This is the fifth installment of our six-part series on 2016 state tax trends. An overview of the various tax policy trends included in this series is here.
As we explain in our annual report on low-income tax credits, the strategic use of Earned Income Tax Credits (EITCs), property tax circuit breakers, targeted low-income tax credits and child-related tax credits can have a meaningful impact on addressing poverty, tax fairness and income inequality in the states.
The use of these tools is so important especially because states have created an uneven playing field for their poorest residents through their existing tax policies. Every state and local tax system requires low- to middle-income families to pay a greater share of their incomes in taxes than the richest taxpayers and, as a result, tax policies in virtually every state make it even more difficult for those families in poverty to make ends meet. Unfortunately, it does not stop there–many recent tax policy proposals include tax increases on the poor under the guise of “tax reform”.
That reality may seem bleak, but it provides state lawmakers plenty of opportunities to improve their tax codes in order to assist their state’s lowest-income residents. Targeted low-income tax cuts can serve as a vital tool in offsetting upside down tax systems and proposed regressive tax hikes. On top of that, targeted tax breaks and refundable credits do not only benefit a state’s low-income residents–they can also pump money back into the economy, providing both immediate and long-term economic stimulus. With this in mind, a number of lawmakers are heading into the 2016 legislative session with anti-poverty tax reform on the agenda.
This year we expect states to build on reforms enacted in 2015 with a range of policies to address poverty and income inequality–including, most notably, efforts to enact or improve state EITCs in as many as a dozen states. Unfortunately, lawmakers in a few states are looking to reduce or eliminate their EITCs. Here’s a look at the opportunities and threats we see for states in 2016:
Enacting state EITCs:
Twenty-six states plus the District of Columbia currently have a state EITC, a credit with bipartisan support designed to promote work, bolster earnings, and lift Americans low-wage workers out of poverty.
In 2016, a number of states are looking to join this group by enacting their own state EITCs. For instance, Mississippi Gov. Phil Bryant recently called for “blue collar tax dividends” to give people back a portion of their hard-earned tax dollars (he has proposed a nonrefundable state EITC). In South Carolina, a refundable EITC is on the table to help offset a largely regressive transportation revenue raising package. And lawmakers in Idaho have proposed the enactment of an EITC at 8 percent of the federal credit (PDF). Advocates in Georgia, Hawaii, Kentucky, Missouri and West Virginia are calling on their state lawmakers to enact state EITCs as a sensible pro-work tool that would boost incomes, improve tax fairness, and help move families out of poverty.
Even states without an income tax could offer a state EITC and lift up the state’s most vulnerable. Washington State enacted a Working Families Tax Rebate at 10 percent of the federal EITC in 2008, though it still lacks sufficient funding to take effect.
Enhancing state EITCs:
While state EITCs are undoubtedly good policy, there is still room for improving existing credits. Three states (Delaware, Ohio and Virginia) have EITCs but only allow them as nonrefundable credits–a limitation which restricts their reach to those state’s lowest-income families and fails to offset the high share of sales and excise taxes they pay. Lawmakers in Delaware seem to have recognized this shortcoming by recently introducing a bill that would make the state’s EITC refundable, but only after reducing the percentage from 20 to 6 percent of the federal credit and then gradually phasing it back up to 15 percent over the course of a decade. Advocates in Virginia are calling for a strengthening of the state's EITC as an alternative to untargeted tax cuts proposed by Gov. Terry McAuliffe.
In addition to refundability, many states are discussing an increase in the size of their credit. Governors, in particular, are stepping up to the plate: Rhode Island Gov. Gina Raimondo recently announced her plan to raise the state’s EITC to 15 percent, up from 12.5 percent of the federal credit; Louisiana Gov. John Bel Edwards, meanwhile, has called for doubling the state EITC as part of his commitment to reduce poverty; and Maryland’s governor, Larry Hogan, called to accelerate the state’s planned EITC increase. In California, Gov. Jerry Brown reiterated his support for the state’s new EITC in his 2016-17 budget. In New York, Assembly Speaker Carl Heastie proposed increasing the EITC by 5 percentage points over two years. And Oregon lawmakers are calling to bring the EITC up to 18 percent of the federal credit.
Another “enhancement” trend that is building momentum is expanding the EITC to workers without children. At the federal level, President Obama proposed just that (PDF) in 2014 and again reiterated his support for such a change in his most recent State of the Union address and budget proposal. Just last year, the District of Columbia expanded its EITC for childless workers to 100 percent of the federal credit, up from 40 percent, and increased income eligibility.
Protecting state EITCs:
Rather than focusing on proactive anti-poverty strategies, a handful of states will be spending the better part of 2016 protecting their state EITCs from the chopping block. Tax reform debates in Oklahoma have led to calls that the state’s EITC should be re-examined and possibly eliminated, possibly in combination with the elimination of the state's low-income sales tax relief and child care tax credit.
For more information on the EITC, read our recently released brief that explains how the EITC works at both the federal and state levels and highlights what state policymakers can do to continue to build upon the effectiveness of this anti-poverty tax credit.