Taking Stock of the Earned Income Tax Credit on EITC Awareness Day

Friday, January 31, 2014 at 5:59 PM by

Despite Using Far More TANF Funds for the WI EITC, Total Spending Declines

Today is EITC Awareness Day, when the IRS works with community organizations, elected officials, state and local governments, schools, employers, and other interested parties to spotlight the Earned Income Tax Credit, and to encourage more eligible families and individuals to apply for the credit. The IRS estimates that one fifth of eligible taxpayers fail to claim and get this important credit. 

In recognition or EITC Awareness day, let’s take a look at the Wisconsin EITC, including some recently released data showing the declining value of that credit over the past years, and the role of that decline in adding to the state surplus.   It’s also a good time to consider the effectiveness of the EITC as a tool for helping make work pay for low-income families.    

As the Center on Budget and Policy Priorities pointed out in a January 31 paper, the EITC helps working families make ends meet and encourages them to keep working and to work more hours.  It’s the single most effective tool for reducing poverty among working parents and their children – lifting about 6.5 million people out of poverty, including 3.3 million children.  Research has found that the EITC has long-lasting benefits for children.   For example, low-income kids in families that get additional income through programs like the EITC do better and go farther in school, and children whose families get an income boost during their early childhood years work more and earn more as adults.  

EITC-GPR-vs-TANF-amts

Unfortunately, the Wisconsin EITC was cut substantially in 2011.  An EITC report recently posted on the WI Dept. of Revenue website helps confirm that.  Here are some of the findings from that report and other new sources:

  • The DOR report shows that the average state EITC fell from $462 in 2010 to $376 in 2011, a decline of 19%.  
  • EITC spending in FY 2013 was $15 million below the amount projected, which added to the surplus carried forward into the current biennium.   
  • The January 16th Fiscal Bureau paper about state revenue and spending shows that lower estimates of the cost of the EITC in fiscal years 2014 and 2015 adds an additional $8.2 million to the projected 2013-15 surplus (as well as $23.3 million from lower-than-anticipated Homestead Credit spending).     

Reduced state support for the EITC has also been adding to the state surplus in another way.  As the bar graph shows, in each of the last two biennial budget bills the state has substantially increased the amount of federal welfare reform funding (from the TANF block grant), even as the state was cutting the EITC.  The TANF increases for the credit have merely supplanted state General Purpose Revenue (GPR) for the EITC, thereby adding to the General Fund balance while creating a large hole in the budget for the state’s welfare to work program (W-2) and an even larger structural deficit in the budget for TANF-funded programs in the 2015-17 budget.

In inflation-adjusted dollars, Wisconsin’s total spending for the EITC (GPR and TANF combined) fell 11% from 2003 to 2013.  Now that the state has a $912 million projected surplus, a portion of which comes from reduced state General Fund support for the EITC, it’s time to reverse the tax increases for hardworking low-income families that were enacted in the 2011-13 budget bill. 

Jon Peacock  

Categories: 2013-15 biennial budget, Blog, EITC, STATE TAXES, TANF | Comments Off on Taking Stock of the Earned Income Tax Credit on EITC Awareness Day

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