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.


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

Statement From Chris Hoene on the New LAO Forecast: “California Must Continue to Reinvest”

November 20, 2014

Yesterday, Chris Hoene, executive director of the California Budget Project, released the following statement in response to the new long-term fiscal forecast from the Legislative Analyst’s Office (LAO):

“The new budget forecast from the Legislative Analyst’s Office is encouraging on some key fronts, with the economy continuing to recover and the state regaining its financial footing. California’s public K-12 schools and its community colleges are expected to see additional dollars, both in the current budget year and looking ahead to 2015-16.

“We also see in this forecast that state policymakers have the opportunity to significantly rebuild support for other vital public services, while continuing to save for a rainy day and pay down state debts. Especially in light of a recovery that has failed to reach so many individuals and families, California must continue to reinvest in child care and preschool, the CSU and UC systems, support for low-income seniors and people with disabilities, and the other foundations of a strong economy and healthy communities.”

Lack of Affordable Housing Contributes to California’s High Poverty Rate

October 28, 2014

Poverty is more prevalent in California than in any other state, according to recently released US Census Bureau data. Nearly one-quarter of Californians (23.4 percent) lived in poverty each year, on average, between 2011 and 2013, based on the Supplemental Poverty Measure (SPM) — a more accurate indicator of economic well-being than the traditional poverty rate. Only Nevada’s poverty rate, at 20.0 percent, comes close to California’s under the SPM, while the poverty rates of all other states fall at or below about 19 percent, reaching as low as 8.7 percent in Iowa.

California’s high housing costs help explain why the state has the highest SPM poverty rate in the nation. Unlike the traditional poverty rate, the SPM takes into account local housing costs: poverty thresholds — the incomes below which families are considered to be living in poverty — are higher where housing costs are higher, reflecting the fact that families typically spend more in these high-cost areas to keep a roof over their heads. For example, the SPM poverty threshold is $24,336 for a four-person family who rents their home in a California metropolitan area, compared with $19,985 for a comparable family in an Oklahoma metro area. SPM thresholds also vary within California: In the San Francisco metro area, a family of four who rents their home is considered to be living in poverty if their income is below $33,562, while the threshold is much lower — $23,344 — for a similar family in the Merced metro area.

Rising rents have made housing much less affordable in recent years, particularly for families whose wages and incomes haven’t kept pace with the cost of living. The housing market bust helped fuel demand for rentals as people lost their homes or were unable to buy houses due to tighter lending standards, unemployment, or lower incomes. As rental vacancies fell, rental prices spiked. Typical rents increased by more than 20 percent in the metro areas of Los Angeles, San Diego, Riverside-San Bernardino, and Fresno between 2006 and 2011, and by more than 10 percent in the Bay Area and Orange County. By 2012, typical rents were higher than they were six years earlier in nearly all of California’s metro areas.

More recently, rapid job growth in California’s major urban areas has caused rents to jump higher, outpacing average wage gains. Typical rents rose by 6 percent or more in six of California’s major metro areas between July 2013 and July 2014. San Francisco, Sacramento, and Oakland saw the greatest increases among the 25 largest rental markets in the US, with typical rents rising by more than 13 percent. In fact, six of the 10 metro areas with the nation’s least affordable rents relative to wages are in California. Los Angeles, for instance, ranks third, after Miami and New York. Workers earning the average wage in LA would have to spend just over half of their earnings to afford the typical rent on a two-bedroom apartment. In Oakland, San Francisco, the Inland Empire, San Diego, and Orange County, typical rents would eat up between 44 percent and 49 percent of the average worker’s earnings.

California’s rental housing affordability crisis is even tougher for workers earning below the average wage. A full-time worker earning San Francisco’s minimum wage of $10.74, for example, would have to spend 83 percent of her income to afford a one-bedroom apartment in the city priced at “fair market rent.” To afford a comparable apartment in LA, a full-time worker earning the state’s minimum wage of $9 per hour would have to spend 69 percent of her income on rent.

Clearly, reducing economic hardship in California will not only take boosting workers’ earnings, as we discussed here, but also increasing access to affordable housing. Watch in the coming weeks for more blog posts on how the state’s lack of affordable housing contributes to poverty.

— Alissa Anderson

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.



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

CBP Infographic: Poverty Is a Problem We Can Address

September 17, 2014

Census Bureau data released yesterday show that poverty in California remains high. Our brief report on the new Census data shows that the share of all Californians with incomes below the federal poverty line in 2013 remained significantly higher than in 2006, the year before the Great Recession began. More than 5.6 million Californians — over one in seven — had incomes below the poverty line in 2013.

What’s more, nearly 2 million California children were living in poverty in 2013. Although the state’s child poverty rate — 20.3 percent — is down significantly from that in 2011 (24.3 percent), children still account for a disproportionate share of Californians living in poverty.

This CBP infographic (below) highlights the new top-level poverty data from the Census and shows why state policies that boost workers’ earnings can play a major role in reducing poverty and fostering greater economic opportunity across our state. A full-size (PDF) of this infographic is available here.

— Steven Bliss