Top Things to Know About a State EITC for California

December 8, 2014

As policymakers grapple with how to ensure economic security for the 5.6 million Californians living in poverty, one option needs to be part of the discussion: a state Earned Income Tax Credit (EITC). A state EITC could give millions of Californians a much-needed economic boost by building on the successful federal EITC, a tax credit that has been instrumental in lifting families out of poverty and helping them make ends meet.

How would a state EITC work in California? And what should policymakers consider when designing one? Last week, we released a report answering these questions. Here are some of the most important things to know about a state EITC:

  • To be effective, a state EITC must be refundable. While Californians pay a variety of state and local taxes — and low-income households on average pay a larger share of their income on taxes than do higher-income households — many low-income households do not pay income tax because of its graduated structure. If a tax credit is refundable, then a taxpayer receives the credit even if they do not owe any income tax. This is key if policymakers want a state EITC to reach those who would most benefit from it. A refundable state EITC would reach about one in five California families, while a nonrefundable state EITC would reach less than 0.5 percent of California families.
  • A state EITC is typically set as a percentage of the federal credit. Generally, a state EITC is directly based off the federal EITC and will simply “add on” to what the federal credit provides. (For additional detail on how the federal EITC works, see this useful summary.) This means that the main features of a state EITC — who is eligible for a credit and how the size of the credit varies for different types of households — are already established. If California were to pursue this path, one of the most important decisions is at what percentage of the federal EITC to set the California credit. The higher this percentage, the larger the credit to families. For example, a refundable, 15 percent state credit would provide, on average, a $321 tax credit to families in the bottom fifth of the income distribution, while a 30 percent credit would provide an average tax credit worth $638 to these families.
  • A state EITC structured as a simple add-on to the federal credit would primarily benefit families with children. Under this model, a larger share of families with children than without children would receive a credit, and the credit would be, on average, substantially larger for families with children. For example, if California had a refundable state EITC that was 15 percent of the federal credit, a little more than one-third of families with at least one child (36 percent) would receive a credit, compared to just 7 percent of households without children (see table). Moreover, the average credit for families with at least one child would be $481, compared to just $61 for childless adults.

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As our report outlines, there are plenty of reasons to pass a state EITC. Not only would it give more than 3 million households additional economic support, it would also help rebalance California’s tax system, which currently asks the lowest-income households to pay the largest share of their income in taxes. Further, a state EITC would help strengthen California’s safety net. It’s a smart approach to the crisis of poverty in California. In the coming weeks, additional posts on this blog will look in depth at different aspects of a state EITC.

— Luke Reidenbach


Many Californians Struggle to Make Ends Meet Despite a Growing Economy

October 10, 2014

The economic recovery has continued to largely bypass low- and middle-income Californians, according to new Census data released last month. These latest Census figures show that California households in the bottom three-fifths of the income distribution saw their incomes essentially stagnate last year, even though the economy had been expanding for four straight years in California and nationally. The absence of any significant income gains is especially bad news given that these households suffered steep declines in their incomes in each of the prior five years.

California households in the bottom fifth, whose incomes fall below about $23,600, fared the worst in recent years. Their average inflation-adjusted income dropped by about 19 percent between 2007 and 2012, then flat-lined in 2013. This means that the lowest-income state residents have yet to gain back any of the nearly $3,000 they lost, on average, due to the weak job market during and in the aftermath of the Great Recession. While sobering, this trend is not entirely surprising given that hourly wages stagnated or declined for low-earning workers throughout the recovery.

High-income Californians also saw their incomes fall in recent years, but unlike state residents at the low end of the distribution, they regained in the last year much of what they had lost in prior years. The average inflation-adjusted income for households in the top fifth dropped by about 8 percent ($18,200) between 2007 and 2012, but then rose by about 4 percent ($9,500) in 2013. This means that in a single year the highest-income households — whose incomes averaged $224,000 — regained more than half of the income they lost, on average. The top 5 percent of California households — whose incomes averaged $399,000 — fared even better: Last year alone, they regained nearly two-thirds of the income they lost during the prior five years.

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The Uneven Economic Recovery Is Exacerbating Inequality in California

As the benefits of recent years’ economic growth largely accrue to Californians at the top of the distribution, income gaps are widening, exacerbating already high levels of inequality in the state. Last year, the average household in the top 5 percent had an income of $399,000 — 31 times the income of the average household in the bottom fifth ($12,700). Just six years earlier, at the height of the housing boom, the average household in the top 5 percent earned 26 times as much as the average household in the bottom fifth. This widening divide means that nearly one-quarter of total household income now goes to the wealthiest 5 percent of Californians, while less than 3 percent goes to the bottom fifth. And as striking as these figures are, they actually understate the extent of inequality in California. This is because they exclude one of the most significant sources of income for the wealthy — capital gains — and also because the Census does not report income changes for most millionaires.

