A California Earned Income Tax Credit
Governor Brown has proposed a state Earned Income Tax Credit (EITC) for low-income families, similar to the federal tax credit. This adds to the mix of strategies policymakers are considering to address the state’s poverty rate, which is the highest in the nation when cost of living is accounted for. The governor’s proposal is aimed at workers who have earnings well below poverty. For example, a parent of two children would be eligible if she filed a tax return and earned no more than $13,870—equivalent to the annual pay for about 30 hours a week at a minimum-wage job. Because it depends on earnings and the number of dependents, the credit would vary widely. The maximum credit of $3,121 would go to families with three or more children and earnings below $7,000 per year, but the governor’s proposal estimates the average credit to be $460. About a quarter of the 3.1 million California filers who can claim the federal EITC would also be eligible for the proposed state EITC.
While a state EITC would increase the cash resources of millions of Californians, the resources families need to make ends meet are substantial. A family of four needs about $29,000 a year to stay above poverty, according to our California Poverty Measure (CPM), a comprehensive yardstick of poverty that accounts for regional variation in the cost of living and the impact of social programs.
How would the proposed EITC affect Californians? Using CPM research, we estimate that the proposed credit would:
- Move 70,000 Californians, including 31,000 children, above the CPM poverty line.
- Help about 1.28 million Californians experience less severe poverty.
- Benefit 1.83 million Californians who already live above the CPM poverty line. (Many of those with low earnings are nonetheless above the poverty line because they receive benefits such as food stamps and/or live and share resources with other family members.)
The governor’s state EITC proposal focuses on augmenting low wages—an acknowledgment of the importance of earnings even for families in poverty. Research has shown that the federal EITC encourages work, and a state credit promises to do the same.