Long-shot presidential candidate Governor Jerry Brown offered to have California tax-payers double the federal Earned Income Tax Credit for many Californians this week. Though the credit is considered by the IRS Inspector General to have an “improper payment rate” of 22 to 26 percent, Brown wants to give away an additional $380 million in state funds to deflect what Breitbart News has reported as the fact that “California might be 7th Largest Economy, but is 1st in Poverty.”
Gov. Brown proposed to write checks to about 825,000 California families. The proposal, to be known as the California Earned Income Tax Credit, would help the state’s poorest residents on a sliding scale, based on their wages and how many children they have. The average household to qualify would pocket $460 a year. The maximum credit, for families with three or more children, would be $2,653. No one earning more than $13,870 a year would supposedly qualify.
The federal Earned Income Tax Credit (EITC) is big business in California. About 3.1 million of the state’s tax filers claimed $7.3 billion in federal Earned Income Tax Credit (EITC) payments for the 2013 tax year. Federal government outlays on the EITC were about the same as California’s form of the food stamps program, called CalFresh.
The Left went ballistic earlier this year when Senator Rand Paul said that the EITC has a 25 percent “fraud rate.” The progressive Salon.doc ran a blistering article, “Rand Paul’s prevarication problem: Afflicting the afflicted & comforting the comfortable.” Sarcastically, Salon added, “It’s good to know that Paul will trounce sick and struggling working people” when he “insisted the program is fraud-ridden–which it is not.”
But according to Politifact, Senator Paul was correct about the percentages of EITC fraudulent, or improper, payments. Each year since 2002, the IRS Inspector General has been required to report to Congress estimates of improper IRS payments. The IG wrote in 2013, “The IRS has made little improvement in reducing improper Earned Income Tax Credit payments.” The following year, the IG stated that the EITC is the only IRS program that is considered a “high-risk for improper payments,” since “22 to 26 percent of all payments are improper.” That means that of $63 billion in EITC paid out in 2013, between $13.3 billion to $15.6 billion were improper or fraudulent payments.
Gov. Brown has been like the Energizer Bunny this year as he has crisscrossed the state with new initiatives to keep his name highly visible. He celebrated a minimum wage hike, broke ground on his high speed train, passed legislation to guarantee paid sick leave, supported farmers need for a Delta peripheral tunnels, demanded more aggressive cuts in carbon emissions, and just released California’s May Revised Budget showing a big surplus.
But Governor Brown has been also been dogged by that fact California has one of the highest poverty rates in the nation, at 16.8 percent. Despite about $3 billion in extra capital gains tax collections as a result of hot new Silicon Valley initial public offerings (IPOs), California unemployment is the sixth worst in America, at 6.7 percent. According to an analysis by the American Community Survey based on Census Bureau data, of the 25 major metropolitan areas in the nation, Los Angeles took the booby prize as America’s Poorest Big City, with a 17.6 percent poverty rate.
Gov. Brown’s California Earned Income Tax Credit is supposedly designed as a social welfare program. But the U.S. Treasury Inspector General for Tax Administration report states: “an improper payment is defined as a payment that should not have been made or that was made in an incorrect amount or to an ineligible recipient.” The program offers a significant reward for under-reporting income, or claiming additional dependents the filer is not eligible to claim.
Economist Jeffery Liebman researched the rate of improper payments and how they increased or decreased when the size of the credit increased. Looking at the 1996 program expansion, he found a causal relationship that for every dollar spent on the EITC, 24 cents went to ineligible taxpayers. Of the 24 cents, 45 percent went to taxpayers who fraudulently claimed children due to gain larger EITC payments.
The timing of the California Earned Income Tax Credit payments may be politically motivated, since virtually all the cash payments will be mailed out during the 2016 Democrat Presidential Primaries that run from February into June next year.