Question

You are a staffer to Shannon Lee Groves, Minority Leader of the California Senate. She has asked you the following question to address in your memo: “Governor Newsom has recently proposed a large change in the state’s EITC – a new “Working Families Tax Credit.” How does the state EITC currently work, and how would the new proposed EITC work? I am strongly supportive of policies that encourage more people to work, and to reduce reliance on government handouts. Would the new proposed EITC help achieve this goal? Would it do so efficiently (i.e., well-targeted at increasing work)?”

Answer 1

Earned Income Tax Credit (EITC) is a tax incentive plan of the Federal government of USA that provides tax credit or refunds to people belonging to low income group. It was first introduced by Ford Administration to compensate people for rising food and fuel prices. It thus indirectly promotes savings and family welfare of people belonging to low and middle income groups. Individuals who qualify for the tax credit can receive tax refunds from the government. Many state governments have their own EITC schemes. The EITC incentive is also available to families without children. The recent amendment to the EITC in California and Maryland provides tax incentives to workers having no children. The latest amendment to the state EITC will benefits around 700,000 households in California province alone. Key purposes of State and federal EITC incentive are to encourage young workers for high productivity and provide old aged people a better coverage for their children.

The basic objective of EITC is to reduce tax burden of working people. But in reality it reduces tax burden of low and middle income group people but increases tax burden of people earning high income. The recent amendment to state EITC reduce tax burdens of low income workers having no children. Under state or federal EITC plan, all eligible workers receive a certain proportion of their income tax as tax refunds, which they can utilize for their other family expenses. But working people having no tax liability cannot apply for tax credit either from federal or state government. The recent modification to tax incentive rules of California and other states will also induce more young people to earn more and stabilize their career. But there is also chance of workers working less in order to become eligible for tax refunds under EITC.