Capitol Alert

Options floated for Golden State version of U.S. tax credit to help poor

The federal income tax form 1040.
The federal income tax form 1040.

A California version of a popular federal tax credit meant to help poor people would cost an estimated $400 million to roughly $1 billion annually, depending on its scope, the Legislature’s nonpartisan fiscal analyst said in a report this week.

About half of the states offer their own versions of the federal Earned Income Tax Credit. The federal program, created in 1975, is intended to offer incentives to people to work by decreasing their tax liability. In 2012, the federal credit cost $68 billion, spread among 28 million taxpayers.

There have been several attempts over the years to create a California version of the federal program. Proponents say such a state credit would help reduce poverty and get people into the workforce. This week’s report by the Legislative Analyst’s Office was prompted by lawmakers’ interest during last summer’s budget talks.

The LAO offered three options for a state earned income tax credit:

▪ A state credit equal to 15 percent of the federal version that would piggy-back on the federal program. About 10.3 million Californians lived in households that would have benefited from this option in the 2012 tax year, moving 120,000 of them out of poverty. Estimated revenue loss (2012 tax year): roughly $1 billion.

▪ A state credit that would be focused on working families with the lowest incomes. About 2.7 million Californians were in households that would have benefited from this option, moving 45,000 of them out of poverty. Estimated revenue loss (2012 tax year): roughly $450 million.

▪ A state credit that would help childless adults, who benefit less from the federal credit. About 3.2 million Californians would have benefited from this option in 2012, moving 21,000 people of them out of poverty. Estimated revenue loss (2012 tax year): $400 million.

Two lawmakers have introduced measures to create a state version of the federal credit: Assembly Bill 43, by Assemblyman Mark Stone, D-Scotts Valley, and Senate Bill 38 by state Sen. Carol Liu, D-La Cañada Flintridge. Scott’s measure specifies that it would create a “refundable” state credit – in cases where the credit exceeds tax liability, the government would pay the taxpayer the difference.

Groups that advocate for low-income residents also have called for the creation of a state credit. The California Budget Project issued a report recommending a state credit. The County Welfare Directors Association of California said such a tax benefit would help reduce poverty.

“We know that a state (credit) coupled with existing social safety net services such as nutrition support, child care, and employment training make a difference in the lives of families,” association executive director Frank Mecca said in a statement after the LAO report’s release.

Call Jim Miller, Bee Capitol Bureau, (916) 326-5521. Follow him on Twitter @jimmiller2.