Expanding the Earned Income Tax Credit, feat. the California Budget & Policy Center

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While basic income is often described as a revolutionary proposal, we do have programs in the federal government and some U.S. states that contain elements of a basic income, namely the Earned Income Tax Credit (EITC). The California Budget & Policy Center (CBPC) has studied the effects of the EITC, and what it might look like to expand the program to something resembling a basic income. Jim and Owen are joined by Senior Policy Analysts at the CBPC, Alissa Anderson and Sara Kimberlin.

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Episode Transcript

Owen: Hello, and welcome to the Basic Income Podcast. I’m Owen Poindexter.

Jim: And I’m Jim Pugh. In past episodes, we’ve talked a bit about the Earned Income Tax Credit, or EITC, as a policy that in some ways resembles the universal basic income and could potentially be expanded to more closely model the policy and to the live up to the aspects of it that so many of us find so interesting. One of our past guests, Chris Hughes, talked about his proposal for a guaranteed income, which is heavily inspired by the Earned Income Tax Credit.

But we haven’t delved too deeply into the policy to understand exactly how it works and what current proposals actually are moving and have been discussed as far as taking it more in the direction of basic income.

Owen: So, in this episode, we have some people who’ve done some deep analysis on this, in the context of the State of California. So joining us from the California Budget & Policy Center are Alissa Anderson and Sara Kimberlin. They are senior policy analysts. Welcome to both of you.

Alissa: Thanks very much for having us.

Sara: Yeah, thanks.

Owen: To start with, can you just tell us generally about the work that the California Budget & Policy Center does?

Alissa: Sure. So we are a non-partisan public policy research organization. And we basically seek to inform state budget and policy debates, primarily by analyzing the impact of policy proposals on low and moderate income Californians.

And so we cover a wide range of policy areas, everything from early care and education, K-12 education, higher education, health and human services, tax policy, housing, and many others.

Jim: Now, as I said earlier, one policy we’ve talked about in the past in relation to basic income is the Earned Income Tax Credit. Since we haven’t really gone into too much depth, do you mind just giving a brief description of what that policy is and what impact it has for low-income Americans?

Sara: Sure. So the the Earned Income Tax Credit is, originally it’s a refundable federal income tax credit that’s designed to allow low and moderate income working families to keep more of their earnings. And basically, it reduces the amount of federal income tax that families. They’ll get more money if they have more children, and it’s based on how much they earn.

But importantly, because it’s refundable, if the Earned Income Tax Credit is more than what a family owes in taxes, then they get the difference back as a refund. So they’ll actually get a check back from the federal government that you can help them increase their income and pay for their basic needs. So what that means is even families that don’t owe any federal income tax can get the full amount of EITC that they qualify for.

Some important things to know about it: for one thing, it actually has a very broad reach. About one in five tax filers in the US claims it. And it can be a very sizable cash benefit, so the federal EITC can boost families earnings by over a third to almost a half depending on the number of children with a maximum credit about $6,300.

And there’s also some other important things to know about it. For one thing, it’s been around for a very long time. It’s very well researched. So there’s a lot of evidence behind it showing that, for one thing, it lifts more children out of poverty than any other federal policy, that it helps increase families incomes. For another thing, it’s been shown to increase employment among single mothers, and single mothers with kids are the largest group that benefits from it.

And finally, it appears to provide benefits that really help the next generation. So for one thing, it’s linked to improved health for babies like higher birth weights. It’s a key predictor of future health and economic well being. And it’s also been linked to higher test scores for kids and higher high school graduation rates and college attendance rates.

So it just appears to be linked to a lot of really important positive long-term outcomes for kids.

Owen: Those are really fascinating findings. So, Alissa, EITC is a federal program, but a number of states provide a supplement to the federal funds, including California, where the supplement is called CalEITC. Can you tell us about the program and its specific impact?

Alissa: Yeah. So currently, 29 states have state EITC, and the District of Columbia does as well. And generally the purpose of state EITCs is to enhance the benefits of the federal EITC. Tt basically provides an additional state credit on top of the federal credit.

