Earned Income Tax Credit (EITC): A Hand Up...or a Hand-out?

By Rob Wilkinson,
Contributing Writer: The Local Planet Weekly

There are some that will tell you that the Earned Income Tax Credit (EITC) is the
best thing since baked beans. Spokane citizens got a good feel for that mindset when the EITC was heavily and urgently promoted during last year’s ONE Spokane Conferences to fight poverty, encouraging low-income families to “get what they had coming to them”. I perceived that particular move as a cheap, Mayor John Powers’ “slap-shot” and just another way to weasel-out of, (1) solid economic development, (2) tax base restructuring, and (3) Spokane government “getting what was coming to THEM”, relying on the nearly $10 million in EITC that sits unclaimed by Spokane’s low-income families, thus pouring money back into local government vaults.

Yet others will tell you the EITC is the most abused tax credit system in the
nation. Who’s right?

EITC provides tax reductions and wage supplements for low and moderate income
families. Since 1975, with updates in 1986, 1990 and 1993, and an additional
expansion in 2001, more than 19 million families have claimed EITC - roughly one out of seven taxpayers.

The EITC has been widely praised as a system that, (1) supports employment, and, (2) reduces poverty. Reportedly, some 4.8 million people (including 2.6 million
children) are “removed” from poverty due to the EITC. One of the major questions regarding the “reduction of poverty” is - for how long, which implies that the EITC is nothing but a once-a year temporary Band-Aid, covering up a still festering, existing and ongoing problem: poverty. It has also been noted by critics that the EITC just allows a poor family to play yearly “catch-up”, which reoccurs until either economic stability is achieved…or they have fallen through the socioeconomic cracks.

The EITC has also been touted as an incentive for single moms with children to
return to work…but what kind of work is most often scrutinized. Many single moms with children, if their skills are minimal for today’s labor market, are working in dead-end, low-paying jobs - mainly retail or service-oriented. One might then have to ask: Is the EITC a “buy-out” for single moms, just to put a few tax dollars back into their pockets to keep ‘em smiling, in return for taking low-paying, no benefits and go-nowhere jobs of which Spokane seems to have an abundance of?

The EITC likes to tout its success by bringing up the fact that many states have
also enacted an earned income tax credit on top of the standard federal EITC. It has been reported that seventeen states now offer EITC’s based on the federal tax credit guidelines. Although we’re into tougher economic times, many states have recognized that EITC’s may be helping keep families afloat, even though the programs themselves are in jeopardy due to crunches felt in many state treasuries. In reducing poverty, the EITC’s reportedly “boosts” the family income to above the federal poverty guidelines, thus giving the illusion that another “low-income” family is out of poverty. For example, a family of four, with two children and one year-round worker earning about $7/hr. has total earnings well below the federal poverty guidelines. Such a family, during this tax year, qualifies for an EITC of $4,204 plus a small federal child tax credit, bring the family’s income close to the poverty line.!
If this family lived in one of the states that offered a state EITC, then chances
are they would get another $631…or a total family income that would put this family of four just above the poverty line.

One of the major errors of the above type of thinking is: the federal poverty levels
have no reality basis because economics vary from county-to-county, state-to-state, and the federal poverty guidelines do not take this into account...as proven by
grant-funded research done in 2002 by Dr. Diana Pearce. The poverty guidelines set by the government is a “one size fits all” blanket, which is economically
unrealistic. So, if the above sample family, with income, the EITC’s and additional
child tax credit, makes $18,830 for a family of four, where is this income going to
stretch the most…in King County, or in Stevens County?

Robert McIntyre, of The American Prospect: “Let’s pretend that the government
decided to place bushel baskets full of cash at every street corner, with the
following attached note: Please read the attached instructions and take the
appropriate amount, if any, from the basket. Write your name, address, and the
amount you took on the sign-in sheet. WARNING! We will check one out of fifty names, and anyone we find taking too much will have to give the money back.” Would the federal government do something this inane? Hardly. But they may as well do just that with the EITC, which is one of the largest cash transfers in the government, for low-income families. In truth, about half the people who take money out of the EITC basket do so honestly; the bad news is that the other half takes more than they should.

Overall, the EITC does a fair job at putting money into the pockets of the
low-income families of America. However, because the program is touted for
“rewarding work” and totally dependent upon the worker’s wages, “rewarding work” is only true to a certain degree. For minimum-wage parents, EITC can add up to nearly 40 cents to each dollar earned. On the other hand, as the EITC begins to “fade-out”, it punishes work by imposing a 21 percent added tax on earnings between $14,000 and $34,000. The EITC also imposes strict marriage penalties that no one has seemingly figured out how to resolve.

And the largest of problems: how the EITC is policed.

Since it has gotten so large - maxing out at $4,204 for a family with two children -
lots of people cheat to get the money. Even though Congress has insisted that the
IRS crack-down on the abuses and the IRS has stepped-up the number of audited
claims, the EITC audit rate is still only 2 percent.

It is believed that EITC should still be preserved, but in a modified form so that
endemic cheating is deterred. How to go about that is still unknown, but a solution
should be found soon so that the money actually goes to those families who really
need it – and NOT to the cheaters...nor money-hungry local governments. Perhaps
there’s a Federal agency that would be more adept at managing the program, before the cheating gets so out of hand that EITC loses all support and then will be
unavailable to anyone.

Hopefully that won’t happen.

Submit Article