Our Recommendation: Any Changes Made to State EITC Should Be Temporary
Expiring Federal Provisions Mean that State Spending on EITC Will Decrease in Next Biennium
On Tuesday, May 31st, the Joint Finance Committee is scheduled to vote on the $41 million cut proposed by the Governor to the state’s Earned Income Tax Credit (EITC). WCCF has submitted a memo to the Joint Finance Committee with recommendations for the credit.
There are several reasons why the EITC should be preserved at the current level:
- It’s a refundable credit, which allows it to offset the impact of the social security tax for low-income workers, and increases the incentive to work.
- The EITC is good for Wisconsin’s economy. Because families that receive the credit don’t have a lot of money, they tend to spend those dollars on necessities — quickly and in their own communities. That gives local businesses a much-needed boost.
- It’s also good for Wisconsin’s families. The credit lifts an estimated 5,000 people in families with children above the poverty line in Wisconsin and helps to ease poverty for another 43,000 each year.
- Cutting the EITC would increase the amount of tax paid by low-income workers who can least afford it.
- The Recovery Act temporarily expanded the federal EITC, resulting in higher credit amounts and more people qualifying for the federal credit. The state credit is calculated as a percent of the federal credit. As a result, state spending on the credit has been elevated since the Recovery Act went into effect in 2009.
- At the end of 2012, the temporary expansion of the federal EITC is scheduled to expire. After that occurs, state spending on the state credit will decrease significantly in the next biennium.
- By sunsetting structural changes to the credit in 2012, the Committee can reduce spending in this biennium while still keeping the level of the state credit roughly the same going forward once the federal credit decreases (without adding to the structural deficit).
The enhanced federal EITC, which was originally part of the Recovery Act and then extended in subsequent legislation, has played an important role in helping cushion the recessions’ harshest effects for low-income workers. An analysis by the Center for Budget and Policy Priorities found that in 2009, the expanded Child Tax Credit and the Earned Income Tax Credit kept an additional 1.5 million people above the poverty line. (You can read more about CBPP’s analysis in a Wisconsin Budget Project blog post from February 2011.) Overall, Recovery Act expansions to the safety net kept more than $4.5 million people out of poverty.
Gutting the state’s EITC doesn’t help low-income workers struggling with the aftereffects of the recession, and it doesn’t help Wisconsin to get back on the road to economic recovery. But if policymakers are determined to increase the taxes paid by low-income workers, they should make sure the changes expire at the end of 2012.