The Earned Income Tax Credit has proved effective in lifting people out of poverty. That especially goes for the federal version, which can route to a working parent with two children and $20,000 a year in taxable income as much as $5,700. The credit serves, among other things, to offset payroll and other taxes paid. In 2013, Ohio added its own version of the credit, and in the just-enacted transportation budget, the credit has been strengthened.
The Ohio Senate initiated the welcome improvement. One advance removes a limit that sharply reduced the credit for income above $20,000 a year and created something of a benefit cliff. In addition, the credit has been increased from 10 percent to 30 percent of the federal credit. These steps will help poor working families.
Unfortunately, they still leave many behind. As Policy Matters Ohio points out, the changes benefit just an additional 1 percent of the state’s lowest income families. That is because the state version remains nonrefundable. It doesn’t result in a refund if the credit exceeds a taxpayer’s income tax liability.
That explains why 95 percent of the poorest Ohioans receive practically nothing from the state credit. Their earnings are too low.
By contrast, the federal version is refundable, meaning the amount of the credit that exceeds the tax liability flows to the taxpayer as a refund. Of the 29 states with their own Earned Income Tax Credit, 25 have refundable credits. Ohio would do well to join them.
The federal credit has been around long enough, dating to the 1970s, that studies have confirmed the value it delivers. The credit has been linked to positive outcomes for children, from higher birth weights to college enrollment. The money boosts family finances and encourages more stable households. By one measure, 3 million children escaped poverty in 2016 due to the credit.
This isn’t about giveaways. Work is an eligibility requirement. Rather, one aim goes to achieving a more equitable tax code in an era of stagnant wages and stark income inequality. Consider the fallout since Republicans at the Statehouse embarked on years of tax changes (big reductions overall) starting in 2005. The 20 percent at the bottom income rung (average $13,000 per year) has seen a $140 increase in state and local taxes. The middle rung (average $48,000)? The tax increase has been $10.
Meanwhile, the wealthiest 1 percent of Ohioans (average income $1.28 million a year) has enjoyed a $40,790 tax cut. Today, the bottom 20 percent pays 12.3 percent of its income in state and local taxes, compared to 6.5 percent for the top 1 percent.
Recall that six of the 10 most common occupations in the state pay so little that workers are eligible for food assistance. Policy Matters Ohio adds that just two of the 10 pay enough to make a modest two-bedroom apartment affordable. Is such low pay an accurate reflection of their contribution in the workplace?
A refundable state Earned Income Tax Credit would not be cheap. At 20 percent of the federal credit, Policy Matters puts the sum at more than $427 million a year. Worth bearing in mind is that the state has engineered a business tax break for “pass-through” income that costs $1 billion annually. This is a loophole ripe for unmerited use. The state has yet to show how it delivers for the Ohio economy. So there is a much better way to deploy a portion of that money — to help lift children and their families, expanding opportunity and improving lives.