Should California Adopt an Earned Income Tax Credit?

Abstract

Over the past thirty years, the federal earned income tax credit (EITC) has grown from a relatively modest program to the largest income transfer program in the country. For the tax year 2003, approximately $39.2 billion in EITC benefits were paid out to more than 22 million claimants - an average benefit of $1,772 per claimant. As the federal EITC has grown in both size and popularity, state government officials have begun to consider income transfer programs designed to build on its success. Among the programs most commonly considered is the state-level EITC. As of August 2005, nineteen states had adopted EITCs based on the federal credit. To date, however, the country's largest state, California, has refused to adopt a state-level EITC. In this article, I consider the arguments for a California EITC and examine an alternative policy option that has not yet been discussed in the literature - namely, that a state income transfer program may be designed not only to supplement the federal EITC, but also to exploit and take maximum advantage of the benefits provided by the federal program. This can be done through the adoption of state policies that increase the earned income of EITC recipients whose income falls within the phase-in range of the federal credit. Rather than just supplementing the federal credit, the idea would be to maximize the amount of federal EITC dollars flowing into the state by ensuring that each potential EITC beneficiary earns an amount of income equal to or greater than the plateau range within the federal EITC structure. A properly designed state program - i.e., one that takes account of the nuance and detail of federal tax law - can target state resources at those with the lowest levels of household income, while maximizing tax benefits available under federal law.