California is expanding the scope of its tax credits, including creating a nationwide first $1,000 benefit for former young adoptees.
But the programs – designed to cut taxes owed to the government and put money in the pockets of people living in poverty – remain underutilized, leaving millions of dollars on the table each year.
The state budget signed last month by Governor Gavin Newsom includes more than $100 million to extend tax credits to low-income Californians, as research shows unconditional benefits are among the best ways to help those in need.
State officials, however, grapple with a conundrum: Not everyone who qualifies is likely to claim the credits, and those who need them most may not file taxes at all.
This is partly because low-income people in California are not required to file taxes. The threshold requirement for single Californians with no dependents is a gross annual income of $19,310.
A study published last year by the nonpartisan California Policy Lab found that nearly half of households receiving CalFresh food benefits were eligible for the state earned income tax credit but did not receive it, totaling $76 million in unclaimed credits.
“The tax return is the most effective tool to reduce poverty in our country. This is one of the fairest ways to get money out. But it may not be the most effective way,” said Anna Johnson, associate director of housing and health at John Burton Advocates for Youth, a nonprofit serving young adults in foster care. reception or without housing. “We are really trying to make it a more equitable and responsive structure. If we don’t give enough of an incentive to overcome these obstacles, it will continue to hinder us.
Another hurdle is cost: tax preparers can charge up to $300, mitigating the impact of potential credits.
“It really eats away at people’s refunds. There’s not enough support for low-income and no-income people to file their taxes,” said Sabrina De Santiago, director of policy and research at Golden State Opportunity, an anti-poverty organization that operates CalEITC4mea tool that helps people determine tax credit eligibility.
Advocacy groups have launched tax credit information campaigns and coordinated free tax preparation and filing centers across the state since California created programs reflecting federal benefits from 2015.
The full universe of people potentially eligible for tax credits who don’t claim them is unknown because the state lacks substantial data, according to the California Policy Lab.
Some of the state’s outreach efforts have proven insufficient. Over the course of two years, text messages and letters reached more than a million eligible Californians urging them to claim the credits, but none of the efforts “had a demonstrable impact” on tax returns or claims. earned income tax credit claims, according to a California political lab report in 2020.
Instead, advocates say, the focus should be on affordable, community-based tax relief. Applying for the tax credit has a multiplier effect, they said, and can open up filers to other benefits they didn’t know they were eligible for and streamline processes for other government programs.
A pilot project launched last year in Santa Clara County reported that it helped 45 young adults in foster care pay their taxes and collectively generated returns totaling more than $135,000. The project increased the annual income of first-time filers, on average, by 17% and, for those who are parents, by 42%, according to a report by John Burton Advocates for Youth.
“We’re trying to find ways to make it as easy as possible for people to file their taxes,” De Santiago said. “That’s really important because a tax refund is often one of the biggest lump sums they’ll get in a year and can be used to fix a car or pay school fees – all those things that it is more difficult to save.”
According to the state Department of Finance, 4.3 million filers received the California Earned Income Tax Credit in 2020, the latest available data, compared to 3.9 million in 2019. The number of filers Californians who received the Young Child Tax Credit fell to 420,000 in 2020 from 430,000 in 2019.
These credits are for Californians who earn less than $30,000 a year and have children under the age of 6.
California’s latest tax credit, which will provide $1,000 to former young adoptees between the ages of 18 and 25, is expected to benefit 20,000 residents beginning in the 2022 tax year.
Former foster youth in particular are at risk of not qualifying for a tax credit, said Jane Schroeder, policy director at advocacy group First Place for Youth.
Many young people in foster care have spent most of their lives in institutional or non-traditional settings and enter adulthood without financial knowledge or other life skills, she said.
“We have kids who come into our program at 18 years old, and they’ve never been to a grocery store before,” Schroeder said.
Jesse Rothstein, a UC Berkeley professor who has conducted research on tax credits for the California Policy Lab, said the issue calls into question the effectiveness of the country’s tax system.
“I think if we really want to repeatedly use the tax system to try to distribute aid, we should work hard to create easier processes for people,” he said. “I think a lot of people don’t realize how complicated our social safety net system is and how difficult it is to qualify and find out if you qualify. It can be a full time job, just managing it all.