In June 2015, California became the 26th state to pass its own Earned Income Tax Credit (EITC). The new credit, worth as much as $2,653 per year for families with low earned income, supplements the federal EITC. Families will start receiving the credit in 2016 on income they earned in 2015, and approximately 2 million residents are expected to benefit. The average qualifying household is expected to receive $460 per year, for a total cost to California of $380 million for tax year 2015.
The California EITC has a more limited reach than the federal credit – only about a fifth of Californians who receive the federal credit will qualify for the state credit. Nevertheless, the California EITC promises to make a significant dent in extreme poverty in the state. Research on the federal EITC and on other states’ experiences suggests that it will both promote work among disadvantaged parents and bring important benefits for children in recipient families.
This issue brief examines how the new California EITC works, how it compares to the federal credit and how it affects both the well-being of working families and the labor market. The brief also looks at how the California credit will interact with the recent minimum wage expansions across the state, and lays out options for future changes.