Tax Credit Rewards Work, Boosts Local Economy
Beckley Register-Herald - Low wages and low-labor force participation are two of the biggest economic challenges facing West Virginia. Not enough West Virginians are working, and too many of those working are paid low wages and have trouble staying above water. Story link.
Those who do find work not only face low wages, but also deal with an upside down state and local tax system. Low- and middle- income families in West Virginia pay a larger portion of their incomes in state and local taxes than wealthier families. For example, on average, families with earnings of $16,000 a year pay 8.7 percent of their incomes toward state and local taxes, while those in the top one percent – making on average $675,800 a year – pay 6.5 percent.
Federal tax reform did little to change this situation, with the majority of the benefits going to the wealthy. The wealthiest one percent of West Virginians received 37 percent of the tax cuts passed by Congress and signed by President Trump, receiving an average tax cut of $28,120, compared to an average tax cut of $430 for middle class West Virginians. A recent analysis found that West Virginia benefited the least from President Trump’s tax reform.
The Trump tax cuts were a missed opportunity to reform our tax system in a way that helps working families, while encouraging and rewarding more work. West Virginia could make such a reform by creating a state Earned Income Tax Credit.
Enacted in 1975, the federal Earned Income Tax Credit (EITC) is a refundable tax credit (often referred to as a “wage supplement”) for low-income working families that is designed to encourage and reward work, offset payroll and income taxes and reduce poverty.
The federal EITC is a credit against federal income taxes that boosts the wages of low- and moderate-income workers and, in doing so, encourages people to keep working, decreases their need for public benefits and helps them move toward the middle class. The credit is refundable, meaning that working families get to keep the full value of the credit they earn even if it exceeds the income taxes they owe. In doing so, it helps offset the other taxes people pay even if they owe little or no income tax – like sales, gas and property taxes.
The amount of the EITC depends on a family’s income, marriage status and number of children. The credit’s value grows to a certain threshold, with the largest credit going to parents making about $10,000 to $23,000 a year, who can receive a credit of up to $6,242. The value of the credit gradually phases out as workers earn more and is fully phased out at incomes between $39,000 and $53,000. The unique structure of the EITC avoids a cliff effect by supporting the neediest families in the state as well as those who have begun to improve their financial security.
In West Virginia, approximately 157,000 tax filers (21 percent) received $351 million in federal EITC benefits in 2014 with an average EITC credit amount of $2,241.22. The vast majorityof EITC benefits in West Virginia went to workers with children: 70 percent of tax filers who claimed the EITC had at least one child, while 93 percent of the $347 million in benefits went to tax filers with children. Overall, more than 412,000 West Virginians live in an EITC-eligible household, including more than 174,000 children.
The income boost provided by the EITC, along with the federal Child Tax Credit, reduces the economic struggles that thousands of West Virginia families face. Together, the credits lifted, on average, 38,000 West Virginians out of poverty each year from 2011 to 2013, including 18,000 children. Children in struggling families receiving the EITC experience several benefits because their basic needs are met. And this, in turn, strengthens West Virginia’s future economy. For example, children in families who receive the EITC have been found to have higher elementary school test scores, higher rates of high school graduation and college attendance and higher earnings as adults.
The EITC also boosts local economies by putting more money in the pockets of those who earn low wages and who are most likely to spend their money in their community, creating a ripple effect throughout the economy. Various studies have shown that the federal EITC has a large economic “multiplier effect,” with every $1 of EITC realized by local taxpayers, between $1.07 and $1.67 worth of local economic activity is generated.
Recognizing the considerable valueof the federal EITC, 29 states and the District of Columbia have enacted EITCs. State and local EITCs provide an additional boost for taxpayers who already receive the federal EITC. Only taxpayers who are eligible for the federal credit receive the state credit, and the state EITCs are typically claimed as a percentage of the federal credit’s value. State EITCs range from 3.5 percent to 40 percent of the federal credit.
A West Virginia EITC would cut taxes for those who need it most: low-wage workers. Unlike simply reducing tax rates, which disproportionately favors the wealthy, the EITC cuts taxes from the bottom up, rather than the top down. By enacting a state EITC, West Virginia would build upon the positive aspects of the federal credit, which include helping reduce poverty, improving the workforce and increasing tax fairness. A West Virginia EITC set at 15 percent of the federal credit would put an estimated $46.9 million annually into the pockets of about 141,000 working households, including about 162,000 children. If a family earned a $3,000 federal credit, it would also receive a $450 state credit.
West Virginia has the opportunity to be the 30th state to build on the undeniable success of the federal EITC of encouraging work, reducing the struggles of low-income families and building a better future for children. A West Virginia EITC would help hard-working families in about 141,000 households from every part of the state make ends meet by reducing the substantial share of income they spend on state and local taxes.
Sean O'Leary is a senior policy analyst at the West Virginia Center on Budget and Policy.