States weigh cuts to earned income tax credit for working poor

By Pamela M. Prah

Rohnalda Hollon, a single mother of three in Beaverton, Michigan, and an Iraq war veteran, worries that state budget cutbacks will wipe out the refund she gets from a program aimed at helping the working poor.

“The $400 from the Earned Income Tax Credit could mean the difference between paying my Consumer’s Energy bill or not,” says Hollon, who works full-time for the Army National Guard Military Funeral Honors program, and has been put forward as one of the faces of an advocacy campaign called Save Michigan’s Earned Income Tax Credit.

Hollan is typical of the recipients of the Michigan credit, which returns an average of $432 to families, most with children. Governor Rick Snyder wants to eliminate the program, along with a slew of other tax credits, in a bid to make the state tax system “simple, fair and efficient.” Eliminating the credits also would help close the state’s $1.8 billion budget deficit. Just scrapping the Earned Income Tax Credit, or EITC, would save the state at least $340 million a year.

“We cannot afford sacred cows,” Michigan state Senator Roger Kahn said when he introduced legislation to eliminate the EITC. With the budget expense from the credit growing each year, Kahn said, it’s important to ask: “ ‘Do we need it? Can we afford it? What is it worth?’ For the EITC the answers are no, no and not enough.”

Hollon, who earns $37,000 a year, says she lives paycheck-to-paycheck and has earned her refund. “I would like legislators to know that there are people like me — from all walks of life — that depend on this,” she said in a video with other supporters of the Michigan credit.

Hard choices in budget cuts

Facing yet another tight budget year — but this time, without federal stimulus dollars — state lawmakers are looking everywhere they can for cost savings. That has led a growing number of states to target their earned income tax credits. Those credits are patterned after a federal program of the same name that supporters say reduces poverty and encourages work. State policymakers in Kansas, North Carolina and Wisconsin are among the 23 states with EITCs that are considering scaling back those programs.

According to the Center on Budget and Policy Priorities, which advocates for state earned-income tax credit programs, the people who qualify for the benefit usually come from working families with children. Their annual incomes are below about $36,000 to $49,000, depending on marital status and the number of children in the family.

The way it works is that those who qualify for the federal credit also receive a state refund, which is calculated as a percentage of the federal rebate. The percentage ranges from 3.5 percent in Louisiana to 40 percent in Washington, D.C. (see sidebar). All but three of the states with EITC programs are “refundable.” That means low-income families can receive the credit even if they pay little or no income tax.

Proponents of the credits say the programs have a strong, proven track record and for years have garnered bipartisan support. Supporters like to tout that even President Ronald Reagan endorsed the EITC, calling it “the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress.”

Now, however, some fiscal conservatives are balking at the idea of giving tax breaks to people who earn so little that they may not pay any state income taxes. Pete Sepp, executive vice president of the National Taxpayers Union, a group that advocates lower taxes, is one of them. “Our primary concern with the EITC,” Sepp says, “is with its outlay effects resulting from the ‘refundable’ portion that allows recipients to receive more money back than they paid in income taxes.”

Advocates of the working poor say cutting the EITC is counterproductive. Families typically spend the money quickly on local purchases — whether it’s paying the electric bill in Hollan’s case or on auto repairs or medical bills. Either way, the money is spent in the community, helping to stimulate the local economy, says Amy Greene, a senior policy associate at the Hatcher Group, a public affairs firm that manages the website taxcreditsforworkingfamilies.org.

In Greene’s view, the movement in the states to reduce tax credits on earned income conflicts with the pledges many governors have made to not raise taxes. Wisconsin Governor Scott Walker, for example, is proposing changes to the state EITC that would cost a single mom who has two children and is making the minimum wage $302 per year, according to the Wisconsin Budget Project. Likewise, New Jersey Governor Chris Christie last year reduced his state’s EITC to 20 percent from 25 percent. “That’s a tax increase,” says Greene.

Sepp acknowledges that a change like the one made in New Jersey likely does result in a tax increase for some people. For many others, though — those who have been getting the credit but don’t owe income tax — he says it’s not accurate to say their taxes are going up.

Moves to expand, not cut, EITC

Not all states are eying cutting back on the earned-income credit. In fact, Connecticut may go the opposite direction. The governor there, Democrat Dannel P. Malloy, wants to create one. For a family of four with an income of $20,000, the governor’s proposal would generate an additional $1,500 a year.

“For those who won't take a low-wage job in the hopes that something better will come along, this is an incentive to take that job — because you will only get the credit if you’re working,” Malloy said when he unveiled a sweeping and controversial budget plan that includes raising taxes on alcohol, tobacco and the general sales tax. He figures the program would cost $110 million a year and help 190,000 low-income citizens.

Likewise, Iowa has been discussing increasing the state’s earned income credit. The state Senate has approved the idea, but the state House has not. Meanwhile in Virginia, Governor Bob McDonnell recently signed legislation that advocates say strengthens the state’s EITC by ensuring that it conforms with any changes at the federal level. It is expected to cost the state $6 million a year.

“It’s a well-spent $6 million,” argues the Center on Budget and Policy Priorities’ Nicholas Johnson, “that will benefit 114,000 Virginia children and families.”