Setting the Record Straight

By Rob Schofield

A hot topic of debate in North Carolina policy circles these days is the question of whether to adopt a state earned income tax credit (EITC). Analysts at the N.C. Budget and Tax Center (and its parent organization, the N.C. Justice Center) have long touted a state EITC as an extremely simple and efficient way to put more money in the pockets of the working poor. Recently, they released a pair of reports that explained the EITC (and why a state version would benefit thousands of low income North Carolinians) and responded forcefully to some of the criticisms leveled at the idea.

Among the key findings:

• The federal EITC is one of the nation’s most effective anti-poverty tools. A state version set at 10% of the federal credit would further its impact by providing nearly $134 million in annual tax reductions to working families.
• A state EITC would improve the state’s overall tax fairness – something that’s currently skewed dramatically in favor of the wealthy.
• A state EITC would have very low administrative costs – less than 1% of the total program cost.
• Contrary to the assertions of those who have urged scaling back the EITC proposal to 5% of the federal credit, state EITC recipients under a 10% credit would NOT receive a credit larger than the amount they pay in total state taxes. 

 
New Attacks
Notwithstanding the compelling evidence presented by the Budget and Tax Center, new EITC critics have emerged in recent days on the ideological far right. On Monday of this week, the John Locke Foundation released a brief “Spotlight” report that attacked the idea of a state EITC. According to the publication,     

“The Federal Earned Income Tax Credit (EITC) has helped single mothers escape poverty, but it has penalized married parents and is plagued by misunderstanding and fraud. A state EITC at five percent of the federal level would cost $66 million with the same problems but less impact. State tax credits should address problems in the federal tax code, such as the penalty against middle class parents who do not qualify for means-tested programs or against individuals who do not purchase health insurance through their employer. The state child tax credit addresses the former and a health insurance purchase tax credit would address the latter problem.”

At the bottom of page one and top of page two, the report goes on to quote “A 2006 GAO report to Congress” to support its contention that the EITC is fraught with abuse and a major source of improper government payments.

Setting the Record Straight

The Locke Foundation report (written by staffer, Joseph Coletti) contains multiple errors and inaccurate or misleading assertions.

#1) As one can readily discover by clicking on the link above and reading the cited Government Accounting Office document, the language quoted by Coletti about fraud and abuse is not from the GAO but from the questions posed to GAO by an arch-conservative Senator (Tom Coburn, R-Okla.). The GAO does not find that the EITC needs a “complete overhaul.” Again, those are Coburn’s words.

#2) Coletti alleges that 28% of EITC payments are improper. This is also wrong – the actual number was 25.5%. Moreover, this figure includes both overpayments and underpayments to taxpayers. It’s also worth noting that Congress enacted new rules in 2002 that dramatically improved the incidence of honest mistakes and fraudulent EITC claims. In 2003, the EITC accounted for only 2.8% of uncollected federal taxes.  

#3) The Locke Report asserts that “the federal EITC is extremely complicated.” Like all tax laws, the EITC could be made simpler. Many of the complicating factors, however, are a function of the desire to assure that taxpayers do not make improper claims. It’s also worth noting that the IRS promotes a vibrant network that provides free assistance for lower income and elderly people to aid them with filing accurate tax returns. More importantly, whatever the challenges of the federal version, a state EITC would add no confusion as it would merely “piggyback” on the federal credit.

#4) Although it never really deals with the issue again, the Locke report alleges in the executive summary that the EITC “has penalized married parents.” This is a somewhat misleading statement. Yes, it is true that EITC at one time provided notably less generous treatment to married taxpayers. Ever since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, however, this “penalty” has been phasing out. Even before that time, according to one the experts cited in Coletti’s report, the old system had no clear effects on marriage patterns.

#5) Neither of the report’s suggested alternatives (a new state health insurance credit and a new child tax credit) is a viable substitute for an EITC. The point of an EITC, after all, is to provide targeted tax reductions to low income people. Both of his alternatives would spread tax benefits to people of all incomes. Coletti’s idea of paying for the enormous cost of his health insurance credit ($500 million) by slashing Medicaid and the Health Choice children’s health insurance program is a counter-productive and even mean-spirited idea. It’s not surprising that he never specifies which Medicaid and Health Choice services and recipients he would eliminate.

#6) The suggestion in the report that a state EITC has been rendered unnecessary as a result of the recent bump in the state minimum wage and that groups supporting an EITC are doing so “because the minimum wage is not efficient at improving the welfare of families” is simply and demonstrably untrue. The minimum wage hike was great for working families, but far from enough to get the job done. Advocates support a state EITC in addition to the minimum wage because they understand that it will take action on many fronts to improve the fairness of our economy.       

The Bottom Line: The emergence of right wing opposition to the EITC is perplexing. The EITC has been around for more than 30 years and has enjoyed strong support from leaders across the political spectrum as a work incentive and contributor to tax fairness. Ronald Reagan once called the EITC "The best anti-poverty, the best pro-family, and the best job creation measure to come out of Congress." He also described it as “what America is all about.” If North Carolinians pay attention to the facts, it seems likely that opposition of the kind included in the Locke report will remain confined to the state’s ideological far right. 

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This entry was posted on Thursday, February 22nd, 2007 at 9:45 am and is filed under Setting the Record Straight. You can follow any responses to this entry through the RSS 2.0 feed.