State Earned Income Tax Credit: Good or Evil?

No matter how big the pie is, it’s never big enough.

At a time when the state is gearing up to tackle a $3.5 billion deficit through increased taxes, is it appropriate to enact a state tax credit that could put money into the pockets of people who may not necessarily be paying taxes?

Last tax year, 203,716 Connecticut residents received roughly $1,944 per head in federal earned income tax credit (EITC). That amount, which totaled $396.1 million in 2010 according to the Internal Revenue Service, is expected to inch steadily upward each year.

Now, politicians and poverty alleviation groups are rallying to support a proposal incorporated in SB 1107 – “An Act Concerning the Governor’s Recommendations on Revenue,” which is awaiting action from the finance, revenue and bonding committees. The proposal calls for a state EITC in the 2011-12 Connecticut budget, set at 30 percent of the federal EITC. Currently 25 states offer EITC. 

Rep. Geoff Luxenberg, D-Manchester, in a recent press release, said: “I can’t think of a better way to provide help to low-income families in Connecticut. When you’re always concerned about where the money will come from to maintain your household, any extra help you receive is critical.”

Unlike during the previous administration led by Republican Gov. M. Jodi Rell, the current proposal has the backing of Democratic Gov. Dannel P. Malloy and the Connecticut General Assembly Democrats. Interestingly, the federal EITC was enacted in 1975 under a Republican government led by President Gerry Ford, and strongly supported by the fiscally conservative President Ronald Reagan.

According to the statement from Rep. Luxenberg, 13,617 families in Manchester benefited with an average federal return of $1,660 in 2007.

“A state EITC would reward people in Manchester working hard to support their families,” he said. “It would dovetail with the federal EITC already in place.”

In a campaign launched on April 12 on Facebook, the Connecticut Alliance for Basic Human Needs urges residents to sign a letter to the governor and the legislature in support of the proposal.

The page said: “Working families can qualify for the federal EITC with incomes up to $49,362, the same threshold to be used for a Connecticut EITC. Working families with incomes between $11,500 and $16,000 benefit the most. A state EITC set at 30 percent of the federal level would provide a $1,725 credit for a family of four earning $16,000 per year. This is a significant work incentive for low-wage workers. It would also substantially boost the income of low-wage families and reduce child poverty, as the federal EITC has done.”

Thomas Scanlon, CPA, FCP at the accounting firm Borgida & Co. in Manchester, said the federal EITC has been successful in helping low-income families nationally. 

“According to the Center on Budget and Policy Priorities, EITC is the largest poverty reduction program in the U.S. The EITC lifts more children out of poverty than any other single program or category of programs,” he said.

That’s a compelling argument. The other side of it is that there is no such thing as a free lunch. Those that oppose the proposal question whether it is fair for others to bear the financial burden. 

“In an ideal world, we would certainly like to help low-income families. But this is not the time for the state to invest upward of $100 million each year with a $3.5 billion deficit,” Rep. Christopher Davis, R-East Windsor, said.

“Besides, only 6 percent of my district will be eligible for the state EITC, if passed. How do I justify the proposal to the rest of my people?” he asked. Davis’ district also includes Ellington.

Not all Democrats are jumping in with both feet. Some are taking a cautious approach.

“There is a lot of debate on this proposal. I am still studying it, trying to ascertain whether any such tax will ultimately be passed on to taxpayers, which would be worrisome to me,” Rep. David Baram, D-Windsor, said. “Testimony is divided on this issue and I am seeking to find an honest answer.” 

Deb Prior, a tax consultant and owner of Liberty Tax Service franchise in Manchester, said given the state’s budget constraints, the proposal did not seem like a good idea. Further, she pointed out that the tax credit opens up a can of worms.

“While putting more money in the pockets of low-income families will increase the quality of their lives, some people will purposely keep their earned income low so they can qualify for the EITC. It has happened at the federal level,” she said. “Plus we’ll all end up paying more taxes to fund this program.”