The Economic Impact of the Earned Income Tax Credit (EITC) in California

Abstract

Using Internal Revenue Service (IRS) data in an input-output (IO) model, this paper assesses the economic impact and foregone economic impact of the Earned Income Tax Credit (EITC) in the 58 counties in California in 2006, the most recent year for which data are available. Findings show EITC payments received by California residents contributed over $5 billion in output and nearly 30,000 jobs to the state economy in 2007. The foregone economic impact of unclaimed payments is substantial as well. Foregone claims are estimated to total $1.1 billion in 2007.

If claimed, the payments would have contributed $1.2 billion in output and 7,500 jobs to the state economy. This foregone impact was likely 20% to 25% higher during the year 2010, due to the recession and accompanying legislation. The foregone economic impact is not spread uniformly across counties, but is more acute in counties where the presence of likely nonclaimants is higher. Revamping and increasing efforts to increase the participation rate in the federal EITC program is probably a cost effective policy approach in terms of labor force participation and poverty reduction per state tax dollar spent.

Keywords: EITC, economic impact, California, welfare, employment

JEL Classification: H2, H5, R15, R12