In all of the major income tax proposals this year (including the plan announced yesterday by Senate Republicans), the Earned Income Tax Credit (EITC) has been targeted for elimination. That’s strange, because lawmakers have made no clear argument for why we should lose this credit. They’ve spoken about the need to end handouts to “corporate special-interests,” but the EITC goes to low-income working families.
It’s also strange because the EITC has a long history of support from conservative leaders. For example, at the State Chamber of Oklahoma’s tax policy forum earlier this month, Arthur Laffer said he would favor a “negative income tax” that pays credits to those earning below a certain amount.
The negative income tax idea has a long conservative pedigree, beginning with Milton Friedman. According to Friedman, the most efficient and effective way to solve poverty is to give poor people money. This preserves their ability to make market choices and reduces the need for bureaucracy to run more complicated assistance programs, such as food stamps and rent subsidies. To maintain the incentive to work, the payment is reduced by a fraction for each dollar the family earns. Rising wages would eventually eliminate the credit, but not so quickly that it makes more sense to stay unemployed.
The EITC is closely modeled after Friedman’s proposal, though it goes beyond that to create an even larger incentive to work. At the lowest income levels, the value of the credit increases for each dollar earned.
The federal EITC was originally proposed by the Nixon administration and expanded under Presidents Ronald Reagan, George W. Bush, and Bill Clinton. President Reagan called it “the best antipoverty, the best pro-family, the best job creation measure to come out of Congress.”
In 2001, under Republican Governor Frank Keating, Oklahoma joined the 24 states with a state-level EITC. Oklahoma’s EITC supplements the federal credit by an additional 5 percent. It goes to about 1 out of 4 Oklahoma families. In 2009, the state EITC was claimed on 307,253 Oklahoma tax returns for a total of $31.9M and an average benefit of about $104. You can see a breakdown of EITC benefits by legislative district here.
The EITC furthers conservative goals. In this short video, Oklahomans shared personal stories of how the EITC helps them invest in the future and build a better life for their children. A large number of studies show that the credit stimulates people to join the work force and reduces the number on welfare. And at a time when bipartisan cooperation can be hard to come by, the EITC has been praised by all sides.
So why are Oklahoma lawmakers proposing to end it? The pressure is on to cut the top income tax rate, but any tax cut requires trade-offs. Losing such an important incentive for working families would be a bad trade.
Read more about the EITC and other broad-based tax credits that are being threatened in our issue brief, “The Tax Cut Bait and Switch.” A 1-page action alert on defending broad-based credits is available here. To find out what you can do, go to the take action page.