This tax credit works
The earned income tax credit has enjoyed four decades of bipartisan support because it helps working people at the bottom of the economic ladder climb up a few rungs. In their zeal to bring the federal budget into balance without raising taxes on people with means, however, congressional Republicans have proposed to shrink the federal credit in 2018. Democrats in the California Legislature, meanwhile, want to create a state version. The latter is a good idea, if done the right way. The former is a step in the wrong direction.
The idea behind the credit is to supplement low-wage workers’ incomes with a tax refund that, in many cases, is greater than the amount withheld from their checks. The credit has enabled millions to move off public assistance and has been particularly helpful to single mothers shifting from welfare to work. That’s true in part because the credit is significantly larger for workers with children — up to $6,242 per year for a family with three or more — than for childless adults — up to $503. The approach has been so successful that both President Obama and House Republicans (in the budget resolution passed last year) have called for increasing the credit for workers without children
Republicans have since dropped that idea and are proposing to let an increase in the credit for married couples and for families with three or more children expire at the end of 2017 as part of their 10-year plans to eliminate the deficit. Congress enacted the increase as part of the 2009 economic stimulus and has extended it twice since then. The cooling GOP support for the credit reflects the split in conservative ranks between those such as former House Budget Committee Chairman Paul D. Ryan (R-Wis.), who see the credit as a helpful anti-poverty tool, and those who consider it an effort by Democrats to buy the support of low-income Americans. But rolling back the credit would be counterproductive if it reduces the work incentive for married couples and larger families.
For its part, the California Legislature is considering whether to create a state earned income tax credit, as 21 states have done. Lawmakers have floated such proposals for 15 years to no avail; the latest effort is by Assemblyman Mark Stone (D-Scotts Valley), whose bill would create a credit ranging from 60% of the federal amount (for childless adults) to 15% (for parents without young children). That approach is expensive, though — Stone’s office estimated the annual cost at more than $1.4 billion — and for many low-wage workers, the aid would be too small to make a difference. The Legislative Analyst’s Office has laid out an attractive alternative, which would be to provide a larger credit to fewer people, such as workers with the lowest incomes or childless adults whose federal credit is minimal. Considering where Congress is heading on the federal credit, state lawmakers should answer Stone’s call and move ahead now to create their own.