Brookings study urges changes for Earned Income Tax Credit

from The Buffalo News

By Jonathan Epstein

More than 38,000 low-income Western New York workers could get an additional $22.6 million from the federal government if Congress adopts a proposal to triple their benefits under a popular refundable tax credit, according to a new report released today.

The analysis by the Brookings Institution found that expanding the Earned Income Tax Credit for the very low-income workers without children would boost benefits by nearly 15 percent in the Buffalo area.

That’s the fourth-largest gain among the 100 largest cities nationwide, the report said.

“That’s pretty amazing,” said Diane Bessel, director of the Creating Assets, Savings and Hope Coalition, an arm of United Way of Buffalo and Erie County that promotes the EITC to reduce poverty and sponsors free tax preparation for low-income consumers. “It would have a big benefit here. I would really love to see it happen.”

Other proposals by presidential candidates and lawmakers would have lesser effects here, but would still be significant, Brookings said. Allowing second earners in a low-income married couple to exclude half of their income when calculating the tax credit would give $6 million in extra cash to 8,905 taxpayers locally. That’s a 4 percent increase in benefits.

And creating a larger tax credit for working families with at least three children, who can’t get extra benefits currently, would help 14,393 tax filers in the area with an additional $12.5 million. That’s an 8.2 percent increase, the report said.

Combining all three would generate $41.9 million extra for 60,025 taxpayers here. That’s a 27.7 percent increase in benefits — ranking Buffalo No. 34 nationally, Brookings said.

The report supports passage of all three proposals, and calls for the government to provide the payments throughout the year — such as in four quarterly installments — instead of in one lump sum so it can help struggling families make ends meet.

“The EITC is widely regarded as a success story for working low-income Americans,” researcher Alan Berube said. “However, the EITC could do much more for certain groups of low-wage workers. Making these expansions would help close the growing gap between wages and costs of living.”

The report by the Washington- based think tank’s Metropolitan Policy Program represents an attempt to quantify the impact of several proposed changes to the EITC, a federal credit that not only offsets taxes but can be refunded to inject money into the hands of low-income workers who need it.

The anti-poverty initiative for low-income individuals and families was first introduced in 1975, and was expanded several times over its first 20 years. It’s supported by both Democrats and Republicans because it is only available to workers — giving people an incentive to work.

It also stimulates local economies, especially in metropolitan areas where 60 percent of recipients live. And it’s been copied by 16 states.

The maximum credit is $4,800, and more than 22 million families nationwide claimed $43 billion in 2006. In all, more than $500 million has been given out since 1975.

However, the last significant change was in 1993, Berube said. That’s when the size of the credit roughly doubled over two to three years, making it more generous for families with children and creating the credit for workers without children.

But the childless EITC tops out at $438 for workers earning $5,700 to $7,200. That’s just one-tenth of the maximum EITC. The refund is smaller for those outside that income range, with those earning $13,000 getting nothing.

There’s also a “marriage penalty” within the EITC, where a married couple gets a smaller credit than two parents filing separately. And there’s no extra benefit for families with three or more children despite higher living expenses.

Democratic presidential candidates Sens. Barack Obama and Hillary Rodham Clinton proposed changes, and bills were introduced in Congress, including by powerful Democratic Rep. Charles Rangel of New York, chairman of the House of Representatives Ways & Means Committee. Republican presidential candidate Sen. John McCain hasn’t spoken out.

Rangel’s bill would triple the childless credit to $1,313. It would also raise the cap on income eligibility from $13,000 to about $19,000 before the credit disappears, Berube said. About 7.1 million people nationwide would get $4 billion.

Allowing a “marriage earnings deduction” would let couples with one child earn nearly $50,000 and still get a credit, up from $37,000 now. With two children, they could earn up to $55,000. About 3.3 million people would get $2.3 billion.

Finally, creating a credit for larger families would boost the maximum credit for them by $1,500. That would give 4.8 million people $4.3 billion.