Step Up coalition’s new tax credit is a poor substitute for restoring the EITC

Just a few weeks ago, the Step Up Oklahoma coalition announced their plan for a variety of tax increases and reforms to resolve some of Oklahoma’s long-standing budget problems. Since then, the proposal has attracted support from a broad range of groups representing different parts of Oklahoma’s private and public sectors, and House leaders have promised that they will vote quickly on the package.

Several of the revenue ideas in the Step Up plan have been discussed in Oklahoma for years. The plan includes well-vetted ideas like increasing the cigarette tax to raise revenues while reducing smoking, increasing the gas tax which hasn’t been adjusted for inflation in three decades, and partially rolling back Oklahoma’s unnecessary tax breaks for oil and gas drilling. However, the plan also includes changes like a first-of-its-kind production tax on wind energy and a complex set of changes to the income tax that haven’t been nearly as well-vetted.

The income tax changes have been introduced in special session as HB 1037. Among these changes is the creation of a new tax credit for low and moderate-income Oklahoma families. The credit would be provide:

  • Up to $70 for households with incomes less that $16,000
  • Up to $65 for households earning $16,000 to $32,000
  • Up to $50 for households earning $32,000 to $50,000

The credit would be nonrefundable, so families would not be eligible for the full value if their income tax payment is reduced to $0.

An analysis prepared for OK Policy by the Institution on Taxation and Economic Policy shows that this new credit would cost about $28.4 million in state revenues. Interestingly, that is almost precisely what it would cost to undo cuts to the state Earned Income Tax Credit made by Oklahoma lawmakers in 2016 ($28.9 million).

It’s unclear why the Step Up coalition wants to create a whole new credit instead of restoring the EITC. However, it’s a bad trade for several reasons.

Unlike the EITC, the new credit would create “tax cliffs” that penalize work and marriage

Both state and federal Earned Income Tax Credits are designed to encourage and reward work among families at lower income levels. To help make work pay, the EITC grows with each dollar of income until reaching its maximum value. Then as families continue to earn more, the EITC gradually phases out so there is never a point where earning another dollar would mean losing substantial income.

The credit proposed by the Step Up coalition would not work that way. Instead, it would add several new “tax cliffs” into our tax code, where earning one dollar more could result in big costs for a family. The problem is compounded because the Step Up coalition’s credit fully phases at out $50,000 in income, just like Oklahoma’s already existing Sales Tax Relief Credit of $40 per household member. That means a family of three making $50,000 a year would be eligible for $170 in credits ($120 from Sales Tax Relief Credit and $50 from the new credit). But if this same family makes $50,001, they get nothing. We will have increased incentives for workers to turn down a raise or work fewer hours.

Under the language filed for HB 1037, income limits for the new credit would also be the same for single filers as for joint-filing married couples. That adds a new marriage penalty into the tax code, where two single adults each earning $30,000 can claim $130 in credits while a married couple earning $60,000 can claim $0.

The new, nonrefundable credit would do little to nothing for the families who need it most

An important component of the federal EITC, and formerly the state EITC, is refundability. That means families are eligible to receive the full value of the credit as a tax refund, even if their income tax payment is reduced to zero. Refundability is critical to the success of the EITC because it allows the credit to reward work and support families all the way down the income scale. Even those families who aren’t paying income taxes are paying federal payroll taxes and state sales taxes, and many are paying property taxes as well. In fact, the lowest income fifth of Oklahomans who typically aren’t paying income taxes are still paying the highest share of their incomes in state and local taxes because sales taxes take such a big bite.

These families who were hurt most by the Legislature’s decisions to make the state EITC nonrefundable will not be made whole by the new credit. Many won’t receive any benefit at all. Thousands of families who need the most help to pay for basic living expenses would once again be left out.

A restored EITC would be easier to administer

Finally, the creation of a new tax credit with standards for eligibility different from anything else in the tax code could be significantly more costly to administer. It would require new eligibility rules, a new form for applicants to fill out, and new outreach and publicity efforts to let people know that they qualify. The state EITC doesn’t have those problems — because it is worth 5 percent of whatever families receive from the federal EITC, almost all of the administrative cost is already covered by the federal government. That means nearly every dollar Oklahoma spends on the EITC goes directly to working families in need of help.

The EITC is a proven policy

A large body of research shows that state and federal Earned Income Tax Credits have numerous benefits for working families — they lift millions out of poverty, boost employment and earnings, and create benefits that extend across generations. The EITC has been shown to be associated with better maternal and infant health, better school performance among children, increased college enrollment, and higher earnings by the next generation. Oklahoma doesn’t need to reinvent the wheel with a whole new tax credit for working families — we already know what works.

The bottom line

For a similar cost, restoring refundability of the state EITC would avoid disincentives to work and marriage, provide more help to the families who need it most, and be less expensive to administer than the new credit suggested by the Step Up coalition. We’re glad to see Step Up leaders have joined the consensus that Oklahoma needs new revenue for services, and many of their ideas have merit. But lawmakers must still perform the due diligence of assessing ideas suggested by any outside group, including Step Up.

Restoring the EITC would make for better policy than the new credit suggested by Step Up — and with the EITC’s long history of bipartisan support, it should make the whole package more politically palatable, too. Oklahoma faces many difficult budget challenges in 2018, but this is one fix that should be easy.

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Gene Perry worked for OK Policy from 2011 to 2019. He is a native Oklahoman and a citizen of the Cherokee Nation. He graduated from the University of Oklahoma with a B.A. in history and an M.A. in journalism.

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