So California’s credit, which is called the CalEITC, was created in 2015, but it’s structured really differently from the way other state EITCs are structured. So California basically decided to target the state EITC only to workers who are facing the greatest economic needs, in order to be able to provide those workers with a much more generous credit.

So California’s EITC is actually far more robust than other state EITCs in terms of the size of the credit. Generally speaking, it provides the credit that’s about 85% of the federal EITC, whereas most other states provide credits that are 30% or less of the federal EITC. So our credit is actually the most generous refundable state credit in the nation. And so families with kids in California can get a maximum CalEITC of about $1,500 to $2,700 dollars, depending on how many kids they’re supporting. And workers who aren’t supporting children can get just over $200.

But the credit is only available to families with extremely low incomes, mostly families that are living well below the poverty line. And that’s different from the way other state EITCs work. In most other states, the state EITC is provided to all workers who qualify for the federal EITC, but because the states are providing the credit to so many people, they provide a much smaller credit. So there’s a trade-off there.

In terms of the impact, in each of the last two years, about 370,000 tax filers have benefited from the CalEITC. It actually means that many more people have benefited from the credit because a tax filer can be a married couple, it can be a parent with kids. It’s basically all the people listed on a tax form.

And this year, the credit has reached over 900,000 tax filers as of the end of March, so a few weeks before the end of this year’s tax filing season. And that’s because the credit was significantly expanded last year.

Sara: In terms of thinking about who the people are who benefit from the CalEITC, I think one important thing to note is it really overwhelmingly benefits children. Tax filers are eligible if they have low incomes and they aren’t supporting any children, but in fact, more than 90% of the CalEITC dollars have gone to families with kids. So it’s a really important tool especially for helping working mothers. If you look at the tax filers with kids who are eligible for the CalEITC, about 70% of them are women. So it’s especially beneficial for children and and working moms.

And the CalEITC is really targeted to reducing the depth of poverty. So in terms of how it affects poverty of among families who are eligible, it really brings families closer to the poverty line because it’s really focused on, the largest credits go to the families with the with the lowest earnings. It’s not really designed to lift families above the poverty line as much as reduce the depth of poverty because a lot of these are families where a single parent is working part-time or part of the year.

But another thing that’s important to note is, it’s important to think about the CalEITC in combination with the federal tax credits that the same families are eligible for. So if you look at the CalEITC in combination with the federal EITC and the federal child tax credit, which is another tax credit that low-earning families are eligible for, those three credits combined can really significantly boost the earnings of families that are really earning a small amount.

So for example, a family with three kids could see their earnings rise by as much as 92% And again, we’re talking about families who have very low earnings, well under $20,000 a year. So, again, if you look at the CalEITC plus the federal EITC combined, those lift over 800,000 Californians out of poverty each year. And many of those are children. So those credits combined also have lifted over a quarter million Californians out of deep poverty.

Jim: Wow. That’s great to hear that such a recent program that’s providing direct cash has already had such an impact. One thing I’m curious about: in past episodes, we’ve talked about some of the different barriers to access that exists for means-tested programs that we have today. And a really big one is simply awareness of the existence of the program. People don’t even realize that there’s more support available to them.

And I know, at least in the past, EITC has faced challenges around that. Can you tell us a bit about, what has the update bin for the program? And what has actually been effective at getting more people to be able to take advantage of it?

Alissa: Sure. So, it does appear that many people who are eligible for the CalEITC have missed out on it. And one of the ways we know that is, we conducted a survey at the end of 2016, so after the first tax filing season when the credit became available. And we found that fewer than one in five people who were likely eligible for the credit, based on their income and family size, had even heard of it.

And we also found that fewer than half of the people who appeared eligible for the CalEITC had even filed their taxes that year. So we have some evidence that people are missing out on the credit.

Unfortunately, we don’t know the exact uptake or the participation rate. We know how many people are receiving the credit, but we don’t have a really good handle on how many people are eligible for it. And really the key challenge is, the credit targets people who have such low incomes that many of them aren’t required to file state income taxes. And so if they’re not filing, of course, we don’t have tax data on them.

