EITC Eligibility, Participation, and Compliance Rates for AFDC Households: Evidence from the California Caseload

Abstract

In this report, we examine the eligibility for and participation in the earned income tax credit (EITC) for low-income families in California during the 1990s. The EITC is a federal in-come tax credit available to working poor families, with the amount of credit determined by the number of eligible children and by family income. The EITC has become the largest cash or near-cash program available to low-income families in the U.S., making it one of the corner-stones of the nation’s antipoverty effort. The effectiveness of the EITC depends, in part, on whether those who are eligible for the credit actually receive it and whether it is actually claimed. We examine EITC eligibility, participation and non-compliance rates for a special group of potential EITC beneficiaries, namely low-income households in California who received AFDC during the 1990s. Our sample consists of AFDC assistance units from four counties—Alameda, Los Angeles, San Bernardino and San Joaquin—that were part of the California Work Pays Demonstration Project (CWPDP), a waiver demonstration to assess the impacts of a series of reforms to the AFDC program in the state. For this sample we have data from administrative records from county welfare offices on AFDC participation, AFDC payments and the income re-ported to county welfare departments for the purpose of determining AFDC payments. These data were supplemented with quarterly wage and salary information from the state’s unemploy-ment insurance records as well as taxable income, by source, and EITC credits from federal in-come tax returns for the years 1993 and 1994. The latter information was obtained by matching state unemployment insurance wage earnings records and IRS tax returns data for the adults in the assistance units included in the demonstration project.

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