The North Carolina House of Representatives this week approved and sent to the Senate a measure that would raise the state's earned income tax credit (EITC) from 3.5 percent to 5.0 percent of the federal EITC. The measure is bittersweet: assistance to the working poor but still not enough to lift families out of poverty and the grasps of regressive taxation.
A 10 percent state EITC in North Carolina would be more effective and would cost less than one percent of the current budget, according to estimates by the NC Justice Center. Research suggests that, among its many benefits, the EITC increases workforce participation and encourages asset building. Some surveys conclude that families invest their EITCs in education, savings accounts and transportation improvements, investments that, in turn, promote economic security among low-income workers.
At the state level, an EITC helps to offset the regressivity of the sales and property taxes, the burdens of which fall primarily on low-income earners. In North Carolina, the wealthiest one percent of families spend 6.1 percent of their incomes on state and local taxes. Compare that with the poorest fifth of families in the Tar Heel state, who devote 10.6 percent of their earnings to state and local taxes.
One in 5 North Carolinians benefit from the EITC. If the bill passes, under North Carolina's new EITC structure these residents would be able to receive from the state an additional credit equal to 5 percent of their federal EITC. Unfortunately, even with this boost from the state, low-income residents would still be subject to regressive sales taxes greater than this amount. A report by the NC Justice Center estimates that an 11 percent state EITC would be needed to offset the burden of state and local sales taxes on a family of four.