Reviewing the Earned Income Tax Credit

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Governor Raimondo’s proposed increase in the earned income tax credit (EITC) that Rhode Island grants families in addition to the federal program is estimated to be a $3 million hit to next years budget, and presumably doubling in the following year, when the rate goes up by the same increment.

According to the Dept. of Revenue’s “2014 Tax Expenditures Report,” in the current calendar year, the state expects to forego $11.7 million in revenue to pay out these benefits to 95,793 tax filers.  The report consistently shows the number of recipients going up by 3.7% each year, while the amount of benefits goes up 4.2%, so with no change in the law, $12,156,436 will go to 99,337 in 2016.  Raimondo’s additional funds, in other words, will increase an average annual payout of $122 to $153, costing taxpayers $15,194,976.  (This is a rough calculation, so I’m just mixing calendar years and fiscal years.) [See this follow-up post for an important correction/update.]

As somebody who finds it obnoxious to argue that a particular tax increase will “only” cost the average family a small amount of money (on top of all of the other taxes they pay), I’m not inclined to belittle $31 in tax relief.  However, not only is some significant portion of this money more like welfare than tax relief, because recipients get it in cash if they have no tax liability, but government shouldn’t be using taxes to shuffle money around to favored constituencies.

One reason for that principle is that government officials — elected or bureaucratic — are not well situated (or competent) to determine where the money would do the most good in the economy.  The money to pay those 100,000 Rhode Islanders an EITC has to come either from the budget or (more likely) from the other taxes.  Given the flow of tax money, some of it may even come from the taxpayers who think they’re receiving a benefit.  (This quotation comes to mind.)

Another reason is that the politics of the debate don’t allow for an honest assessment of the trade-offs.  Just look at this op-ed by Kate Brewster (of the Economic Progress Institute, formerly the Poverty Institute) and Andrew Schiff (of the RI Food Bank).  One must almost take it line by line:

Significant research on the impacts of state and federal EITCs has found that beneficiaries work more, earn more and are less likely to rely on welfare. The EITC has also been proven to benefit children, who are healthier, do better in school and earn more as adults when their parents claim the EITC.

Naturally, no examples of the “significant research” are given, so it’s impossible to know what nuances are at play in the advocates’ writing, but this appears to be a tautology:  The EITC reaches many more people than cash welfare payments, many of them working, so obviously they “work more” and “earn more,” and it’s not surprising that their children do better.  One suspects these outcomes are independent of the EITC.

A higher EITC is also good for our communities and our economy. A recent study, documented in the book “It’s Not Like I’m Poor,” shows that families receiving the EITC use the extra money to pay current bills, including rent, utilities and groceries; they pay off debt; and they invest in their future, for example, by moving to a better neighborhood. These purchases and payments mostly take place in our local economy, putting more money in the cash registers of supermarkets, retailers, and other Rhode Island businesses.

Whether or not one considers the amounts I described above to be significant to the economy, the Brewster-Schiff argument misses the point: That money has to come from somewhere, also “mostly… in our local economy.”  For economic growth, the question is whether those other uses are more economically productive.  If the landlord or store owner ends up paying more in taxes than his or her tenants or customers pay him or her from the EITC, it’s a loss for them.  If the marginal cost is enough to dissuade them from hiring or expanding, then the increased EITC is a disaster.

Our neighboring states have recognized the economic advantages of a higher EITC. Governor Raimondo is calling for a rate that would be equivalent to 15 percent of the federal credit. Meanwhile, newly elected Massachusetts Gov. Charlie Baker — a Republican — has proposed doubling Massachusetts’EITC from 15 to 30 percent of the federal credit, which if passed would match Connecticut’s 30 percent credit.

First of all, according to the tax expenditure report cited above, Connecticut has actually been reducing its EITC.  This page from the National Conference of State Legislatures confirms that Connecticut is now at 25%.

Be our neighbors what they may, looking at the table of the 25 states with their own EITC programs, only 11 states have higher rates than Rhode Island’s right now, and in two of those, the credit isn’t refundable, meaning that it can only be used as tax relief, not as a cash handout.  Arguably, one thing all of those states have in common — that almost every other state in the country has in common — is that they have better job markets than Rhode Island’s.

According to this Pew map on the middle class, Massachusetts has a median income that’s about 20% higher than Rhode Island’s.  Advocates for big government and high taxes can try to spin every policy to sound like an economic development plan, but the real question Rhode Islanders should be asking themselves is whether they can afford to be competing with the likes of Massachusetts and Connecticut when it comes to handing out money.



  • ShannonEntropy

    Naturally, no examples of the “significant research” are given, so it’s impossible to know what nuances are at play in the advocates’ writing ….

    There are plenty of studies to pick from that praise the EITC to high heaven, like this one =►

    http://www.cbpp.org/cms/index.cfm?fa=view&id=1649

    Of course you will note that nowhere in there do the authors address Justin’s main point i.e. that the bucks have to come from *somewhere* so the ETIC is just a lateral shifting around of economic resources that provide no benefit to the economy overall

    (( The same argument can be made about the proposed new PawSox stadium in LaProv, but that is a subject for another day ))

    The Brewster-Schiff op-ed also cherry-picks which research it obliquely refers to as there are plenty of other studies that show the EITC actually has an *adverse* impact on the economy

    See, fer ex , http://taxfoundation.org/article/case-study-7-earned-income-tax-credit

  • Greg

    “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”
    ― Alexis de Tocqueville

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