Patricia Lara, 39, makes $35,000 a year as an administrative assistant for an Orange property manager. With four teenagers to support, she says, “my income can’t keep us afloat.”
But at a recent free tax preparation fair at the Brookhurst Community Center, Lara got some good news. Not only doesn’t she owe any income tax, but the Internal Revenue Service will send her $2,783 in the form of what’s known as an “Earned Income Tax Credit.”
The money is welcome but no windfall. “My grocery bill is about $2,000 a month,” Lara said, adding that she pays $500 in monthly rent, plus utilities, to share a home with her parents and a brother.
Lara is among some 27 million U.S. wage earners who last year benefit from the Earned Income Tax Credit. The 43-year-old federal program, which paid out $65 billion in cash subsidies in 2017, is the one anti-poverty policy that sparks little controversy.
At an Anaheim free tax preparation fair, Patricia Lara and her son, Joseph Ducret, get help with their returns from IRS-trained volunteer Stan Manley (Photo by David Kawashima/ Orange County United Way)
“Inequality is worse as the wages of the low-skilled have fallen way behind the wages of the higher-skilled,” said UC Irvine economist David Neumark who has authored more than a half-dozen studies on the tax credit.
“Democrats like the EITC because it redistributes wealth. Republicans like it because instead of giving you money like welfare, it only applies to those who work.”
Three years ago, confronting the fact that one in four residents live below or close to the federal poverty line, California became the 26th state to offer its own supplemental tax credit for workers. Last year, eligibility for the state program was extended to the self-employed.
But there’s one big problem: some low-income workers earn too little to be required to file taxes, even though they could qualify for the extra money if they did.
In California, where 2.9 million beneficiaries collected $6.8 billion in federal EITC payments last year, one of four eligible workers fails to claim the credit.
That leaves some $2 billion a year on the table, according to a recent study That’s money not only for workers to pay rent and feed their children, it is also unspent revenue for local businesses.
“A lot of people don’t know about the credit,” said Joseph Sanberg, a Los Angeles entrepreneur who founded CalEITC4Me, a non-profit advocacy group. “California’s poverty is not about a lack of jobs. It’s about jobs not paying enough. People work two and three jobs and still can’t afford basic needs.”
At an Anaheim tax preparation fair, table signs encouraged workers to claim up to $6,000 in earned income tax credits. EITCs offer cash-back refunds to low and moderate income workers. (Photo by Margot Roosevelt/SCNG Orange County Register)
Last year, CalEITC4me texted 70,000 low-income Californians prompting them to call legislators, urging an expansion of the state program. The resulting law more than doubled the number of eligible families to 1.5 million this year.
The group runs a digital platform with information in English, Spanish, Mandarin and Vietnamese. It also offers free tax preparation in the Inland Empire and partners elsewhere with groups such as Orange County United Way.
At the Brookhurst Community Center event, the United Way served a free taco and quesadilla lunch as IRS-trained volunteers helped Lara and other workers file returns. Signs reading “What Would you do with an extra $6000?” adorned tables and brochures urged, “It’s your money: Get it!”
In Orange County alone, United Way recruits 500 volunteers to help low-income filers in 24 locations including colleges, churches and government agencies. “I just like to crunch numbers,” said Stan Manley, a 75-year-old retired sales manager who helped Lara with her return.
Cash-back amounts vary according to some 20 different criteria including levels of income and number of children.
Federal EITC credits can range from $510 to $6,318. Even individuals with incomes well above the poverty line, up to $53,900, are eligible for modest amounts, depending on their family size.
Last year, California’s program paid out $205 million to 386,000 recipients. This year, workers with children earning up to $22,300 can get a CalEITC credit, with amounts ranging from $223 to $2,775.
At an Anaheim tax preparation fair, table signs encourage workers to claim earned income tax credits. EITCs offer cash back to minimum wage workers even when they earn too little to pay income tax. (Photo by David Kawashima/Orange County United Way)
Economists see earned income credits as an incentive to work because, unlike some social programs, the more one works the more money one gets—up to various thresholds.
“This is a generous program that may affect how intensely you look for work,” Neumark said. “If a job pays $12 an hour, and you have to pay child care, maybe (the job) is not worth it. But the EITC means your effective wage might be a lot more than your employer pays.”
Earned income credits are successful in lifting single mothers out of poverty, studies show, and 60 percent of poor children live in female-headed households. According to a Neumark paper, the effect is long term, and recipients of earned income credits often build skills that lead to higher future earnings.
A report by the California Budget & Policy Priorities, a Sacramento think tank, notes the federal EITC compensates for the fact that low and moderate income families pay higher state and local taxes as a share of their income than do wealthy households. According to the organization’s analysis, the lowest earning non-elderly households pay 10.8 percent of their income in total state and local taxes, while the top one percent pays just 5.4 percent.
Do earned income tax credits relieve pressure on employers to pay workers a living wage? It is a question viewed through different prisms by conservatives and progressives.
Neumark, director of UCI’s Economic Self Sufficiency Policy Research Institute, funded by conservative financiers, says, “The firm pays you, and the government kicks in a lot more. Some may call it corporate welfare, but you end up with more people employed.
“I don’t know any law that says a company is responsible for paying a living wage.”
Sanberg, a liberal Democrat, sees EITCs as just one tool to alleviate poverty.
“If the minimum wage had grown with productivity since 1960, it would now be about $22.50 an hour,” he said. “A disproportionate amount of income growth has gone to CEOs. For workers to prosper, we need a higher EITC, single-payer health care and a higher minimum wage.”
Paying for a funeral
At the Brookhurst fair, Eduardo Farfan, a 27-year-old Saddleback College student, was helping Yolanda Gentile with her return.
At an Anaheim free tax preparation fair, Eduardo Farfan, an IRS-trained volunteer, helps Yolanda Gentile, a customer service representative, with her return in January 2018. (Photo by<br />David Kawashima/Orange County United Way)
Gentile, 51, is blind in one eye and half-blind in the other from a domestic violence incident. She works 20 hours a week as a customer service representative for Stater Bros.
“I still have hands,” she said. “I still have arms. I can still work.”
On her 2017 income of $5,100, Farfan told her, she would be paid $392 under the federal credit program and $118 by CalEITC—modest amounts since she has no dependent children.
“I’ll use it on my $5,000 credit card bill,” she said. “My daughter died last year, and I’m trying to catch up after paying her funeral.”
As for Lara, the Orange administrative assistant, her EITC credits have dropped since her oldest child, 18, no longer qualifies as a dependent. Next year, another son will turn 18 “and I’ll have only two dependents on my taxes, even though they live with me.”
Lara’s last raise was 15 years ago, she said, and, with or without the extra EITC, her financial life will remain a struggle. “Everything is going up,” she said. “We are treading water.”
How many got credits?
Low and moderate income Southern Californians are claiming record numbers of federal and state earned income tax credits (EITCs), a program only available to those who work.
Federal EITC credits worth $6.8 billion were awarded to 2.9 million Californians in 2015, with an average payout of $2,379.
Number of claims
State EITC credits worth $205 million were awarded to 385,910 Californians in 2016, with an average payout of $531.
Number of claims
Sources: Internal Revenue Service, California Franchise Tax Board
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Source: Oc Register