Wednesday, 31 October 2012 12:00
by Heather Miller
LBP: Extend tax credit for working poor
A new report from the Louisiana Budget Project concludes that Louisiana should extend — and double — the state’s earned income tax credit for low-income working residents.
According to the report, of the 24 states offering earned income tax credits to enhance the benefits of the federal tax credit by the same name, Louisiana’s EITC is the lowest of any state offering such credit. The funding for the extension of the credit, LBP maintains, could be funded by eliminating some of the endless tax credits offered to business and industry:
The EITC is only available to taxpayers who earn income through work during the year. It encourages work by effectively raising the earnings of low-wage workers as they work more hours. In fact, the credit was largely responsible for the increased labor force participation among single parents after the federal welfare overhaul of the 1990s. Not only does the credit encourage low-skilled workers to enter and stay in the job market, but many families spend their credit on necessities that help them work, like repair of a car or child care. They also use it to buy the basics, pay down debt and medical bills, or to move to a better neighborhood by paying first and last month’s rent.
The federal EITC lifted 6.3 million people out of poverty in 2010, including 3.3 million children. State credits leverage and amplify the impact of the federal credit. Louisiana has one of the highest poverty rates in the country, with one in five people living below the poverty line (about $23,000 for a family of four), including more than one in every four children. To thrive, Louisiana needs its families to succeed. Combating poverty and reversing the current trend will be key to Louisiana’s future.
In Louisiana, most of the benefits from the federal EITC—over 98 percent of all dollars—go to working families with children, though single workers and people without kids can also claim a small credit. Benefits are larger for families with two or three children and for families headed by married couples. The credit phases in as families earn more, until they reach the maximum benefit amount. As income rises, families eventually hit the phase-out range and their credit decreases gradually to zero (see graphic below). The gradual phase-out keeps families from abruptly losing the credit and reinforces the incentive to keep working and earning more. While families earning poverty-level wages receive the largest benefit from the EITC, it also gives families at somewhat higher income levels substantial help in making ends meet.
Workers who are eligible for the federal credit are automatically eligible for the state credit. This makes Louisiana’s credit easy and cheap to administer because it requires just one line on the state’s income tax form. This also means that nearly every dollar spent on the EITC goes directly to working families, rather than toward administrative costs.
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