantly over- or underestimate the CalEITC for many people if it tried to predict the credit workers are eligible for based on their W-2 earnings under the current structure of the CalEITC, since relatively small differences in workers’ earnings can result in significant differences in the size of the credit they are eligible to claim. However, if all workers without dependent children and annual earnings between $1 and $25,000 were eligible for $500 from the CalEITC, it would be far easier for FTB to predict the exact credit owed to many workers. FTB would simply need to identify workers who likely earned less than $25,000 annually.
Increasing the minimum CalEITC could also boost take-up of the credit. Although it’s difficult to determine an exact participation rate for the CalEITC, it is likely that many Californians who are eligible for the credit miss out on it each year.13It’s difficult to determine a precise participation rate because the exact number of eligible workers is not known. The total number of workers eligible for the CalEITC can only be estimated using non-tax data sources, such as US Census Bureau data, which requires making assumptions about who is likely eligible for the credit. Budget Center analysis of Census data, using a tax model developed for the California Poverty Measure (a joint project of the Stanford Center on Poverty and Inequality and the Public Policy Institute of California), shows that the estimated number of potentially eligible CalEITC filers has been substantially larger than the number of CalEITC claims each year, reinforcing FTB’s finding that many eligible workers likely do not receive the credit. FTB estimates that around 1 million tax filers who appeared to be eligible for the CalEITC failed to claim it in recent years. However, this number likely includes some filers who did not actually meet all CalEITC eligibility criteria, and FTB does not have data on people who were eligible for the credit and did not file taxes. In addition, researchers found that roughly 440,000 CalFresh households who were likely eligible for the CalEITC did not claim it in 2017. John Islen, et al., CalEITC Falls Far Short of Its Full Reach: Measuring the CalEITC Take-up Gap Among CalFresh Enrollees (California Policy Lab, July 2021). One study that estimated CalEITC participation among eligible households participating in CalFresh in 2017 found that 78% of households that missed out on the credit were adults without children who were eligible for an average CalEITC of just $82 to $85.14Specifically, 76% of those who missed out on the CalEITC were single adults without children who were eligible for an average credit of $85, while 2% of those who missed out were married adults without children who were eligible for an average credit of $82. John Islen, et al., CalEITC Falls Far Short of Its Full Reach: Measuring the CalEITC Take-up Gap Among CalFresh Enrollees (California Policy Lab, July 2021), p. 6.
Similarly, research on federal EITC participation finds that workers without qualifying children — who by definition qualify for small credits — are less likely to claim the EITC, as are workers who qualify for small credits based on their earnings, regardless of how many children they have.15See, for example, Dean Plueger, Earned Income Tax Credit Participation Rate for Tax Year 2005 (Internal Revenue Service: 2009) 182-183. It’s plausible that workers eligible for very small credits, who generally are not required to file tax returns, find that they cannot justify the effort to file their taxes just to claim such a small credit, suggesting that increasing the credit could help to boost take-up, ensuring that these state resources intended to help working Californians actually result in more income for these workers and their families.16Jeanne Harriman, Chief Financial Officer, Franchise Tax Board, pointed out at a recent legislative hearing that people who are eligible for the CalEITC but do not claim the credit may find that they cannot justify the significant time and effort to file their taxes because the size of the CalEITC is so small. Assembly Revenue and Taxation Committee, Unclaimed Credit: Examining the CalEITC and Increasing its Utilization by Working Californians (October 3, 2022). Flattening the credit to facilitate simplified claiming or automated payments could also help ensure that more eligible workers receive the credit and benefit from these resources.
5. State Leaders Can Build an Inclusive California with the CalEITC
With the right policies, state leaders can build an inclusive California where all people have the income they need to pay for basic needs. Further investing in a proven policy like the CalEITC is one simple way to bring the state a step closer to achieving this vision. Providing a larger, more meaningful credit would help around 4 million workers and their families put food on the table and better afford other necessities. And it would particularly benefit people of color, immigrants, LGBTQ+ individuals, women, and young adults who are frequently stuck in low-paying jobs that fail to provide economic security, as well as put young adult Californians on more stable financial footing as they are beginning their careers.
Providing increased support to workers with low incomes through a refundable tax credit like the CalEITC also complements the state’s minimum wage and other important public supports that help individuals and families meet their basic needs. By maximizing the resources Californians have to live, learn, work, and invest in the state they call home, state leaders can help ensure that boosted investments in the CalEITC help workers and families meet basic needs and thrive in their schools, workplaces, and communities.