PPIC Releases Report On State Earned Income Tax Credit -- April 23, 2004 -- California Capitol Hill Bulletin -- Volume 11, Bulletin 13

A recent Public Policy Institute of California report, entitled "Evaluating State EITC Options for California" analyzes options for developing a state Earned Income Tax Credit (EITC). Attempting to ease poverty rates and develop incentives for working low-income families with children to leave public assistance is a growing concern for California. Dr. Thomas MacCurdy, author of the report, offers four distinct approaches and tests them along three dimensions: their effect on work incentives, the distribution of benefits across poor families, and the costs of such programs.

The first proposed EITC structure is a simple add-on to the federal EITC program, supplementing federal benefits by a fixed percentage. In this option income solely determines the benefits to families. MacCurdy found that this option does little to improve work incentives and that qualified families would receive $305 per year on average, but cost the state $730 million annually if all eligible families applied. The second option also uses income alone to determine benefits, but allows the state to target families with varying earnings levels. The study found that if families near the poverty level were targeted, they would become more motivated to work the additional hours required to get off CalWORKS public assistance. Given a maximum benefit of 15%, this option would cost 40% less than the add-on; the average benefit would fall to $256 annually, as fewer families would receive the maximum benefit. The third and fourth options both consider hourly wage levels and earnings. MacCurdy discovered the third option would encourage work incentives by providing a share of the maximum EITC benefit based on the share of full-time work. This option would cost three-quarters of the add-on EITC. The fourth structure pays the difference between a worker's market wage and a pre-determined threshold wage. This option could be phased out beyond the equivalent of full-time work, or workers could be allowed to keep the maximum subsidy. This option costs more than the add-on EITC, but provides four times the benefits to eligible families. The two latter options were viewed to better target poor working families and improve work incentives.

One particular point emphasized in the study is if California plans to apply an EITC of its own, the state should carefully design a program which takes into account both a family's hourly wages and earnings. Simply taking the easy route of an add-on will not improve work incentives nor provide enough benefits to those in great need. To view a copy of the complete report or for other related information, please visit http://www.ppic.org .

To expand communications between Washington and California, the California Institute provides periodic bulletins regarding current activity on Capitol Hill that directly impacts our state. Bulletins are published weekly during sessions of Congress, and occasionally during other periods.

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