Let’s fix the Earned Income Tax Credit

By KENT GARDNER

Progressives and conservatives can agree that self-sufficiency is a worthy goal of social policy. That’s why policy wonks of all stripes support the Earned Income Tax Credit.

How does the EITC work?

The concept is simple. People who work but earn less than a threshold receive an income supplement that depends on income. Single parents with one child qualified in 2018 if their income was below $40,320.

The EITC is available only to individuals with earned income. For a single parent with one child, the credit grows as annual income rises to $10,150, equivalent to 923 hours worked at the 2019 Upstate New York minimum wage of $11.10 an hour. The combined federal and state EITC ($4,500) is equivalent to an increase in pay of $4.87 an hour.

The credit stays constant until income hits $15,200, then gradually declines to zero when income reaches $46,000. Read the typically-complicated IRS bulletin here.

Progressives like the EITC because it puts earning power in the pockets of people in need and promotes self-reliance. Conservatives like it because the credit rewards work and encourages engagement with the mainstream economy.

Economists like the EITC because it avoids the labor market distortions of a minimum wage increase—low-skill workers can receive a higher wage than employers might be willing to pay. When markets work reasonably well, low-wage work can improve an individual’s skills and make better jobs more likely.

What’s not to like?

The EITC may appear to be a salve for low-wage work, but there’s a rather big fly still fluttering in the ointment. Unlike a higher hourly wage that appears in every paycheck, the EITC is a tax credit. Workers who qualify receive the money only after filing their tax return. If you owe $6,000 in tax, you get to deduct the EITC from what you owe. As it is a “refundable” tax credit, you get a check if the credit is more than you owe.

Thus, while we can pretend it is equivalent to a pay increase, that’s only mathematically true. The once-per-year lump sum payout is certainly a benefit to recipients, but doesn’t help with the rent in October or the car repair in August.

The EITC doesn’t appear to encourage work

The wonkish promise of the EITC is that it will encourage more people to enter the labor force. A recent study by Princeton University’s Henrik Kleven (brought to my attention by the Children’s Agenda’s Peter Nabozny) argues that the impact of the EITC on labor force participation has been exaggerated in previous studies.

These studies connected a late 90s increase in labor force participation with the 1993 EITC reform. “Not supported,” says Kleven. Instead, he finds strong evidence that EITC participants were pushed into the labor market by the 1996 welfare reform and pulled in by a strong job market. The EITC incentive played only a bit part. Passed with the support of the Clinton Administration, the 1996 policy changes added significant work requirements and limited the duration of public assistance payments. A summary of Kleven’s paper and its conclusions is available from the Institute for Family Studies.

What should change?

Fans of the EITC (me included) have long speculated that the incentive value of the credit is blunted by the annual nature of the payout. With SNAP benefits and cash assistance having made the transition to forms of electronic funds transfer, surely we can devise a system for distributing a large share of worker’s anticipated EITC throughout the year.

That would make the EITC even more complicated than it is already, of course. Even the IRS’s online “EITC Assistant” requires some work to disentangle. Fortunately, many community organizations offer technical assistance, particularly on the annual EITC Awareness Day (coming January 31).

The Earned Income Tax Credit is an important part of our national safety net. Let’s make some common sense changes that will improve its power to pull potential workers into the labor market.

Kent Gardner is Rochester Beacon opinion editor.