NJPP Monday Minute 6/7/10: EITC Helps the State and Working Families

Budgets are about priorities so it is surprising that a Republican governor like Chris Christie would propose cutting a benefit that rewards work, avoids welfare and cuts taxes. Yet that is the impact of his recommendation to reduce the state Earned Income Tax Credit (EITC) by 20 percent.

The EITC is a federal and state program that helps low wage working families make ends meet. State EITCs are calculated as a percent of the federal credit. Nearly half a million struggling working families with children receive this credit. For a parent raising two children working in a full time minimum wage job ($15,000 a year), Gov. Christie's budget proposal would reduce the family's state EITC credit by about $300. The total loss to these struggling households from this policy recommendation is a staggering $45 million.

The driving force behind the governor's proposal to cut the state EITC is budget savings-but those may be questionable because of the impact of those cuts on the amount of federal funds New Jersey receives to support low wage workers. The US House of Representatives has passed legislation that includes the extension of TANF Emergency Contingency funds. If this legislation becomes law, New Jersey would receive up to $120 million in new federal funds in FY 2011. With Senators Menendez's and Lautenberg's help, the Senate could approve these funds soon. But if the state EITC appropriation is cut in this year's budget, the state could lose money because the amount the federal government gives the state is based on how much the state has increased funding for benefits to low-income families since 2007.

Beyond budget savings, the administration is supporting its decision to cut benefits by saying, "New Jersey's benefit is one of the most generous in the country. At the reduced rate, New Jersey will be more in line with the average benefit in the 22 other states that offer the credit." Unfortunately this statement misses the point of the state EITC.

New Jersey's EITC is currently set at 25 percent of the federal EITC, making it sixth highest among the 23 states with their own EITCs. States calculate their credits as a percent of the federal EITC which is available to families and individuals with incomes up to $48,000 to reduce the taxes they owe. For most of these households the federal credit is also "refundable"-meaning that even if they do not owe taxes, they still receive a refund. The purpose of this policy is to compensate low-income families for the federal payroll taxes (social security etc) they pay.

States have enacted their own EITCs for a variety of reasons, including the impact of state and local taxes on low income families. More important than taxes, however, is how much it costs to live in different states. New Jersey's cost of living is fifth highest in the nation, exceeding Minnesota, Vermont, Maryland and New York even though all of these states have higher state EITCs than New Jersey. Parents in low wage jobs who have children cannot make ends meet with New Jersey's high child care, housing, health insurance, and transportation costs now-and most of these will become even less affordable when the effects of the cuts and program cost increases in Gov. Christie's budget take place.

The impact of EITCs is to encourage people to work. Without the subsidies provided by the EITC, it makes more economic sense for low-income families not to work and instead go on welfare. Welfare subsidizes many of the costs to raise children but it doesn't lead to a strong work ethic.

A recession--when people are struggling to make ends meet and are worried about losing their jobs--is the wrong time to cut supports to working families. Many families who were living a middle class life style have fallen on hard times been forced to take lower wage or part time jobs, and that's if they have been lucky enough to find them. But basic expenses, like housing, do not go away. These folks need public support from the state to maintain their independence until the economy improves and they can regain their standard of living.

It is the wrong time to cut the state EITC for yet another reason. Increases in the federal EITC that took effect last year in the American Recovery and Reinvestment Act will end this year unless Congress extends them. The expansion of the Child Tax Credit to the poorest working families is also scheduled to terminate. A parent working full time for the minimum wage and raising two kids, would have their child tax credit reduced from $1,725 to $250, causing increased hardship to that family.

The disparity between the wealthiest and the poorest in New Jersey has been growing at an alarming rate. The state EITC helps address New Jersey's rising income inequity which has been growing at the ninth highest rate in the nation for the last two decades. During this time, the wealthiest five percent of New Jersey households have seen their incomes grow by 91 percent while those in the bottom 20 percent have seen only a 10 percent increase. In 2008, households in the top five percent (who earned an average of $412,476), earned 26 times the average amount earned ($15,705) by the lowest 20 percent.

Despite this, the governor refuses to reinstate the 2009 tax rates on those earning over $400,000 at the same time as he is essentially proposing a tax hike for lower income working families by cutting the state EITC. If the legislature is unable to override the governor on this issue, the economic divide between the "haves and have nots" will only further increase in our state.