An estimated 1 million Californians will not receive their full tax refunds this year because the state will intercept the money to pay off debts such as outstanding parking tickets, tolls, court fees, tuition and child support.
California's poorest residents, who qualify for state tax credits, will be hit the hardest as money intended for what Gov. Gavin Newsom has heralded as "the largest anti-poverty cash assistance program in the country" will instead be returned to the government to cover unpaid bills.
Nearly 50% of Californians who had at least a portion of their 2021 tax refunds taken by the state as part of its "offset" collection program earned less than $30,000 a year and filed for the California Earned Income Tax Credit or Young Child Tax Credit, according to data compiled by the Franchise Tax Board.
That means the state's tax credit programs, which give up to $3,160 in extra cash to eligible Californians through refunds, often never reach the people they are intended to help, with funds instead going to cities, counties, courts and other agencies to pay off debts.
Of the nearly $92 million that the state kept from tax returns in 2021, low-income Californians who filed for tax credits forfeited more than $35 million of that revenue, according to the Franchise Tax Board data.
California established its own version of the federal Earned Income Tax Credit program in 2015 under then-Gov. Jerry Brown, and Newsom has continued to expand the program's reach, saying in a January proclamation that it improves the health and educational outcomes of children in the families who receive it.
The state's creation of anti-poverty programs, including tax credits and stimulus packages, while allowing the collections program to continue is like attempting to "plug a bleed on one end while another end is still an open wound," said Courtney McKinney, spokesperson for the Western Center on Law & Poverty.
The organization, alongside two dozen other advocacy groups, is asking the Newsom administration to immediately suspend all income tax intercepts for debts owed to state and local governments through July, as it did during the worst of the COVID-19 pandemic.
"It is counterproductive and cruel to tear these funds out of families' hands to pay off old traffic and parking tickets, criminal fees, and public benefit overpayments," states a letter sent last month from the organizations to state Controller Betty Yee. "And it is all the more concerning that the administration would allow this to happen when the state predicts tens of billions of dollars in budget surplus."
Most states collect delinquent fees from tax refunds, but California and Illinois were the only states to pause collections during the pandemic, according to a report by the Center for Public Integrity.
Yee noted the "severe economic impact" of the pandemic in her suspension of the program last year, and said she hoped the pause in collections would "offer additional relief for taxpayers."
But she did not signal support for continued suspension, saying in a statement last week that 60% of intercepts have already been completed this year. She said that she "shares the advocates' concerns" and is pushing for state legislation that would exclude low income tax filers from interceptions.
No such bill has been taken up by a state lawmaker.
"Controller Yee currently is focused on a permanent solution to minimize the hardship tax refund offsets can cause low-income families," spokesperson Jennifer Hanson said.
When asked whether Newsom would support suspending the policy, a spokesperson for his administration said the governor "continues to explore ways to tackle income inequality and help families make ends meet" and pointed to his support of interest-free payment plans and reducing civil assessment penalties.
A single mother of three in Sacramento, who works as a forklift operator, is among those who have had her refund kept by the state in previous years, due in part to unpaid restitution fines from 2016.
She estimates that she is eligible for about $3,000 in state tax credits this year, which she says she would spend on birthday presents for her children, a new car or to pay down credit card bills. But she knows she will not receive a refund because of her outstanding debt, which totals about $17,000 — more than twice as much as she earns in a year.
Ten percent of her paycheck is already garnished because of outstanding debts.
"I want to pay it back. I want to right my wrongs," said the mother, who asked not to be identified because of a domestic violence restraining order. "It's just a vicious cycle. It's really hard to get ahead when you don't have any money. It feels impossible."
Low-income families depend on annual tax refunds as a financial safety net, advocates wrote in the letter to the state.
"Without a moratorium, some families will have their state tax refunds seized to pay parking tickets and court-ordered debts that are, in some cases, decades old," the letter states. "That means those refunds — which are often state tax credits that are designed to buoy low-income households — will not be available to pay outstanding balances for rent, utilities, student loans, and credit card payments that are now under increased pressures as financial supports are ending, sending people over a financial cliff."
The Franchise Tax Board estimates that annual revenue from the offset program's collection efforts will total $374 million, impacting 1 million tax filers.
The board collects fees from refunds, lottery winnings and unclaimed property on behalf of cities, counties and agencies that request help with debt collection, though participation in the program by government entities is voluntary.
In California, more than 500 agencies use the program, including the Department of Motor Vehicles, the Department of Child Support Services, the Employment Development Department and California Community Colleges.
The California Community Colleges Chancellor's Office said in a statement that it supports a suspension of collections through July despite its participation in the program.
Debts were collected from 8,371 tax returns on behalf of California Community Colleges for unpaid tuition in 2021, totaling nearly $1.2 million, according to state data. About two-thirds of the system's students have a household income of less than $30,000 a year.
"The Chancellor's Office agrees that students who cannot afford to pay outstanding balances should not be prevented from enrolling, and we have encouraged colleges to use pandemic relief funds to forgive debts during the crisis," Vice Chancellor Paul Feist said.
Tax refunds can be intercepted to satisfy debts as small as $10 and even if people are already participating in payment plans to pay off those debts. The state is also authorized to withhold federal tax refunds.
The state can collect unpaid tax liabilities for up to 20 years from their due date.
Victoria Ramirez, a spokesperson for the Franchise Tax Board, said state officials "cannot quickly or easily modify our offset program" and that attempting to change the policy now would put tax return processing and risk.
"Even if [the Franchise Tax Board] cancels or suspends its offset program, it does not void the debt or stop collection attempts by qualified creditors/agencies who might use private debt collectors that could be more aggressive and more expensive for taxpayers," she said.
But advocates argue that tax refund interceptions are particularly harmful because they do not have protections for low-income residents that other policies such as income-based wage garnishments do.
"Bank levies and wage garnishments do not present the contradictory policy issue we are highlighting here: Tax offsets take away EITC and CTC tax credits that the Legislature designed to help children and households with very low incomes," McKinney said.
