Yesterday, the Progressive Pulse published a blog encouraging the NC Legislature to restore the state Earned Income Tax Credit (EITC) instead of increasing the standard deduction. Their argument is that a NC EITC will help more working poor than increasing the standard deduction. That is correct as far as it goes. Many of the poor in NC owe little or no state income tax so increasing the standard deduction will result in no or little tax savings. On the other hand, an NC EITC would be available to many workers earning less than the standard deduction but still have some earned income.
The federal EITC was added in 1975 and expanded quite a bit in 1986. For those not old enough to recall, Gerald Ford (R) was president in 1975 and Ronald Reagan (R) was president in 1986. The EITC was expanded and changed by other presidents, most recently during Barack Obama’s terms as president in 2009, 2010, 2013, 2014 and 2015. Quite a few changes for Mr. Obama. It seems the Feds cannot leave the rules alone when it comes to the EITC.
The EITC is designed to encourage people to work by providing a credit for those earning less than a certain amount. The certain amount varies based on the number of children, if any, and marital status. The law is quite complex with many other requirements I will not get into here. The maximum credit for 2015 is $6,242 for a married couple filing a joint return with three children. That is a nice chunk of change for someone earning between $13,850 and $23,649. A married couple with that income and three qualifying children probably owes no federal income tax so they get all their federal income tax withheld back plus another $6,242. In addition, they could also receive up to $3,000 for having three qualifying children under the age of 17.
You can see why a couple with three children making under $23,650 needs other resources to cover their living expenses. Of course they do not even receive all their gross wages as they have to pay Social Security and Medicare taxes of as much as $1,809. Without the EITC, the fear is they would quit and go on welfare. In effect, the EITC is a reward for not being on welfare. Some argue that the EITC itself is a form of welfare run through the tax code. I am not here to argue that point.
NC EITC better?
So is an NC EITC better at getting money to the working poor than a larger standard deduction? A couple with three children under 17 could make a little over $21,800 in NC and owe no NC income tax. The first $15,000 is tax-free due to the NC married filing jointly standard deduction and the $374 of tax on the next $6,800 ($21,800 – $15,000 standard deduction) is offset by the $375 child credit. In this example, increasing the standard deduction by $2,000 saves this couple no NC income tax. Even at $23,649, the extra $2,000 in standard deduction only saves $102.
If NC adds an EITC of 5% of the federal then our couple with three kids gets $312. Much more than $102 and even more than the nothing a couple with $21,800 in income receives. So NC Policy Watch is correct, an NC EITC will provide more money to more people. The results are even more dramatic if NC makes the credit equal to 10% of the federal and NC Policy Watch suggest.
Why could an NC EITC be a bad idea?
After all that, an NC EITC sounds good if you want to encourage the poor to work. Several possible problems:
- Does up to $312 annually, tip the scales in favor of working versus welfare for a family of five making as little as $13,850? I really doubt it. On the other hand, they can sure use the $312 which seems to be the argument of those in favor of an NC EITC.
- To be revenue neutral, someone has to pay more tax to cover the NC EITC. This money does not materialize from thin air. So some other taxpayer has to pay more to cover the credit. On the other hand, if the option is to add a $2,000 standard deduction then someone has to pay the extra tax of as much as $110 ($2,000 * .05499).
- The big problem with an NC EITC is it encourages fraud. Basing NC’s credit on the federal means NC pays as many fraudulent claims as the Feds. In December 2014, TIGTA estimated that 24% of federal claims were fraudulent or otherwise improper. Human error due to the complexity of the law is probably the largest cause outside of fraud. So if NC sets aside $205 million, as NC Policy Watch suggests, NC will pay out more than $49 million in improper claims. The error rate in the food stamp program was estimated at 4.07% according to this December 2013 NY Times article. Not great but a heck of a lot better than 24%.
Until the federal government gets its act together and brings the improper payment percentage to a reasonable level, how can anyone promote the EITC as a cost-effective way to fight poverty? What do you think?