California bills to expand state tax credits could send $1 billion to low-income families

This year things are different. Bonilla cleans homes a few days a week but only makes about $10,000 a year. Most of her pandemic aid has phased out, so she struggles to keep up with expenses.

Add to that, her youngest child turned 6 in November, making Bonilla ineligible for California’s Young Child Tax Credit. Her tax refund will be $1,083 less this year, squeezing her already tight budget.

“Sometimes I say I’m going to save money and I start saving,” she said, “but the prices go up and I can’t do it anymore.”

Advocates say California’s tax credits are more crucial now, as low-income families like Bonilla’s struggle to financially recover from the pandemic as other government relief programs end.

For instance, the federal government in 2020 expanded its tax credits to send advanced monthly payments to low-income families with children and, for the first time, included very low-income earners. It helped cut child poverty, but the federal credit expansion ended in December 2021.

Democratic Assemblymembers Mike Gipson of Gardena and Miguel Santiago of Los Angeles recently authored two bills that would expand California’s Earned Income Tax Credit and its Young Child Tax Credit.

Combined the bills would cost about $1.1 billion annually, in a year the state is predicting a $22.5 billion to $25 billion deficit.

Who gets earned income, young child tax credits?

“The need for lower-income tax credits is as dramatic as ever,” said Teri Olle, California campaign director of the Economic Security Project, a nonprofit based in New York.

“Gas prices, food prices — none of that is better than it was before the pandemic. Now a lot of these supports that have been in place are expiring and people are left with higher prices, a higher cost of living and nothing to support them. “

Currently the California Earned Income Tax Credit gives credits of $1 to about $3,400 to tax filers who earn as much as $30,000 in annual income.

In 2022, 3.6 million Californians received the state’s earned income tax credit, according to the Franchise Tax Board. It had a modest impact; about 83% of those filers got less than $300 in state tax credits.

That’s partly by design. The state earned income tax credit is structured to provide an incentive for people to work, so it phases in more cash as earned income increases to $30,000.

For instance, someone who earned only $200 in 2022 and has three children would receive $67 in earned income credit, while someone who made about $9,000 with three children would receive $3,417.

Those who make $30,000 receive $1, regardless of how many children they have. Those who earn more don’t qualify.

It targets working individuals with dependents who are most in need. But it leaves out many people who can’t work because they are caring for loved ones and single filers who don’t have dependents but struggle to get by, advocates said.

“It doesn’t go far enough, especially in the economy we find ourselves in,” Gipson said.

Raising minimum child credits

His Assembly Bill 1498 would raise the minimum credit to $300 from $1, regardless of number of dependents, as long as a recipient makes less than $30,000 a year.

On the other hand, California’s Young Child Tax Credit currently gives $1,083 to filers with a dependent under the age of 6. Once a family’s youngest child turns 6, the family no longer qualifies for the credit.

Santiago’s AB 1128 would enable tax filers with dependents who also qualify for the state Earned Income Tax Credit to continue qualifying for the young child tax credit after the youngest child ages past 6. Those families would keep the child tax credit until the child reaches 18, or as old as 23 if they are a student.

Families with a dependent with disabilities also would qualify for the young child tax credit regardless of their dependent’s age.

Santiago said the proposal is a “modest” ask that would greatly benefit  families that suffered the biggest financial losses during the pandemic.

“This program is one of the most effective anti-poverty programs we have,” he said. “We can expand the current program and help more people than have ever been helped.”

The young child tax credit bill would benefit 700,000 to 1 million more children each year, said Monica Lazo, a senior policy manager of Golden State Opportunity, an anti-poverty organization.

Lazo believes there is ample support for stretching California’s tax credits.

“The will is there,” she said. “We are in a recession, but there’s a lot of folks that always come out unscathed — because they have certain tax credits those of us in the working class don’t have access to.”

‘Essential workers’ could benefit

Many very low-income workers were forced to go to work during the pandemic, she said, while higher earners often could work from home.

“These are people who are helping our local economy; we declared them essential,” she said. “So this is a way we can help them and really prove to them they are essential.”  

Research shows that people spend tax credits almost immediately on basic needs, such as school supplies for their children, which means the money immediately goes back into the economy. For every $1 of  tax credit, $1.70 is invested in a local economy, said Anna Hasselblad, director of public policy for United Ways of California.

“Where you’re going to see the greatest economic stimulation and impact is if you invest it in folks with lower incomes,” Hasselblad said. “They’re going to put that money to work immediately.”

Bonilla said she has spent her tax credits on electricity bills, clothing and shoes for her children. If she were to get an extra $1,083 in child tax credits each year, Bonilla said, she would save it for future expenses for when her daughter starts college.

“There wouldn’t be so much worry. I would have extra money,” she said.

Expanding California’s earned income tax credit would benefit people of color the most because they make up three-quarters of eligible workers in the state, said Alissa Anderson, policy researcher at the California Budget & Policy Center, a research nonprofit.

It also would simplify the process of claiming tax credits; the Franchise Tax Board would more easily identify qualifying workers and automatically send funds, Anderson said.

Seeking bipartisan support

Tax credits traditionally receive bipartisan support, but the two bills may face a challenge in the projected state budget deficit. If passed, the proposed earned income tax expansion would cost about $460 million annually and the proposed expanded youth tax credit would cost about $700 million annually.

Both bills are new versions of a proposal last year which would have provided a one-time payment of $2,000 per child to families who received California’s earned income tax credit.

That proposal, also sponsored by Santiago and anti-poverty organizations, included a permanent increase of the earned income credit’s $1 minimum payment to $255.

Last year, the state had a projected surplus of $31 billion. But as inflation rose, other state priorities arose, such as the “middle class tax refund” that gave households $9.5 billion in financial relief.

Santiago pulled the bill from the Senate Governance and Finance Committee because it did not have enough votes to pass, a spokesperson for Santiago said.

Assemblymember Tom Lackey, a Republican from Palmdale, said the long-term benefits of tax credits outweigh the short-term financial challenges. Lackey co-authored the earned income credit bill and supports the young child tax credit expansion bill.

“The Republican Party believes in fiscal responsibility,” he said. “When you recognize the contribution people are making and allow them to reinvest that money themselves, instead of allowing government to take that discretion, it’s a better pathway. It’s the people’s money.”

State Sen. Nancy Skinner and Assemblymember Phil Ting, Democratic chairpersons of the budget committees, declined to comment on the feasibility of the bills.

The Senate has stated it intends to protect the state’s earned income tax and young child tax credits from budget cuts and would support the tax credits once the economy improves.

Is it worth it?

Advocates say there’s plenty of evidence that spending more via tax credits pays dividends. Studies show tax credits are associated with better grades, higher educational attainment and improved earnings later in life.

Households receiving such payments had significant declines in credit card debt and were less likely to rely on payday loans, pawn shops or on selling blood plasma, according to a Brookings Institution study.

A month after the child tax credit payments stopped, 3.7 million children joined the nation’s poverty ranks, according to a Columbia University study. The national child poverty rate went from 12.1% to 17%  from December 2021 and January 2022.

That includes 553,000 California children who floated above the poverty line thanks to the tax credit, according to the Center on Budget and Policy Priorities, a Washington, D.C., think tank.

Hasselblad, of United Ways of California, said the proposed expansions of the earned income and child tax credits are “comfortable” compromises to request from the state.

“It’s a lot of money; we’re not pretending otherwise,” she said. But “there’s an immediate return on investment.”