It is rare that tax incentives end up having the effect they are intended to. The Earned Income Tax Credit ‘ a tax benefit for the working poor ‘ is one of them. That’s why it is unfortunate that Mayor Fenty’s budget would scale back DC’s EITC by $1 million. The amount may not be large, but the symbolism is huge.
Since 2000, DC has had an Earned Income Tax Credit that piggybacks on the federal EITC. The federal credit reduces taxes and increases the take-home pay of low-income workers, with the greatest benefits for working families with close to minimum-wage earnings. The EITC is intended to help “make work pay” for low-wage workers, and there are numerous signs that it works incredibly well. Studies have shown that the EITC has encouraged large numbers of single parents to leave welfare for work. The EITC lifts more children out of poverty than any other single federal program.
The EITC has been so successful that President Obama included an expansion of it in his stimulus package last year.
Twenty-three states and DC have created their own EITC to build on the strengths of the federal credit. DC’s EITC is set at 40 percent of the federal EITC. It reaches nearly 50,000 DC households, mainly working poor residents in Wards 5, 7, and 8.
Mayor Fenty’s proposed budget for FY 2011 would reduce the DC Earned Income Tax Credit to 39 percent of the federal credit. While the immediate impact is relatively modest ‘ a maximum of about $50 for a DC family with children ‘ this proposal is significant for several reasons. Most important, it would reduce the net income of residents who already face challenges meeting their basic needs. For these families, every dollar matters.
The DC EITC cut also would weaken a tax benefit that works effectively to reduce poverty and encourage work, and it would take money out of the DC economy. Research shows that families use the EITC to pay for necessities, repair homes, maintain vehicles that are needed to commute to work, and in some cases, obtain additional education or training to boost their employability and earning power. It’s money that gets pumped right back into the local economy.
Finally, the EITC cut for 2011 would make 2011 the second year in a row that the Mayor’s budget increased taxes on working poor residents. The FY 2010 budget eliminated annual inflation increases in several deductions that largely benefit low- and moderate-income families ‘ the standard deduction and personal exemption in the income tax and the property tax homestead deduction. The 2010 budget and the proposed 2011 budget include no tax increases targeted on high-income families.
The recession has battered DC’s finances, and the city needs more revenue to preserve services like health care and education. But there are better ways to raise revenue and worse ways.
Cutting the DC EITC is one of the worst.
