By Susannah Parsons, All Home & Kelli Smith, Economic Security Project Action
Federal and state refundable tax credits are powerful tools to fight poverty, build economic power, and promote racial justice – putting $200 billion back into the pockets of millions of low-income Americans each year. Those same tax credits become even more powerful when they are delivered on a monthly basis, rather than annually. Our bill to enable monthly payments of state tax credits didn’t make it through this year’s legislative session, but the idea is catching on elsewhere, and for good reason.
In 2021, the federal government took an important step in deepening the impact of the federal Child Tax Credit (CTC) by providing half of the credit in advance, as monthly payments spread out over six months. The result was extraordinary: increasing the amount of the CTC drove an unprecedented 46% drop in child poverty to its lowest rate on record, and research from Columbia University shows that monthly payments can cut poverty by 30% more each month than the same amount made annually, because of their income stabilizing effects.
In 2023, a number of states and the District of Columbia built on that federal success by taking steps to pay their state credits as monthly or quarterly installments, and in advance rather than at tax filing time.
Monthly payments reduce income volatility and risk of homelessness.
Providing financial assistance like tax credits in regular installments can have such positive impacts because hundreds of thousands of low-income families in the U.S struggle to make ends meet, and consistently run out of money before the end of each month. This makes it harder for families to pay bills, afford basics like groceries, or stay in their homes.
Income volatility significantly increases the risk of experiencing homelessness. Unexpected financial crises (like a medical bill or job loss) are among the most common causes of homelessness, and recent research has even pinpointed the sharp dips in earnings and increased payday loan inquiries that precede evictions. A UCSF study of people experiencing homelessness found that in the six months before losing their housing, roughly 30% of participants had a decrease in or loss of income.
On the flip side, research on homelessness prevention programs show that a cushion of even just a few hundred dollars a month can make the difference between staying housed or being evicted. In 2018, a Vancouver non-profit and the University of British Columbia launched the New Leaf project, which gave direct cash payments to people experiencing homelessness. Over the next 12 months, participants spent 38 fewer nights homeless on average and built savings of roughly $1,000. More than two-thirds of participants increased their food security, and 35% were able to secure permanent housing.
States made progress in 2023
Several U.S. states and jurisdictions recognize the benefit of flexible cash assistance and are building on the success of the federal CTC. In 2022, the Washington D.C. Council implemented monthly payments of their local EITC when the credit exceeds $1,200 a year, becoming the first non-federal jurisdiction to implement monthly payments. This year, four additional states passed bills to lay the foundation for monthly payments of their state tax credits:
- Minnesota legislators passed a bill enacting the highest Child Tax Credit in the country, which permits the Department of Revenue to pay households in advance periodic payments.
- Typically, a monthly payment of a federal tax credit doesn’t get counted as “income” when tax filers are qualifying for other benefits (like food assistance) – but the law is unclear if that rule also applies to state-level tax credits. In Vermont and Oregon, legislators passed “trigger” bills that are designed to implement a program for advance periodic payments when Congress (or a federal agency or court) clarifies federal law. When that happens, each state will pay 50% of a household’s Child Tax Credit in advance quarterly payments.
- Finally, the Massachusetts legislature passed a CTC expansion bill that requires a study of advance quarterly payments.
What’s Next for California
In this year’s legislative session, California legislators considered a proposal for advance monthly payments of state tax credits. AB 441 (Haney), sponsored by All Home, Economic Security Project Action, and End Poverty in California (EPIC), directed the state to provide advance monthly payments to taxpayers who qualify for at least $1,000 from the Young Child Tax Credit, California Earned Income Tax Credit, and the Foster Youth Tax Credit.
If a tax filer was eligible, they would receive monthly installments of their tax refund in advance, rather than all at once at the end of the tax year. AB 441 didn’t advance this year, because the state budget deficit limited opportunities for enacting new programs, and administrators raised concerns around estimating tax filers’ income correctly.
It was a disappointing setback, but there’s still opportunity for progress next session, despite continuing budget concerns. California could make a commitment similar to Vermont and Oregon, where the state will set up an advanced periodic program once the federal government clarifies that monthly payments won’t impact other benefits. The Franchise Tax Board (FTB) could also update the study bill from 2019 with new details based on the experience of the expanded federal Child Tax Credit – which could lay out a path for creating advance monthly payments over time.
Finally, there are other ways to improve the state’s tax credits that will lay the groundwork for advance payments in the future.
- The state has already taken steps toward easy and free filing by becoming a 2024 pilot state for IRS Direct File, a new simple and free filing tool through the federal government. This year, the FTB could help improve the connection between this federal project with the state’s own CalFile tool.
- Last year, AB 1002 and SB 565 both would have increased access to tax credits by requiring the FTB to more proactively identify who’s eligible and for how much. Both bills passed, but were vetoed by Governor Newsom, who cited budget constraints.
- Increasing the income eligibility for tax credits gets cash to more low-income workers – and also makes advance payments easier to estimate by making more Californians eligible for the credits (today, the annual income threshold is just $30,000).
Flexible, unrestricted cash increases stability and prevents homelessness – and more of California’s benefits should be moving in this direction. As legislators think about cost-effective ways to support more Californians who are struggling to get by, leveraging the power of the state government to help people get the most out of the benefits they have earned can go a long way. We look forward to more work on this in 2024 and beyond.
