Doubling the Earned Income Tax Credit

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Gov. Gavin Newsom’s budget proposes to deal with the poverty issue in part by doubling the size of the Earned Income Tax Credit designed to put extra money in the pockets of low income workers.

It’s a good idea and a worthy goal if the funding needs of the proposal can be met. Newsom has a plan.

Just as lower income tax rates are an incentive to work and produce, an “earned income” tax credit also encourages work even if an individual’s current circumstances are on the lower end of the economic ladder.

There is a cost to the EITC but there is also value to the idea. It’s purpose is to encourage work.The title for the tax credit says it all: “Earned Income.” In fact, Newsom has a new name for the program. “Working Families Tax Credit.” Fine. It’s the idea that work matters. And despite work, if a family still finds itself at the lower end of the economic ladder, the state will provide an incentive to keep working so they can improve their skills and thus rise.

While the idea is a hit on the state budget, the Earned Income Tax Credit idea has found bi-partisan support over the years. Notably, one time Republican vice-presidential candidate Jack Kemp was a supporter of EITC as part of the solution to bring people out of poverty.

For tax year 2018, families earning wages or self-employment income up to $24,950 may qualify for what was formerly known as CalEITC. About $400 million in Earned Income Tax Credit is expected to be granted to 2 million households this year.

Newsom’s budget proposes adding an additional $600 million in additional benefits which add 400,000 families, meaning 2.4 million families will be eligible for the tax credit at a cost of $1 billion dollars.

Ironically, it is the controversial federal tax law changes under President Trump that the Newsom administration is looking toward to help fund the EITC increase.

The administration proposes conforming California law to federal tax changes and eliminating deductions that mostly impact business income.

According to the budget summary, “Differences between federal and state systems can be especially difficult for individuals and small businesses. The Budget proposes conformity to several key provisions that on either administrative burden or policy grounds are clearly beneficial to California. These provisions include flexibility for small businesses; capital gains deferrals and exclusions for Opportunity Zones; and limitations on fringe benefit deductions, like-kind exchanges, and losses for non-corporate taxpayers; among others.”

Business is waiting for details of the conformity ideas before embracing the proposal. But most businesses welcome the idea of not having to do separate tax calculations.

With California’s large poverty problem, an earned income tax credit is one way to help lift the poverty burden.

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