Last week, the Budget and Tax Center (Center), an arm of the North Carolina Justice Center, issued a November 2016 policy brief advocating for the return of the state’s Earned Income Tax Credit (EITC).
In an article addressing tax credits for working families, the National Conference of State Legislators (NCSL) recognized that the EITC is a helpful tool that supports low and moderate income families and working people trying to get ahead. The federal EITC operates by reducing the amount of taxes owed in the first place, and also refunds the difference if the credit is larger than the amount owed. The actual credit is based on earnings, the number of qualifying children, and marital status, and changes each year. Married couples must file their taxes jointly to take advantage of the EITC.
At the federal level, more than 28 million citizens received over $66 billion in earned income tax credits in tax year 2013, according to Internal Revenue Service estimates.
For tax year 2016, the credit provides as follows:
|CHILDREN||MAXIMUM CREDIT||MAXIMUM EARNINGS|
|Three or More Children||$6,269||$47,955||$53,505|
North Carolina’s 2013 tax reform and elimination of the EITC in 2014
Currently, 26 states and the District of Columbia have earned income tax credits. North Carolina lawmakers established theirs in 2007, at a rate of 3.5 percent of the federal credit, and increased it to 5 percent in 2008.
In a March 2014 policy brief titled First In Flight From The EITC, the Center noted that the EITC is “widely recognized as one of the most effective anti-poverty tools nationwide.” It is used mostly for just one or two years at a time “as a way to help families stay on their feet by offsetting short-term struggles resulting from job loss, reduced hours, or reduced pay.” Even so, in 2014, legislation eliminated North Carolina’s EITC. The Center lamented the fact that the Tar Heel State was the only one to eliminate its EITC in nearly 30 years, in contrast to other jurisdictions that have maintained or expanded theirs.
Now, in the November policy brief, the Center is pushing for a return of the EITC, because “[s]imply put, [it] is the most effective anti-poverty tool that legislators have at their disposal. This is especially important today, when North Carolina is facing a 16 percent poverty rate (12th highest in the nation) and a 25 percent child poverty rate. One in three workers in the state earns poverty-level wages.”
More specifically, the Center makes the following policy arguments:
- The EITC promotes tax fairness because it helps to rebalance the tax load. The Center opines that the flat tax, expanding the tax base, and eliminating certain credits, have disproportionately burdened low-income households.
- The EITC encourages employment because individuals must work in order to earn the credit.
- The EITC creates short-term benefits and long-term gains. In the short term, it helps offset regressive taxes, like sales and gas taxes. As for the long term gains, studies show that kids whose families take advantage of credits like the EITC perform better in school, are more likely to go to college, and earn more, on average, when they grow up.
In an October 25, 2016, op-ed for The News & Observer, the Center’s director, Alexandra Sirota, declared that North Carolina’s tax cuts have failed to grow the economy. She was referring to the tax reform package that lawmakers passed in 2013 that led to the EITC’s disappearance. At the time, in a press release announcing the deal, Gov. Pat McCrory highlighted the corporate and individual rate reductions, among other measures, that were designed, with fiscal responsibility in mind, to broaden the tax base, lower income tax rates and reduce taxes for working families. Ms. Sirota criticized these reforms in her op-ed as “failed trickle down economics.” She also contended that:
[g]iven the known limits and damaging results of this flawed and theoretical approach to growing the economy, it is breathtaking how pervasive it has been in Raleigh over the past few years. Policymakers ushered in the first round of tax cuts that primarily benefited the wealthy and profitable corporations in 2013 under the flawed assumption that if we all pay more in sales taxes, it would free them up to create jobs.
Further, she disparaged lawmakers for prioritizing tax cuts over everything else, because that leaves fewer resources for “useful investment or economic development approaches for communities and businesses.”
Even so, the reform package has resulted in strong enough revenue growth that in August 2016, the North Carolina Department of Revenue confirmed that the revenue trigger had been met, enabling the next level of reductions, including a corporate tax rate drop from 4 to 3 percent, and an individual income tax rate drop from 5.75 to 5.499 percent. We detailed this, and the disagreement that some have with the results of the reform, in our August 14, 2016, article.
The Tax Foundation, which holds itself out to be an independent tax policy research organization, encourages states to engage in sound tax policy, characterized by simplicity, neutrality, transparency, and stability. On those principles, the group’s 2017 State Business Tax Climate Index ranked North Carolina at number 11 overall, a remarkable improvement over its dismal position at number 41 just last year. The group attributed this to the state’s continuous improvements in its tax structure, which, in turn, stem from the 2013 tax reform plan.