So I think you know the bottom line here is that, I think one of the keys to making the CalEITC success is for the state to invest more in promoting the credit because it could be that a lot of people just don’t realize they can get cash back if they file their taxes, even if they’re not required to file.

And I also think that it’s really important to connect low-income families to free tax services. I was really surprised to learn when I started studying the EITC that the majority of people who claim the EITC paid to file their taxes, even though all of them are eligible for free tax prep services. So it basically means the majority of people claiming the EITC don’t get the full benefit of their credit. And tax paid tax preparers are not very forthcoming about how much they charge people, but some research has suggested that EITC filers can be charged several hundred dollars, which for low-income family is a lot of money and they really need to get the full benefit of their credit.

And for the CalEITC population, because they have extremely low incomes, well below the poverty line, I would imagine that if they think they’re only filing option is to pay somebody that they really might not think it makes sense to file their taxes and claim this credit if they’re not going to get the full benefit anyway.

So I think one of the best things that California could do to boost participation in the CalEITC and also make sure that families are getting the full benefit of the credit is to expand and promote free tax prep services. Things like VITA, Volunteer Income Tax Assistance. VITA sites provide free tax prep services by volunteers who are trained and certified by the IRS, but only 2% of EITC filers in California actually use VITA.

Part of the problem is a lot of people don’t know about it, but I think an even bigger problem is that VITA sites just really don’t have the capacity to meet the great demand for free tax prep or the funds to compete with the advertising of paid tax preparers.

Jim: And beyond that, if we could get more people to be taking advantage of CalEITC, I imagine they would also be taking advantage of federal EITC, which would mean more money coming into California.

Alissa: No, absolutely, and that’s a great point. So I think there’s evidence that also suggests that the federal EITC is underutilized, and the research suggests that the people who aren’t claiming the federal EITC who are eligible for it tend to have very low incomes, the very population that the CalEITC targets.

So there’s a huge opportunity, now that we have a state EITC, to not only promote that credit but to also make sure that people are claiming the federal credit as well, which draws federal dollars into the state and can help provide a boost, not only to low-income families, but to the businesses where they spend their money.

Owen: Just a technical question: if someone is eligible for the federal or the CalEITC and they file their taxes, do they get it automatically, or do they have to take additional steps?

Sara: They’ll need to fill out the form that demonstrates that they’re eligible for it, but it’s like in standard tax preparation software with any paid preparer or volunteer VITA preparer, they would presumably go ahead and fill out that form and qualify for it. There aren’t any, it’s like filling out any other tax form when you’re filing your income taxes.

Alissa: And my understanding is that VITA actually trains their volunteers specifically on EITC because the population they’re targeting is eligible for that credit. They get special training on that credit in particular.

Owen: So the EITC naturally has a work requirement. What can you tell us, you mentioned single moms before, we can you tell us about the effect this has on incentivizing employment?

Sara: There’s strong evidence that the EITC does encourage people to work. And in fact, it was originally designed to encourage work, and that’s part of the reason why it had such strong bipartisan support over the decades that it’s been in place.

And the way it encourages work is by providing a more generous credit as families earn more income up to a point, so that generally the more people work, as they work and earn more, they get a larger credit until their incomes reach a point where it starts phasing out because their incomes are high enough to not need as much support.

So, there’s a large body of research on the federal EITC showing that it boosts employment, especially among single mothers who, again, are the largest group of beneficiaries. In fact, there’s some new research that’s come out in the past couple years that shows that when you account for the fact that EITC encourages people who aren’t working to start working because they get not just the wages that they earn from their job, but they also then qualify for the EITC, which increases their income for the year. When you account for that extra effect of people entering the workforce, EITC actually reduces poverty twice as much as previously had been thought to do.

So, there’s a large body of evidence showing that it really helps give people a reason to enter the workforce and and helps make the earnings that they get sufficient so it really can allow them to support their families much better.

