Many States Move to Expand the Earned Income Tax Credit
A push to boost tax credits for the working poor could see success in states this year, echoing a key proposal from the White House. In the opening days of 2014 legislative sessions, bills that would expand or create the Earned Income Tax Credit have been introduced in nine states, according to the National Conference of State Legislatures. Four of those states are looking to create new state versions of the credit. These moves would build off the federal credit of the same name that President Barack Obama proposed to expand in his State of the Union speech last month.
Governors on both sides of the aisle have also backed the idea, thanks in part to newly flush budgets and an eye toward aiding their economies by boosting workers' incomes. Democrats Pat Quinn of Illinois and Steve Beshear of Kentucky have proposed expanding or creating their own versions of the EITC, as the credit is known.
And Ohio created its own credit last year with the support of Republican Gov. John Kasich.
"States see this as a good policy," said Erica Williams of the left-leaning Center on Budget and Policy Priorities. "As they're kind of coming out of the lows of the recession and revenues start to come back, they're looking for ways that they can reinvest."
The EITC is a federal tax credit that offsets payroll and income taxes for low-income workers, mostly parents. Households with children and annual incomes below $37,900 to $51,600 in the most recent tax year are eligible. People without children who have incomes below about $14,300 ($19,700 if married) are eligible for a smaller credit. The White House and some in Congress have proposed expanding the credit to more taxpayers, particularly those without children.
Enacted in 1975, the credit has since been vastly expanded by Republicans and Democrats in Congress, and it lifted 6.5 million Americans above the federal poverty level in 2012, according to the U.S. Census Bureau. In 2011, the U.S. government paid out $62 billion to nearly 28 million tax filers through the program, according to the Internal Revenue Service.
In 2011 an average of $1.2 billion in federal EITC payments flowed to tax filers in each state, according to the most recent IRS figures, but in some larger and poorer states the amount was much greater. Mississippi, Georgia and Texas were among the highest in average payment per taxpayer. According to a Brookings Institution analysis, in recent years in those three states alone almost 1.2 million people were kept out of poverty because of the credit. The EITC's history of bipartisan backing in Congress and the states has opened the door for spurts of expansion at both levels.
Democrats often see it as a supplement to other safety net programs, while Republicans favor it as a work-oriented welfare program.
Supporters hope 2014 will be the next chapter of the pro-EITC trend in the states, no matter the fate of any further federal boost in Congress.
States over the years have moved to piggyback on the federal tax credit, allowing taxpayers to claim at least some of the federal credit on state income tax bills. In effect, the states allow their taxpayers to claim a percentage of the federal credit on their state income tax bills, reducing the amount they owe. Rhode Island was the first in 1986. Now 25 states and the District of Columbia offer their own credit.
But the policy hasn't been universally embraced, and similar strains of opposition that could hinder the White House's proposal in Congress have emerged in some states.
Opponents criticize the high price tag of the EITC, which would cost states anywhere from $4 million to $1.3 billion in fiscal year 2015, depending on the size of the state and the level of credit offered, according to one estimate. New Jersey Republican Gov. Chris Christie cited budget disputes with the Democratic legislature in vetoing an expansion of the credit there last year.
Others point to the credit's notoriously high error rate: A Treasury Department Inspector General report last year found up to 25 percent of EITC payments, or $13.6 billion, were made in error in fiscal year 2012. By comparison, the food stamps program has an error rate below 5 percent.