State-designed and -funded tax credits for low-income families are a small but growing part of California’s anti-poverty portfolio. Policymakers seeking to maximize the effectiveness of these credits could benefit from knowing more about where and when they are claimed. At a virtual briefing last week, PPIC researcher Tess Thorman outlined a new report that sheds light on the factors associated with participation in the California Earned Income Tax Credit.
“Safety net programs are largely federally funded and designed,” Thorman noted. But California has introduced several state tax credits to support low-income families. CalEITC was introduced for tax year 2015; since then, the state has expanded the CalEITC and introduced two additional credits: the Young Child Tax Credit (YCTC) and the Foster Youth Tax Credit (FYTC).
Many safety net benefits are distributed on a monthly basis, while tax credits are delivered as lump sums at tax time. Citing research on the federal advance Child Tax Credit, Thorman noted that steady flows of support can address immediate needs, while a tax credit can help pay down debt or cover major purchases. For example, “when people get a lump sum they might use it to pay down rent arrears; monthly amounts can reduce food insecurity.”
The report finds that CalEITC dollars are distributed proportionately to where low-income families live, on average. It also finds that claiming varies across the state. “When we account for demographic differences, we find that communities with large shares of Latino residents have higher claims ratios,” Thorman said.
Filers in high-eligibility communities—and in areas where more families have children—tend to claim credits earlier in the year. Since benefits are higher for families with children, this probably indicates that many people file early when they know they can get a substantial refund. Thorman noted that it is not necessarily better to file early. But claims made later in the tax season could indicate that eligible filers are facing barriers—or could be a result of outreach to encourage claiming.
In the years since CalEITC was introduced, the income cap has risen from $15,000 to $30,000. However, the credit is still most generous to filers who are extremely low income—many of whom are not required to file a tax return. “Reaching people who are eligible for CalEITC but not filing,” Thorman noted, “is a key challenge for maximizing how effective the credit can be.”
In 2021, CalEITC was expanded to filers with Individual Taxpayer Identification Numbers (ITINs)—most of whom are undocumented immigrants. Thorman said, “People with W2s have taxes taken out of their paychecks and can file a tax return using an ITIN.” She noted that the exclusion of ITIN filers at the inception of CalEITC reflected the design of the federal EITC, and that the decision to include ITIN filers is aligned with other recent efforts to use state dollars to extend safety net programs to undocumented residents.
There are signs that the expansion of eligibility to ITIN holders is already having an impact. It will be important to track this impact over time—and to help policymakers identify ways to encourage and facilitate credit claiming by eligible Californians.