North Carolina created a state EITC in 2007 at the onset of the Great Recession, and it was set at 5 percent of the federal EITC until lawmakers eliminated it as part of the historic 2013 tax reforms after the economy was in full recovery mode.
In short, the EITC is designed to refund a portion of earned income to eligible workers. To be eligible, a worker must earn below certain income thresholds that vary according to household size. The amount of the credit is calculated on a sliding scale: starting relatively small at the lowest levels of income, rising as income rises up to a certain point where it plateaus, then the credit tapers down as the worker’s income continues to rise.
The credit, however, is refundable, which means that if the size of the tax credit exceeds the actual amount of tax paid, the person still receives the full amount of the credit in the form of a check from the government.
Most recently, a state EITC was proposed in an amendment to the FY 2019-20 House budget proposal, but was voted down.
According to recent analysis, the federal government administers 126 separate programs directed at low-income households. Many of these programs are administered in partnership with state governments, while state and local governments provide still more separate programs. Federal government spending alone on these programs approaches $1 trillion annually, and that is not even counting the largest entitlement programs of Medicare and Social Security.
Labeling the EITC a “Working Family Tax Credit” in an effort to re-brand the ineffective program, the Justice Center claims “a Working Family Tax Credit in North Carolina would address the state’s upside-down tax code by offsetting some of the income low-income working families must dedicate to paying state and local taxes, particularly sales tax.” They also add that the credit would help households “make ends meet.”
But would it?
A state credit of 5 percent would distribute roughly $107 million per year to recipients and be directed to 970,440 families, according to Justice Center estimates. That works out to an average of $110 per household per year – about $9 a month.
Nine bucks a month might allow the family to split a couple Happy Meals at McDonalds every four weeks, but it won’t go far to make ends meet or “offset” other taxes paid by low-income households.
Indeed, given the complex nature of processing an EITC, the added bureaucratic costs at the NC Department of Revenue might be larger than actual payments to recipients.
According to a 2015 Cato Institute report, the EITC is “so problematic that 39 percent of all IRS audits under the individual income tax are done on EITC filers.”
Not only would the rank of state bureaucrats swell in order to process these credits – costing taxpayers more – but the recipients of the – often paltry – state tax credit would run a high risk of facing greater scrutiny from state tax collectors. This process can become costly and time-consuming, and an especially heavy burden for low-income households.
Moreover, as the Cato study points out, the rules for filing for an EITC “are so complicated that more than two-thirds of all tax returns claiming the EITC are done by paid preparers.” The additional time required for filling out the state EITC forms will increase the amount filers would owe to the tax preparers, which would eat away a portion of the benefit recipients receive.
Moreover, the EITC, like so many government programs, is riddled with fraud. As the Cato report notes, the program’s “(E)rror rate has been more than 20 percent since at least the 1980s. The Internal Revenue Service reports that the EITC error and fraud rate in 2014 was 27 percent, which amounted to $18 billion in overpayments.”
Additionally, the EITC, in spite of its advocates’ claims that it incentivizes work, ends up disincentivizing work of its recipients. Once passing the ‘plateau’ level of income, workers face significantly steep effective tax penalties for earning more income. According to the Cato report “About three-quarters of people taking the EITC are in income ranges where the incentive to increase hours worked is negative.”
This effect prompts many to avoid taking promotions or working more hours which deprives the economy of productive activity and serves to strengthen the welfare trap of the recipients.
Also, the state EITC would impose millions in additional burdens on other North Carolina taxpayers in order to fund it, reducing their incentives to work, invest, and pursue other productive activities.
The net result of the EITC, because of its perverse and negative incentives, would be a less productive economy.
Fewer productive activities is what causes an economy to stagnate – a situation that harms low-income households the hardest.
Does North Carolina really need another welfare program filled with fraud, high compliance costs and paltry benefits that also further disincentives work?
Finally, the discussion that the EITC is needed to offset the high burden that state and local taxes and fees place on poor people begs the question: Why not just lower those taxes and fees instead?
Realistically, once bureaucratic costs and fraud are factored in, the state EITC would end up costing far more than the $107 price tag presented by its supporters. And recipients would not only see a portion of their small benefits eaten up by increased tax preparer fees, they would also face a higher chance of a costly audit.
The EITC would also further solidify the welfare trap for recipients and increase the tax burden on North Carolina’s job-creating businesses and workers, slowing the very economic growth needed to improve the incomes and job opportunities for low-income households.
Like so many other progressive policies, a state EITC would end up harming the very people proponents claim it would help.