Jim: Now, last year, you release a report that drew a connection, a direct connection, between EITC and universal basic income, and looking at specific steps that could be taken in California to expand CalEITC in that direction. Can you tell us what that expansion looked like and what really motivated your approach here?

Alissa: Sure. So, part of what motivated us was the fact that most discussion around UBI looks at how this could be implemented at a national level, but it might actually be more realistic politically to implement at the state level. And so we wanted to look at, how could we Implement a UBI here in California?

And so what we ultimately argued is that the CalEITC could really lay the groundwork for a much bigger, bolder basic income policy. And what led to that conclusion is that, we thought that providing a truly meaningful basic income, one that significantly cuts poverty, also ideally helps people above the poverty line who we know also struggle to get by in California, if it’s provided universally, it would be really expensive, and we’re not sure that the state could generate a revenue source large enough to do that.

So we thought through, okay, how could we how can we make the cost a little more realistic? And there’s two ways to do that: you either reduce the benefit, or you target it to fewer people. And so we would argue that targeting it to fewer people makes more sense because that way you can provide a more meaningful income Support to the people who need it the most.

Once we go down the road of targeting the benefit we thought, well, we also need to gradually phase it out, because otherwise it can create some sort of weird behavioral responses. So, for example, if the income benefit is only available to people with $50,000 or less in income, if it ends at $50,001, somebody would have a really strong incentive to not take a pay raise if it would push them over that income limit because they would actually be worse off without the basic income.

So once we go down the road of targeting the basic income policy and phasing it out gradually as income rises, what we find is that we’ve essentially recreated the EITC. And so we thought, well, why not build on our existing EITC as a way of moving toward a basic income policy in California?

And then there are a number of other advantages to building on our existing EITC. For one thing, the administrative cost would be low because you’d basically be piggybacking on an existing mechanism for distributing cash to people, the tax system. Plus, all the information you’d need to find out about who’s eligible for the benefit is already collected on tax forms, so it would be efficient.

And then also, when you provide a refundable state tax credit, it’s not subject to federal income tax. But if you provide a payment outside of the tax system, it likely would be. So for example, the Alaska Permanent Fund, which, as you know, is the closest thing that we have two basic income policy in the US, is taxed. It is considered income for federal tax purposes. So it means essentially the state, if we were to provide income outside of the tax system, essentially the state would be handing some money directly to the Feds. It wouldn’t be going into the pockets of the families that it’s intended to go to.

And then on top of that, if we provide a benefit through the tax system, and in the EITC specifically, it wouldn’t reduce eligibility or benefits from other public supports like food assistance or health coverage because EITC payment specifically say that they don’t count as income in benefit levels or eligibility for those other benefits. And a lot of families who are working and getting the EITC also do need other public supports to make ends meet, particularly here in California where we have a very high cost of living.

So we looked at a number of ways that we could make our CalEITC more like a UBI. And so one thing that we looked at is expanding it to people who don’t work for pay but who are engaged in productive activities. So, for example, students pursuing higher education: you could provide the credit based on how much time they spend in school, for example. You could provide it to caregivers, people taking care of young kids or elderly adults or people with disabilities who are doing legitimate work, but they’re just not getting a paycheck for it.

And eventually, maybe, open up the credit to all people without earnings from work, which is somewhat radical idea here in the US, but there certainly is precedents for this because many advanced industrialized nations do provide child benefits that are not tied to work.

And then the other thing we looked at is exploring providing workers who qualify for the CalEITC to opt-in to receiving it as a monthly payment, as opposed to just a lump sum. And the advantage there is that it would allow workers to kind of smooth out their incomes over the course of a year. And it could also serve as sort of a forced savings account.

Owen: Yeah, it’s always interesting to think about the concerns we’d have if we were introducing a program like that right now, as opposed to something where we’d, maybe in 20 years, where we’d have a chance to work out the kinks of whether this income counts toward federal taxes and that kind of thing.

