Capitol Alert

California budget scales back estimated use of anti-poverty credit

Gov. Jerry Brown returns to his office after he announced his budget revise at the State Capitol in Sacramento on Friday, May 13, 2016. California’s current budget included the first-ever state version of the federal earned income tax credit as a way to help fight poverty among the working poor.
Gov. Jerry Brown returns to his office after he announced his budget revise at the State Capitol in Sacramento on Friday, May 13, 2016. California’s current budget included the first-ever state version of the federal earned income tax credit as a way to help fight poverty among the working poor. hamezcua@sacbee.com

A year after creating it as a major new tool to fight poverty, Gov. Jerry Brown and California lawmakers are scaling back expectations on a tax credit for the working poor after claims for 2015 totaled less than half the money set aside for the program.

The budget package negotiated by Brown and the Democrat-controlled Legislature expects $255 million in lost income from tax returns that include claims with the state’s version of the earned-income tax credit, according to the Legislative Analyst’s Office. That is down a third from the $380 million budgeted for the current year and what Brown proposed in January for 2016-17.

Department of Finance spokesman H.D. Palmer emphasized that no one will be denied a credit if they qualify for the program, adding that the state continues to reach out to thousands of taxpayers who may qualify for the credit but have not claimed it.

“Anyone who is eligible under the guidelines is eligible to receive a check, period,” Palmer said. The finance department, he added, projects that participation in the program will reach an estimated $380 million in the budget year beginning June 2018.

But Joseph N. Sanberg, a California entrepreneur who headed up a $4 million private-public campaign to spread the word about the new credit, said state officials are failing to live up to earlier promises, including a December pledge by a top Brown aide to “put $400 million into the pockets of 600,000 Californians.”

“The fact is we got a mind-boggling level of participation last year. This is a $380 million commitment, and the state is supposed to be committed to spending it all,” he said. If the total falls short, he added, the state should broaden the program to include self-employment income or other changes.

The tax credit emerged last spring as a response to growing concern about poverty and income inequality in California, with Brown and lawmakers saying it would help the state’s poorest workers. California’s credit is available to those making up to $6,580 if they are childless, to up $13,870 if there are two or more qualifying children.

Yet the tax credit is complex, requiring expert assistance to compile returns claiming it. Also potentially hampering participation is that the California program, unlike its federal counterpart and earned-income tax credits in some other states, considers only income from wages, not self employment.

According to the latest Franchise Tax Board data, there have been 362,000 returns claiming the credit, reducing tax revenue by $180 million.

This year’s budget compromise includes $2 million to expand publicity efforts for the tax credit.

Some lawmakers have been skeptical of the program’s impact. State Sen. Holly Mitchell, D-Los Angeles, who championed the effort to repeal the cap on maximum family grants for CalWORKS recipients that is part of this week’s budget package, said that change and other policy efforts – such as raising rates for child care providers and increasing the minimum wage – offer a better way to help the poor. It often takes a while to build participation in a new government program, she added, citing the U.S. Affordable Care Act.

Unlike the federal government and most states with their own earned-income tax credit, the California credit limits earned income to wages, salaries, tips and other employee income.

In April, the Franchise Tax Board released a report on possible ways to expand the earned-income tax credit to include self-reported income. The report noted the findings of an Internal Revenue Service study that, from 2006 through 2008, only one-quarter of returns claiming the federal earned-income tax credit are based on self employment income but those returns generated a disproportionate share of improper claims.

But Board of Equalization Member Fiona Ma, who participated in outreach efforts for the tax credit this year, said the program should be expanded so self-employed people and minimum-wage workers are eligible.

“There’s a lot of in-home 1099 workers now,” Ma said, referring to the tax form for self-employed workers.

In its April report, the tax board estimated that expanding the credit to include self-employment would bring in another 130,000 returns and lead to a revenue loss of about $70 million. The state could make that change, Sanberg said, and the state would still fall short of the $380 million in this year’s budget.

“Where we stand today is the state clearly wanted some amount of that money for other things,” he said.

Editor’s note: This post was updated at 4:30 p.m. June 14, 2016 to include comment from Joseph Sanberg and H.D. Palmer as well as other changes.

  Comments