The EITC: Expanding Opportunity for Some Working Californians

The earned income tax credit (EITC) is an essential part of public policy designed to incentivize work and combat poverty. On both the federal and state levels, low-income households receive the EITC as a tax refund, allowing them to keep up with rent, housing, and childcare—all of which represent a rapidly increasing cost-of-living in contrast to stagnating wages. Helping individuals and families cover the difference between their incomes and their living expenses is an especially pressing issue for California, and specifically, the Bay Area.[1] With the ultimate goal of expanding the EITC to lift more Californians out of poverty, Governor Newsom’s 2019-2020 budget implements several important changes to make the credit more inclusive for both workers and their dependents. However, one important provision did not make it into the budget: making taxpayers with Individual Taxpayer Identification Numbers (ITINs) eligible for the credit.

This represents a missed opportunity to improve the lives of many immigrant households. Most importantly, it leaves an estimated 208,000 to 297,000 children[2] without vital support.

Provisions in the final budget increase the child tax credit from $500 to $1,000 and increase the eligibility threshold to $30,000 for workers with and without children.[3] The Legislative Analyst’s Office estimates that these changes will bring an additional 1 million people into the program, on top of the 2.4 million already being served.[4] This is undoubtedly a win for Californians, as historically, expansions of the EITC have improved life outcomes for working families, especially for children and single mothers along multiple dimensions. From the 1993 federal expansion onward, the supplemental income that the EITC provides has been associated with encouraging more people to work, improving health for mothers and children, and increasing educational attainment in elementary and secondary school.[5] These results, in turn, foster better employment opportunities and higher earnings for children when they begin careers of their own. Unfortunately, taxpayers with ITINs and their children miss out on both these short-term and long-term benefits, even if they qualify for the EITC based on income level.

Leaving taxpayers with ITINs and their children ineligible for the EITC is a major issue for California in particular, as we are home to 11 million immigrants—more than any other state.[6]

We also have the highest poverty rate in the nation, as 1 in 5 residents qualifies as poor.[7] On average, immigrants tend to face higher poverty rates than naturalized citizens.[8] In 2015, an estimated 4.35 million California taxpayers paid over $13.7 billion in taxes with an ITIN.[9] Despite contributing to our economy both through work and paying taxes, none of them are eligible for the EITC. Moreover, because the EITC requires every household member to have a valid Social Security number, U.S.-born children from low-income families cannot access the credit if their parents have ITINs. This has important implications for health, educational, and safety disparities between children. Children with immigrant parents are disproportionately non-white and are over twice as likely their non-immigrant peers to experience poverty. [10]

Given such disparities, children of immigrants would benefit the most from receiving the credit because allowing their parents to keep up with food and housing costs now could give them the resources to break the cycle of poverty in the future. Especially in the Bay Area, which prides itself opportunities for economic advancement through innovation, working families need a way to continue to afford its skyrocketing living expenses in order to access these opportunities later on. Expanding the EITC to include immigrant households could be the answer. Proponents of such a policy estimate that it may cost $117 million to $167 million,[11] which is below the $190 million being used to fund the program expansion currently included in the 2019-2020 budget. Although this might seem like a huge expense now, we must take into consideration how much the state already spends on public assistance programs and how much of that spending goes to low-income immigrant families.

A more inclusive EITC system may more than offset the initial cost by ensuring that fewer people need to depend on public assistance down the road, making it a worthy investment in California’s future.

[1]Bay Area Council Economic Institute, “The Cost of Living Continues to Rise for Bay Area Residents.” Retrieved from http://www.bayareaeconomy.org/the-cost-of-living-continues-to-rise-for-bay-area-residents/

[2] Alissa Anderson, “Expanding the CalEITC is an Effective Way to Invest in California’s Children but Hundreds of Thousands of Children of Immigrants Won’t Benefit Unless Policymakers Act.” California Budget and Policy Center. 14 May, 2019. Retrieved from https://calbudgetcenter.org/blog/expanding-the-caleitc-is-an-effective-way-to-invest-in-californias-children-but-hundreds-of-thousands-of-children-of-immigrants-wont-benefit-unless-policymakers-act/

[3] Gabriel Petek, “Analysis of Proposed Earned Income Tax Credit Expansion.” Legislative Analyst’s Office. 6 March, 2019. Retrieved from https://lao.ca.gov/reports/2019/3960/EITC-Expansion-030619.pdf

[4] Gabriel Petek, “Analysis of Proposed Earned Income Tax Credit Expansion.” Legislative Analyst’s Office. 6 March, 2019. Retrieved from https://lao.ca.gov/reports/2019/3960/EITC-Expansion-030619.pdf

[5] Hilary Hoynes, “Policy Brief: The Earned Income Credit: a key policy to support families facing wage stagnation.” Institute for Research on Labor and Employment. January 2017. Retrieved from https://irle.berkeley.edu/files/2017/IRLE-The-Earned-Income-Tax-Credit.pdf

[6] Hans Johnson and Sergio Sanchez, “Just the Facts: Immigrants in California.” Public Policy Institute of California. May 2019. Retrieved from https://www.ppic.org/publication/immigrants-in-california/

[7] Kerry Jackson, “Why is Liberal California the poverty capital of America?” Los Angeles Times. 14, January 2018. Retrieved from https://www.latimes.com/opinion/op-ed/la-oe-jackson-california-poverty-20180114-story.html

[8] Hilary W. Hoynes and Ann Huff Stevens, “Poverty in America: Trends and Explanations.” Journal of Economic Perspectives. 20(1), pp. 47-68. Retrieved from https://poverty.ucdavis.edu/sites/main/files/file-attachments/stevens_2006jep.pdf

[9] “The Facts About the Individual Tax Identification Number (ITIN).” American Immigration Council. 2, January 2018. Retrieved from https://www.americanimmigrationcouncil.org/research/facts-about-individual-tax-identification-number-itin

[10] Alissa Anderson, “Among Working Families, Children of Immigrants Are Far More Likely to Live in Poverty Than Other Children.” California Budget and Policy Center. April 2019. Retrieved from https://calbudgetcenter.org/resources/among-working-families-children-of-immigrants-are-far-more-likely-to-live-in-poverty-than-other-children/

[11] Alissa Anderson, “Expanding the CalEITC is an Effective Way to Invest in California’s Children but Hundreds of Thousands of Children of Immigrants Won’t Benefit Unless Policymakers Act.” California Budget and Policy Center. 14 May, 2019. Retrieved from https://calbudgetcenter.org/blog/expanding-the-caleitc-is-an-effective-way-to-invest-in-californias-children-but-hundreds-of-thousands-of-children-of-immigrants-wont-benefit-unless-policymakers-act/