Rising Inequality Isn’t Just Bad for Low- and Middle-Income Families, It’s Bad for the Economy

Should we be concerned that our nation’s economic rebound isn’t translating into income gains for a broad swath of the population? Certainly if you’re among the majority of families who have yet to see their incomes rise after years of decline, you have good reason to be concerned. As one recent New York Times analysis put it: “You can’t eat G.D.P. You can’t live in a rising stock market. You can’t give your kids a better life because your company’s C.E.O. was able to give himself a big raise.” In other words, without broadly shared income growth, an expanding economy can do little to help most families be economically secure or move up the economic ladder.

But there’s another reason we should be worried about uneven income gains. Recent reports, including one by Standard and Poor’s (S&P) Financial Services, have suggested that income inequality could be holding back our nation’s economic growth. One explanation could be that when many people’s incomes don’t keep up with their expenses, they often spend less. And when large numbers of people spend less, businesses produce less. The end result: an economy that grows more slowly than it otherwise would if fewer families were struggling to pay their bills.

Policymakers Can Reduce Inequality in California

But now for some good news: Inequality is not inevitable. As Nobel Prize-winning economist Joseph Stiglitz recently wrote, “widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.” That means policymakers have the tools to reduce our growing income divide and mitigate the hardship it inflicts on low- and middle-income families. One way state policymakers could do this is by making investments to ensure that all children have sufficient opportunities to move up the economic ladder. Increasing access to high-quality education, from preschool through college, for example, would set low-income children on a path toward greater economic security in the future. State policymakers could also take steps to make California’s income tax system more progressive. Creating a state Earned Income Tax Credit (EITC), for instance, would not only help workers with low to moderate earnings better support their families, but it also would reduce after-tax income gaps. To learn more about how California could reduce inequality by establishing a state EITC, watch for our forthcoming publication on the topic.

— Alissa Anderson


New Data Highlight the Nation’s Uneven Recovery

September 12, 2013

A new analysis from the University of California, Berkeley’s Emmanuel Saez shows that income inequality at the national level has grown during the economic recovery, with only the wealthiest seeing significant income gains. The data can be downloaded as a Microsoft Excel file here. Here are some highlights:

  • Income gains were uneven. Between 2009 and 2012, the last full year for which data are available, the average inflation-adjusted family income grew by 6.0 percent. However, incomes grew by 31.4 percent for the top 1 percent of families and only 0.4 percent for the bottom 99 percent.
  • These uneven gains come after severe drops during the Great Recession. According to Saez, the average inflation-adjusted income per family declined by 17.4 percent between 2007 and 2009, the largest two-year drop since the Great Depression. The top 1 percent saw even greater losses of income, with a decline of 36.3 percent.
  • For high-income earners, the impact of the Great Recession was temporary. Even though the top 1 percent of families saw far more severe drops in average income during the recession than did other families, this was only temporary. As Saez writes, “Overall, these results suggest that the Great Recession has only depressed top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s. Indeed, the top decile income share in 2012 is equal to 50.4%, the highest ever since 1917 when the series start.”

These new data show a trend we highlighted last week in our annual Labor Day report: Large groups of workers are not yet seeing a recovery. Here in California, wages remain depressed relative to their pre-recession levels for all but high-wage earners, and wage inequality continues to rise even as the labor market has grown for more than three years.

— Luke Reidenbach


The CBP Examines the 2013-14 Budget

June 28, 2013

Yesterday Governor Jerry Brown signed the 2013-14 budget bill and related legislation. The CBP has released its initial analysis of the 2013-14 budget, examining key provisions and their implications. Check back to California Budget Bites and the CBP’s website in the coming days and weeks for additional analysis and commentary on the 2013-14 budget agreement.

— Steven Bliss


New CBP Report Looks at State Corrections Spending After Realignment

June 26, 2013

In 2011, state policymakers transferred responsibility and funding for public safety and other services from the state to the counties. A major part of this “realignment” was that counties assumed responsibility for certain “low-level” offenders and parolees, all of whom previously would have served state prison sentences and been supervised by state parole agents upon release.

Yesterday, the CBP released a new report that examines state spending on corrections and assesses how it has changed since realignment. A Mixed Picture: State Corrections Spending After the 2011 Realignment shows that:

  • While state corrections spending is below the pre-realignment level — with annual General Fund savings projected to be $1.3 billion in 2013-14 — these savings are largely offset by county corrections spending that is funded with dedicated special fund revenues provided through the state budget.
  • Per capita costs for California’s prison and parole populations have continued to rise in recent years and are much higher than in the mid-1990s, even after adjusting for inflation.
  • More than half (56.5 percent) of the state corrections budget goes toward prison security and operations, while nearly one-quarter (23.7 percent) of corrections dollars pay for adult inmate health care.

A Mixed Picture also includes a status report on the federal court order to reduce California’s state prison population.

— Steven Bliss


Some Initial Reflections on the 2013-14 Budget Deal

June 24, 2013

The pause between the Legislature’s recent passage of the 2013-14 budget bill and the Governor’s action on the full budget package provides an opportunity to reflect on the emerging budget agreement and what it means for Californians.

In many respects the 2013-14 state budget is poised to be a historical turning point. In the short term, California is continuing to turn the corner on years of severe budget shortfalls. Thanks to new revenues approved by voters last November and the state’s gradual economic recovery, the 2013-14 budget boosts state spending for schools and other key public systems and services, pays down budgetary debt, and provides a sizeable reserve — a far cry from the budget shortfalls of recent years.

