Budget Crisis Clips Credit For Working Poor (Oklahoma Watch)

By Warren Vieth and Mark Lash

In their final rush to contend with Oklahoma’s budget crisis, state lawmakers have voted to curtail a tax credit described by advocates as one of the best programs ever devised to help the working poor.

The measure to eliminate the “refundable” portion of Oklahoma’s earned income credit would reduce the income of about 200,000 low-income households by $147 a year on average, according to a recent data study.

Senate Bill 1604 was approved 30-11 by the Senate on Monday and by the House 51-45 early Friday. It awaits only Gov. Mary Fallin’s signature to become law.

A data analysis by the Institute on Taxation and Economic Policy shows that the measure would eliminate Oklahoma’s credit for about 130,000 households, reduce its benefits for about 70,000 and leave it untouched for another 130,000.

For households with three or more children, the loss could be as much as $312 a year and could reduce their annual income by up to 2.3 percent. The reduction would affect about 1 in 10 households that file individual tax returns in Oklahoma.

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Clashing Assessments

Safety net advocates denounced the measure as an unfair attempt by lawmakers to bridge part of the state’s $1.3 billion budget gap on the backs of the working poor.

“It’s one of the most valuable antipoverty programs on the books today,” said Carl Davis, research director of the Institute on Economic Policy and Taxation. “This is very much a tax credit designed to benefit working families.”

The Oklahoma Policy Institute, a Tulsa-based research group that supports government safety net programs, said in a statement that lawmakers who voted to curtail the credit “have made a deplorable decision.” OK Policy has spearheaded state-level opposition to SB 1604.

Lawmakers who supported it said it is only one element in a package of revenue bills that also require wealthier Oklahomans and businesses to give up some of the tax cuts and incentives they have received in recent years.

“We’re trying to create a well-balanced strategy,” said Senate Finance Committee Chairman Mike Mazzei,” R-Tulsa.

Former Gov. Frank Keating, who signed Oklahoma’s earned income credit into law 15 years ago, said he still supported the refundable credit.

“I have long felt that the refundable tax credit made sense because it provided an aggressive lift to the poor,” Keating said in a written response to a reporter’s question.

“If it is axed as part of a budget deal which saves essential health and welfare assistance for the elderly and disabled poor, that might make sense. But the devil, as always, is in the details,” said Keating, now a partner in the Washington law firm of Holland & Knight.

That kind of reasoning doesn’t sit well with Tammy Greenman of Oklahoma City. Greenman, 45, said she and her husband received an earned income Credit of $152 from the state this year. They put their refund in a savings account to pay health premiums for their 15-year-old son, Nic, who is covered under an individual policy.

“We’re on a tight budget. I have to really plan out months in advance of doing anything,” said Greenman, who helped organize a rally at the state Capitol on Thursday to oppose the tax credit reduction and other safety net cuts.

“This tax return helps pay for my child’s health care, which is outrageously expensive,” she said. “Every little penny helps us make sure that he is covered for the whole year.”

How the Credit Works

Oklahoma’s refundable credit is the little sister of the federal earned income credit, enacted in 1975. Taxpayers who receive the federal credit automatically qualify for the state credit, which is equal to 5 percent of the amount claimed on IRS returns.

At least one adult in the household must have a paying job to qualify.

The amount of the credit is based on household income and number of dependents. For a married couple with two children, the maximum credit goes to those earning between $13,850 and $23,650. It phases out gradually at higher income levels, reaching zero at an earnings level of $49,974 for households with two kids at home.

If a household has enough earnings to have a year-end income tax liability, the credit reduces taxes owed dollar-for-dollar and refunds any remaining credit as a cash payment.

Income Tax Form 2

Why Lawmakers Acted

The cash payment is the portion of the credit that lawmakers just voted to eliminate. Doing so will reduce next year’s budget shortfall by an estimated $29 million. The state could then use that money to fund core services instead.

Finance Committee Chairman Mazzei said that’s what he and other legislative leaders are attempting to accomplish through a series of revenue-raising measures during the final days of the session.

Mazzei said the pain would not just be felt by the poor.

Another measure headed to the governor would eliminate the state’s “double deduction” of state income tax payments for taxpayers who itemize deductions.

That bill would raise $97 million a year, mainly from higher-income taxpayers who enjoyed several reductions in the top income tax rate over the past 12 years. (The most recent cut in the top rate trimmed state tax collections by $147 million annually.)

Businesses are being asked to give up about $160 million a year in tax credits and rebates, Mazzei said. One measure would cap a rebate program for producers of low-volume oil and gas wells at a savings of up to $133 million next year.

Data Analysis

The analysis of Oklahoma’s earned income credit legislation was done by researchers at the Institute on Taxation and Economic Policy, a Washington-based think tank that specializes in the distributional impact of federal and state tax policy.

ITEP Research Director Davis said the change would eliminate more than half of the state’s counterpart to a nationwide safety net program that has proven remarkably effective at reducing poverty for people willing to work.

Of the 26 states that offer state-level credits to people who qualify for the federal credit, Oklahoma already has one of the lowest matching rates at 5 percent, Davis said. Maryland, by contrast, offers a 25-percent match for the refundable portion of its credit, and a 50-percent match for the nonrefundable portion.

Part of the rationale for the credit is that it can help offset other taxes, especially at the state and local level, Davis said. “Some of its best value comes in helping to mitigate the sales taxes being paid on groceries and toiletries and nonprescription drugs and everything else,” he said. “It adds some balance.”

Credits vs. Refunds

Yet in the view of some lawmakers and policy analysts, there is an important distinction to be made between the refundable and nonrefundable parts of the credit.

Enactment of SB 1604 is not the same thing as a tax increase, they said, because the refundable portion funnels cash payments to people who owed no state income taxes in the first place.

“Oklahoma taxpayers through their state taxes and their federal taxes are quite generous when it comes to providing support for housing costs, for free health care services, for the expenses of daily living,” Mazzei said.

“But when we have to fund core services that are important to everybody, we can’t afford direct cash payments to people who don’t owe any income taxes at all,” he said.

Jonathan Small, president of the free-market-oriented Oklahoma Council for Public Affairs, said his organization has taken no official position on the earned income credit, but thinks passage of SB 1604 was reasonable.

“I don’t think it’s political. I think you’ve been seeing a bipartisan wish to depart from the government paying subsidies through the tax code,” Small said. “To the extent that you’re essentially causing other taxpayers to pay a direct subsidy to somebody else, that’s a justified reform.”

Budget Crisis Clips Credit For Working Poor

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