Gov. Gavin Newsom made a bold, smart decision when he made one of his signature proposals a plan to more than double the California Earned Income Tax Credit (CalEITC) to $1 billion.
If Newsom’s plan — which he calls the Working Family Tax Credit — becomes a reality, one of the best tools to fight poverty will be twice as strong. Millions more low-income families who work hard and file taxes will receive cash back to help pay for life’s basic needs like food, transportation, and housing.
The governor is doubling down on the CalEITIC because it works. In 2018, thanks to a meaningful expansion by the Legislature, we worked with our partners to help 1.4 million Californians get nearly $400 million. Economists agree that the EITC is perhaps the best policy we have for lifting working people out of poverty.
But the brilliance behind the governor’s plan isn’t just that it will address our poverty crisis; the one-two punch behind this tax credit is that it also strengthens our economy. In fact, spurring the economy was why the federal tax credit was originally established over 40 years ago.
According to the Brookings Institute, the creation of the federal Earned Income Tax Credit (EITC) was a key tenet of the Tax Reduction Act of 1975 as an economic stimulus program. Over the decades, because of this multiplier effect on the economy, the federal program has maintained its broad bipartisan support and was significantly expanded under both Presidents Reagan and Clinton. And since 2015, the state program has succeed thanks to strong legislative champions who have significantly expanded it year after year.
The CalEITC has demonstrated this original intent by giving a boost to local economies. Doubling it to $1 billion will make that impact tremendously greater. The Franchise Tax Board reports that a majority of those who receive the EITC are female, and nine out of 10 dollars from the program are spent on children. The more the program grows, the more that working mothers can spend money in their communities to take care of their children. Researchers at the Brookings Institute estimate that as of 2015, “the credit creates local economic impacts equivalent to at least twice the amount of EITC dollars received.”
The CalEITC also stimulates the labor market. As the governor’s new Chief Economic and Business Advisor, Lenny Mendonca, and President Clinton’s chair of the President’s Council of Economic Advisers, Laura Tyson, wrote in the Orange County Register, “because the tax credit is only available to people who work, studies show the federal EITC promotes employment and diminishes the need for welfare assistance.”
The National Bureau of Economic Research demonstrates that for every $1,000 in the EITC, employment increases by 7.3 percentage points. As Robert Greenstein of the Center on Budget and Policy Priorities writes, the “EITC increases enacted in the 1990s were the single largest factor behind the impressive increase in employment among single mothers in that decade — larger, in fact, than the employment gains attributed to the 1996 welfare law.”
CalEITC is an economic stimulus program that reaches every corner of the state – even poorer rural and suburban areas where anti-poverty programs and services can be hard to sustain.
As the Brookings Institute points out, “cities have dealt with poverty longer, and have had more time to develop strategies and structures to support their poor populations… . The new geography of poverty makes direct investments in low-income individuals and families — like the EITC — even more important.” By doubling the program to a billion dollars, the governor will succeed in assisting the rural California communities he has pledged to support.
This is the year to double down on bold initiatives so that hard working, low-income Californians have the chance to forge a better future – for themselves and for a stronger California.
Joe Sanberg is the founder and Josh Fryday is the president of CalEITC4Me.
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