Considered in a broader, longer-term context, the 2013-14 budget takes two significant strides forward: (1) restructuring California’s K-12 school finance system through the new Local Control Funding Formula (LCFF), which allocates additional resources for educating disadvantaged students, and (2) expanding the state’s Medi-Cal Program to make more than 1 million low-income Californians eligible for affordable coverage as part of federal health care reform. These fundamental advances in policy position the state to improve education and health care outcomes for Californians in the coming decade and beyond.

While there is much to like in the soon-to-be-finalized budget, the budget deal struck between the Governor and both houses of the Legislature does fall short in a number of important respects, and some key issues remain unresolved. Here is a bit of what we like, what could be improved, and what we’ll be watching in the coming weeks.

Funding K-12 Schools, Higher Education, and Adult Education

The LCFF is an important step forward in making the state’s system of school funding more transparent, rational, and equitable than it is today. The LCFF compromise accepts a key premise of the Governor’s proposal: that it takes additional resources to educate disadvantaged students. However, compared to the Governor’s original LCFF proposal, the compromise version provides fewer resources specifically for these students. Key decisions remain on the issue of funding accountability — that is, how to ensure that school districts spend the LCFF dollars allocated for disadvantaged students to directly benefit these students.

The budget deal also adopts notable improvements for higher education and adult education. The budget deal includes a new scholarship program for California college students from middle-class families. In addition, policymakers have produced a budget that maintains existing funding and structures for adult education programs, while planning for a new regional-partnership system of adult education providers within two years.

Expanding Medi-Cal

The expansion of Medi-Cal eligibility in January 2014 to more than 1 million low-income Californians will substantially broaden access to affordable health care coverage. However, the budget deal also shifts to the state a significant share of the dollars that counties currently use to fund health care for uninsured Californians, many of whom are expected to enroll in Medi-Cal in 2014 under the expansion. It’s uncertain — given this shift in funds to the state — whether counties will be left with sufficient resources to provide health care for the 3 to 4 million Californians who are expected to remain uninsured even after full implementation of health care reform.

The budget agreement also leaves in place the Medi-Cal provider rate cut enacted in 2011, which has not yet taken effect due to litigation. A federal appeals court has ruled in the state’s favor, and the Administration intends to move forward with implementation as soon as it gets the final go-ahead. The cut will be applied retroactively to June 2011 and means that doctors and other health care providers will face Medi-Cal payment cuts of 15 percent or more at the very time the state is expanding the program.

Also on the Medi-Cal front, one especially positive outcome of the budget deal is the partial restoration of adult dental benefits starting next May.

Beginning to Reinvest in Human Services

The budget deal makes a number of enhancements to CalWORKs, such as retaining “early engagement” investments proposed in the Governor’s May Revision, providing a “child-poverty adjustment” to the CalWORKs grant, and increasing the CalWORKs vehicle asset limit in recognition of the fact that many parents need a reliable vehicle in order to successfully secure and retain employment. The CalWORKs changes are considerably more modest than some proposals that had been considered, but nevertheless represent a step in the right direction. More will be needed in the future, especially given that many Californians are still hurting in the aftermath of the Great Recession.

What to Watch For: Restructuring Enterprise Zones and the Final Budget Agreement

Still to be resolved in this year’s budget deal is the potential reform of the state’s Enterprise Zone (EZ) Program. Established in 1984, the EZ Program provides a variety of tax credits to encourage business location in economically distressed areas and to promote job creation. While well intended, the EZ Program as currently structured fails to achieve its goals — and at a significant financial cost to the state. The Governor’s May Revision included a set of proposals to narrow and better target the EZ tax credits, and legislation that would reform the EZ Program has been under consideration. Our recent analysis of the EZ program provides updates on the cost and use of the EZ credits and offers a set of recommendations for reform.

Stay tuned in the coming weeks for more from the CBP, including our analysis of the final budget agreement and a series of publications expanding on the issues summarized here.

— Chris Hoene


Assembly Moves Forward a Much Needed Increase in the Minimum Wage

May 30, 2013

Earlier today, the Assembly passed Assembly Bill 10 (Alejo), which proposes a $1.25 increase in California’s minimum wage over the next three years. The bill also proposes annual, inflation-based adjustments to the minimum wage starting in 2017. Raising the minimum wage and indexing it to inflation would result in modest and predictable increases in pay for low-income families.

Currently, the state’s minimum wage falls far short of providing sufficient income to lift low-income families out of poverty. An individual who works full-time at the minimum wage in 2013 will earn just $16,640 — $2,890 less than the 2013 federal poverty line for a family of three. In fact, the purchasing power of the state’s minimum wage remains low by historical standards and is 31.3 percent lower than its peak value in 1968. Moreover, the purchasing power of the minimum wage will continue to erode in coming years if the state does not act to increase it.

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Raising the minimum wage and indexing it to inflation is a necessary step that will bring low-income families one step closer to self-sufficiency. AB 10’s progress in the Senate merits close attention.

— Kristin Schumacher