Restoring the Earned Income Tax Credit is necessary and overdue

When the Legislature ended Oklahoma’s Earned Income Tax Credit (EITC) refundability in 2016, they reduced an essential tax benefit for over 200,000 Oklahoma families. Prior to that change, if the amount a family received from the EITC was larger than the amount of state income tax they owed,  that family got the difference as a refund. Now, families can claim the credit only up to the amount they owe in state income taxes. Families use these refunds to meet basic needs like food and housing, and to pay off traffic tickets, court costs, and other debts.  By ending refundability, we’ve raised taxes – as much as $279 – on those who can least afford it, low-income parents raising children.

It is time for Oklahoma to restore our EITC in the next legislative session. After that important first step, we can begin plans to increase the amount of the Oklahoma EITC.

Low-income Oklahomans get less benefit from the state EITC than in most other states

Of the 42 states with income taxes, two-thirds (29) have EITCs. The federal government created the first EITC. As states added their own credits, most states made them a fixed percentage of the federal one, to make it simpler for the state and the taxpayer.  Oklahoma’s EITC is five percent of the federal credit. Only Montana has a lower credit than Oklahoma. We are one of just four states where the credit is not refundable, and the other three of those states have credits that are four to six times larger than Oklahoma’s. 

The chart below compares the Oklahoma EITC to the median (half above and half below) value of other states’ EITCs. Because EITCs vary by family structure and the number of children, the chart compares four family scenarios, which are described below the chart. In all scenarios, Oklahoma’s EITC is less than one-third of the median of other states. Simply raising Oklahoma’s EITC to the typical national level would return an additional $433 to a married couple with a child making just under $20,000, and about $300 to other families with children.

Scenario A B C D E

Parent(s)

Single

Married

Married

Married

Married

Children

1

1

1

2

3

Earned Income

$26,500

$19,475

$29,800

$39,450

$41,500

Oklahoma’s low-income families face the same struggles as those in other states. They deserve the same generosity here that they would get in South Carolina, Illinois, or any of the 23 other states which have more valuable credits than Oklahoma. In 2017, three states created EITCs, three expanded existing credits, and two made credits available to more taxpayers. In 2018, six states expanded their EITCs and another made theirs refundable. This year, six more states expanded their EITCs. All but one of these states had a credit larger than Oklahoma’s before this round of increases. 

For low-income Oklahomans, Oklahoma is not a low-tax state

Oklahoma has the fifth highest taxes for the lowest 20 percent of earners, according to the Institute for Tax and Economic Policy (ITEP). The average low-income household in this group (earning $12,000 or less), pays 13.2 percent of their income, or $1,584 per year, in state and local taxes. Those in the highest 20 percent by income, on the other hand, pay just 8.2 percent of their income in state and local taxes.

This makes our tax system among the most regressive in the nation, meaning that low-income taxpayers pay a higher share of income in taxes than their higher-income neighbors.  According to ITEP, this results from Oklahoma’s high reliance on the sales tax, charging the full sales tax rate to groceries, and applying the five percent top income tax rate to low-income taxpayers. 

Oklahoma recently moved up to 9th place on ITEP’s “Terrible 10 Most Regressive States.” In 2015, the lowest income Oklahoma taxpayers paid 10.5 percent of their incomes in taxes, much less than the current 13.2 percent. 

EITCs help states cushion the regressive nature of state taxes, a particular concern in Oklahoma. Refundability has the most impact on regressivity by offsetting most or all state income taxes for those with the lowest incomes.

Restoring refundability is a necessary and overdue first step

The EITC has enjoyed strong bipartisan support at both the national and state levels. Many factors help explain this support, including the fact that the credit encourages work and reduces poverty. Further, the EITC improves mothers’ and children’s health

Efforts to restore refundability failed in the 2018 and 2019 sessions, even though the cost – under $30 million – was dwarfed by the $1.8 billion in general revenue growth in the last two years. Oklahoma can afford to restore refundability in 2020 and is overdue in doing so. Once we take that important first step, it will be time to follow the lead of other states by increasing the state Earned Income Tax Credit.

ABOUT THE AUTHOR

Paul Shinn

Paul Shinn is a Budget and Tax Senior Policy Analyst with OK Policy. Shinn has held budget and finance positions for the Oklahoma House of Representatives, the Department of Human Services, the cities of Oklahoma City and Del City and several local governments in his native Oregon. He's also taught political science and public administration at the University of Oklahoma, University of Central Oklahoma, and California State University Stanislaus. While with the Government Finance Officers Association, Paul worked on consulting and research projects for the U.S. Environmental Protection Agency, the U.S. Department of Transportation, and several state agencies and local governments. He also served as policy analyst for CAP Tulsa. He holds a Ph.D. in Political Science from University of Oklahoma and degrees from the University of Oregon and the University of Maryland College Park. He lives in Oklahoma City with his wife Carmelita.

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