Chairman Alarcón and members of the Committee, I am pleased to submit testimony to the Los Angeles Committee on Jobs and Business Development on the topic of increasing the take up of the Earned Income Tax Credit in Los Angeles. I applaud Chairman’s Alarcon’s leadership in exploring effective ways to bring more of this important resource to Los Angeles—for the sake of Los Angeles working families and the local economy.

My name is Anne Stuhldreher and I am a Senior Research Fellow with the New America Foundation. We’re a nonprofit nonpartisan policy institute with offices in Sacramento and Washington DC. Our California asset building program aims to advance a range of financial empowerment strategies to help lower income families. We’ve been very active in promoting strategies that help more Californians draw down the Earned Income Tax Credit. We helped the City of San Francisco become the first and only city in California to offer a local Earned Income Tax Credit—called the San Francisco Working Families Credit. We also worked with California First Lady Maria Shriver to develop her WE Connect Campaign—which aims to connect Californians with under-used programs and tax credits, like the Earned Income Tax Credit.

My testimony is going to focus on the importance of EITC dollars to California families and the California economy—and how cost effective strategies to draw down more of this federal resource are a worthwhile investment .

I think we can all agree that one billion dollars is a lot of money. Divide it among 600,000 working poor Californians and it's still a lot -- about $1,667 per family. That's how much the Brookings Institute estimates eligible Californians miss out on from our country's largest resource for low-income people -- the Earned Income Tax Credit.<!--[if !supportFootnotes]-->[1]<!--[endif]--> Previous estimates found that Los Angeles residents didn’t claim over $300 million in EITC refunds that they were eligible for.<!--[if !supportFootnotes]-->[2]<!--[endif]--> My Los Angeles colleagues likely have more updated estimates of local unclaimed refunds.

The credit is easy to apply for: Eligible people -- who at the uppermost end of the income threshold have a household income of $48,279 or less<!--[if !supportFootnotes]-->[3]<!--[endif]--> -- fill out a simple form. In 2007, 2.7 million Californians claimed $5.3 billion in refunds, for an average of $1,946 per family, according to the IRS<!--[if !supportFootnotes]-->[4]<!--[endif]-->. But the IRS also estimates that twenty to twenty five percent of eligible families in California never apply for a resource that can increase their wages by as much as 40 percent. Latinos, non-English speakers, and the self employed are among those most likely to miss out.

Why don’t they apply? Many eligible filers don’t know about the credit. Some low-income families may fear that they’ll owe taxes, so they don’t file. Others may know about the credit, but fear that they’ll lose eligibility for other benefits if they claim their EITC.

California families pay a steep price when they leave these dollars sitting in Washington, D.C The EITC is widely accepted as the most effective, least bureaucratic federal antipoverty program. It was designed to reward the work initiative of those who may be transitioning off welfare. Many studies show that it encourages and rewards work, and has been shown to increase workforce participation, especially for families with children<!--[if !supportFootnotes]-->[5]<!--[endif]-->. The maximum credit is $5,657 for a family with three or more children. The credit also lifts more children out of poverty than any other federal program, according to the Center on Budget and Policy Priorities<!--[if !supportFootnotes]-->[6]<!--[endif]-->.

Simply put, these tax windfalls help families make it. Studies show people use them to fix their car, move, or pay for the big expenses they sometimes can't cover with their regular paychecks<!--[if !supportFootnotes]-->[7]<!--[endif]-->. Keep in mind that reliable transportation is highly correlated with increased workforce participation<!--[if !supportFootnotes]-->[8]<!--[endif]-->, and for the lowest-income workers, a car may be their first important asset, and one that helps them on the road towards greater goals.

Low-income neighborhoods also lose out when EITC refunds go unclaimed. The EITC is a key contributor to local economies, as those eligible for the credit spend the bulk of their refunds in the cities where they live. Unclaimed EITC dollars will never be spent at local grocery stores and other neighborhood businesses. Most California cities miss out on tens of millions of dollars. A study conducted at Fresno State University estimated that each additional EITC dollar received and spent in the City of Fresno generates $1.40 in local economic activity, and creates one additional permanent job for each $100,000 claimed.<!--[if !supportFootnotes]-->[9]<!--[endif]--> The study also found that sales tax revenue increases since EITC dollars are spent locally. New America is working with Antonio Avalos, Chair of the Department of Economics at Fresno State and the author of the study, to create similar estimates of foregone economic impact from unclaimed EITC dollars in all 58 counties in California. Similarly, recent studies by Moodys Economy indicate that the most effective ways to stimulate the economy, those that get the largest bang for the buck, are those that put resources in the hands of low income people, since they’re likely to spend a large part of them immediately.<!--[if !supportFootnotes]-->[10]<!--[endif]-->

Finally, tax time and claiming the EITC can be an important moment for California families. Tax time can be the right time for many families to start saving, especially now that the IRS has raised the income thresholds and maximum credits during the recession. A few thousand dollars from the EITC may be the best opportunity families have to put aside some money this year. This is important, given that the Corporation for Economic Development estimated this year that 25% of Californians live in "asset poverty," meaning they don't have enough savings and assets to survive for three months at the poverty level if they lose their jobs.<!--[if !supportFootnotes]-->[11]<!--[endif]--> For some families, through the help of local tax coalitions, tax time is the right time to open a bank account if they don’t have one, so they can receive their refund quickly and cheaply. Estimates range that eighteen to thirty-six million American families lack bank accounts, and often pay excessive fees just to cash their paychecks and pay their bills.<!--[if !supportFootnotes]-->[12] <!--[endif]--> Los Angeles is, unfortunately, a prime example of this problem. Councilmember Alarcón recognized in a recent press release that 300,000 people in the city of Los Angeles do not have bank accounts.<!--[if !supportFootnotes]-->[13]<!--[endif]--> A<!--[if !supportAnnotations]--> study by Scarborough Research in 2006 found that the greater Los Angeles area had the second-highest percentage of unbanked consumers of any one market in the nation- 9%.<!--[if !supportFootnotes]-->[14]<!--[endif]-->

The un-banked don’t have free access to their own money. Nor do they have a safe place to keep that money, or a way to build up their savings or credit score.

Tax time can also be the right time to help people take advantage of other important resources, like Food Stamps and other local programs, and I’m sure you’ll hear more about what the Los Angeles coalition is doing to connect people to important resources.

We're always hearing how California doesn't get its fair share of federal funds. Tax time and under-claimed credits like the EITC provide an opportunity for policymakers to take steps to bring home dollars that will go directly to their constituents who need it the most. Approaches like those used in New York City, that you’re hearing about today, show that a small investment can yield a large return. Similar approaches should be vigorously explored in California, especially this year. Thank you.