How Tax Credits Address Poverty

Providing Relief and Promoting Workforce Participation

 
By Sophia Selassie, UWBA Program Manager, Free Tax Help
 
With rising costs of living, increasingly shrinking wages and a widening gap between the wealthy and poor, the fight against poverty has never been more important. This is especially true in the Bay Area where families with lower incomes are often struggling to meet basic needs. Fortunately, tools like tax credits exist that can help enhance economic justice while empowering low-income families to participate more in the economy. Let’s explore how targeted tax credits can provide relief for those most affected by income disparities as well as stimulate workforce participation rates.

Real Cost of Living

It’s no secret that the cost of living in California is extremely high, but it turns out the federal poverty level does not even come close to capturing this reality. According to a recent United Ways of California report, one-third of households throughout the state struggle just to make ends meet – three times more than official government standards suggest. In Alameda County alone, an average two-adult family with two children requires $101K+ annually just for their most essential expenses; childcare takes up another huge part ($20K+) which results in many parents, usually moms, being sidelined from work opportunities due to its prohibitively expensive cost.

Using Tax Credits to Address Poverty

Federal tax credits are among the most powerful tools in fighting poverty! Research has proven that claiming Earned Income Tax Credit and Child Tax Credit can provide a significant one-time boost of income during tax season and long-lasting positive impacts on families. These credits not only help reduce the effects of poverty but also lead to better health outcomes. Studies show these benefits include:

• improved maternal health
• higher birth weights for babies born into poverty-stricken households
• better test scores among school children who benefit from this economic relief
• increased college enrollment numbers due to greater access to resources — all of which ultimately lead to securing future retirement incomes

This is particularly impactful on communities with high concentrations of Black and Latin/e women living on low-wage jobs, as 21% took advantage of the EITC in 2019 versus only 9% of white women claimants by comparison.

Expanding Tax Codes to Address Systemic Inequities

Racial & Gender Justice
California has taken significant action to combat systemic racial and gender inequality within its tax code. Demonstrating their commitment towards progressive policies and social justice, the state legislature passed two major credits this decade alone – The California Earned Income Tax Credit in 2015, which offers families experiencing economic challenges financial security; as well as the Young Child Tax Credit in 2019 providing an additional $1K boost for any households with young children under the age of six who also qualify for CA EITC. These critical steps help to support racialized communities – particularly women within them who remain disproportionately affected by these policies.

Senate Bill 860
This year, an important legislative victory was achieved in the form of Senate Bill 860, which is taking steps toward leveling an uneven playing field. It expands the eligibility of tax credits by lowering the earned income amount requirement to zero, allowing for even those without income, like caregivers or homemakers- to qualify to receive financial help through the system.

This crucial reform recognizes that historically unpaid labor and care work often falls disproportionately on women’s shoulders. Furthermore, research has shown when parents can rely on childcare services, more mothers will join (or remain) in the workforce: rising from 77% participation to 89%. This number is particularly striking among single moms, whose workplace presence jumped all the way up to 84%, even as fathers’ rates remained unaffected by changes in childrearing arrangements.

Moving Forward

Poverty is a complex and multi-dimensional problem, but targeted tax credits are a powerful tool that can help address some of its causes and effects. By reducing income disparities and stimulating local economies, tax credits can provide relief for those most affected by poverty as well as lead to better health outcomes overall. We must continue to amend the tax code so that it reflects our commitment to addressing structurally reinforced poverty. We must continue amending the tax code so that it helps rather than entrenches poverty. Doing so will not only improve the lives of millions of Americans but also make our Bay Area economy stronger.