So you started to get into this in the last answer, but both the federal EITC and the CalEITC, in addition to including a phase-out, include a phase-in. So someone who doesn’t earn any income doesn’t receive any benefits, but they will gradually receive more money as their annual income increases up to a certain point. This means anyone who doesn’t have a job or is engaged in unpaid labor, Like you mentioned, doesn’t receive any support through the program.

So you mentioned addressing this through including other types of labor, such as family caretaking or being a student. Another way to do it would just be to eliminate the phase-in, so that people with zero income would receive maximum benefits, which would effectively convert the EITC into a negative income tax, which is the form of basic income we were testing in the 60s and 70s.

What do you feel like the pros and cons are of these two approaches?

Sara: It’s relatively easy to imagine support for the idea of eliminating the phase-in for people who are doing things like caregiving or going to school, doing different kinds of productive activities that are not paid employment, but they’re productive activities that benefit the community broadly.

So, for example, the pros of allowing caregivers to to claim the credit, regardless of income: for one thing, it rewards the work that is necessary, but typically unpaid, and would also do things like help address the lack of affordable child care and affordable options for caring for elderly relatives or people with disabilities and their families.

But it’s also important to note that, not just those families and individuals, but also the community at large really benefits when children are raised in families that are not facing economic insecurity, because children who are raised with enough income and their families have better long-term health and education outcomes. So, over the long term, they become more productive worker and are likely to need less public support as adults. So I think is a very clear argument, very clear sort of bipartisan argument for why there’s a good state interest or public interest in supporting individuals who are doing caregiving work.

And similarly with students who are the same way, we know that a lot of low-income students face a lot of struggles to meet their basic needs and really be able to afford to stay in college long enough to graduate, which is a really key problem in the community again. Not just the students, but the community benefits from having a better educated and more productive future workforce. So I think there are clear pros on both, of course, the individual level and at the state level or community level for eliminating the phase-in and allowing those kinds of individuals doing those kinds of activities to to claim a credit without any kind of phase-in.

Extending it down to anyone without paid work would definitely be a much more radical idea. Again, though, if you eliminated the phase-in for anyone who has children in their family or anyone who is caring for dependents regardless of what age they are or anyone who’s raising children or dependents, I think there’s a lot of research that shows that children growing up in poverty face a lot of serious disadvantages over the long term. And so helping ensure that their families have enough resources when they’re young can really pay off over the long term, both those children and also for society at large.

And again, many other countries, and in fact, even the United States, we provide a child tax credit and child benefits for tax filers with children that are not specifically linked to how much income you make, kind of recognizing the fact that there are costs associated with raising kids, and it’s in everyone’s best interest to make sure kids’ families have the resources they need when the kids are growing up.

I think a lot of the cons in terms of eliminating the phase-in are largely political. The key argument against it is that it would discourage paid work because if you can just claim the credit whether or not you have any earned income and the amount of credit you get doesn’t depend on your earnings, then you might be less inclined to go take a low-wage job or a part-time job or anything that would give you an earned income that was less than the amount of credit you could get, less than the amount of basic income you could get.

Although again, in the context of thinking about this as a state policy, I think it’s important to note that the federal EITC is structured with a phase-in, so there could be opportunities to eliminate the phase-in at the state level, and there would still be an incentive to work based on the federal credit that people would be eligible for.

And, of course, the other major con would be just that it would significantly add to the cost the more you expand the the population of people who are eligible. So that again gets into the question of trying to figure out how to prioritize how much credit and who gets the credit in order to make it financially feasible.

Jim: You just touched on the politics around this issue, and I’d be interested to delve a bit more into that. Is there currently political movement towards significantly expanding EITC in California? If so, where is that at? If not, what might that process look like?

Alissa: Yeah, absolutely, there’s a lot of support for continuing to build on our state EITC. So, first of all, we have a lot of champions in the legislature that have been strong proponents of the credit since it was first created. So, for example, Senator Toni Atkins played a really critical role in getting the credit established when she was Speaker of the Assembly and now she’s Senate President Pro Tem. Assembly Budget Chair Phil Ting, who represents parts of San Francisco, has also been a champion of the credit, and he signaled his strong support for a robust expansion of the CalEITC this year through the state budget. And there are many other legislators who have carried bills over the years to strengthen and expand the credit as well.

Also in California, there’s a large coalition of over 30 organizations that’s been advocating for continuing to build on the CalEITC ever since it was created. It’s called the CalEITC Coalition, and they advocated for the expansion of the credit last year, and they’re continuing to advocate for further improvements in the credit this year and beyond.

And so specifically this year, the Coalition is proposing to make the credit more inclusive because there are a number of low-income workers who have the incomes to qualify, but who are actually ineligible for the credit, and many immigrant families who work and pay taxes also don’t qualify for the credit because their primary earner doesn’t have a social security number that’s valid for work. And so that means many children don’t have access to the credit, and that even includes US citizen children.

So the Coalition also is supporting the proposal that Assemblymember Ting put forward late last year that would significantly expand the CalEITC over the next few years and really provide much greater financial security to working families in our state. Basically, the proposal is to raise the income limit to qualify for the credit from about $22,000, where it is currently, to about $31,000. And what that means is a full-time minimum wage worker would be able to access the credit even as the minimum wage rises to $15 per hour over the next few years.

And then his proposal would also increase the size of the credit across the board for everyone who’s currently eligible for the credit. So, there are numerous other ways that the credit could be strengthened or expanded, and the Coalition has some ideas for other options to pursue in future years, but that’s really sort of currently what’s moving. And there’s certainly people in the legislature who are strongly supportive of the credit and really want to make it a success and make sure that it reaches as many people in the state who are working and struggling to get by as possible.

Jim: That was Alissa Anderson and Sara Kimberlin, both senior policy analysts with the California Budget & Policy Center.

Owen: So I thought first and foremost, it’s just a good reminder of how powerful the EITC is, both federally and and statewide. You can have certain objections to who it leaves out and how it phases in — I think we might desire some modifications around that. But just in terms of its effects, it’s keeping millions of people out of poverty.

Jim: Yeah, and not only is it effective in making a huge difference, it is actually an area where movement is happening, that this is a pretty new policy in California, and there are ongoing, well-backed efforts that have very strong shots at success to make significant improvements. And so, if we’re thinking about what sort of policies can move right now, this is definitely one of them.

Owen: Yeah, it’s nice to hear that we have people who are pretty powerful in the legislature, especially Toni Atkins who, like they mentioned, just became our Senate Pro Tem, who are big backers of this program and sound open to expanding in.

Jim: Yeah, I’d be curious to try to understand more what those barriers are, political barriers are, to actually taking this to be a negative income tax. I thought the point about how a state could do that, because the federal EITC has the phase-in, as far as incentivizing work, to the degree that happens, that that would still exist. But it’d be interesting if we started having more conversations about making that change in California and perhaps other states who have those states supplements to the federal EITC.

Owen: Yeah, and it sounds like people are open to the idea of at least eliminating the phase-in for parents or other caretakers, you know, people taking care of elderly grandparents, perhaps, students. And maybe if you start shaving away some of those exceptions, you can start to get close to it just being a universal program.

Jim: True. I do think that there’s an interesting question about, is it more effective to chip away at it that way, and that eventually gets you to a full negative income tax, or should it be something where in one go you say, everyone ought to have this, as opposed to starting to really enumerate and list out those particular categories that you deem are worthwhile.

Owen: Yeah, I think it would be cleaner if you could just do it all at once, and it would be more of the program you would design if you are starting from scratch. But I also don’t really see them as mutually exclusive projects. I think the closer you can make it so that a true negative income tax is a smaller leap, that I think is going to be good progress either way.

Jim: Well, it’ll be exciting to see how this develops in the months ahead.

Owen: Yeah, absolutely. Thank you for listening to the Basic Income Podcast. Thank you to our producer, Erick Davidson. Please subscribe on Apple Podcasts or the podcast service of your choice. And please tell your friends — we’re always looking to expand our audience, and word of mouth is always the best way to do that. See you next week.

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