The federal Earned Income Tax Credit has been one of the country’s most effective responses to poverty. Launched almost four decades ago, during the presidency of Gerald Ford, the credit helps working families struggling with low wages to make ends meet. It currently lifts about 6.1 million people out of poverty, roughly half of them children. That, in turn, boosts the economy, families using the added money to cover basic needs.
The idea has been so successful that Democratic and Republican administrations have authored expansions. More, 24 states, plus the District of Columbia, have enacted their own versions, usually offering a percentage of the federal credit, from 3.5 percent to 40 percent, putting a bit more money into the pockets of the working poor.
With the new two-year state budget, Ohio has joined the ranks. That is a welcome step, especially in view of state income tax cuts further favoring those at the highest income rungs and an increased sales tax rate falling more heavily on those below. Gov. John Kasich and his Republican allies leading the legislature deserve credit for the credit.
The Ohio Earned Income Tax Credit amounts to 5 percent of the federal version. Do the rough math, and $2,238, the average amount for the federal credit in the state, yields $112 for the state credit. Unfortunately, what lawmakers approved isn’t so simple. The federal credit is refundable, as are the those in 20 states. Ohio has followed the path of three states that made their credit nonrefundable. The difference is significant, the nonrefundable type less generous and covering fewer people.
Consider the findings of a March report issued by Policy Matters Ohio, a Cleveland-based think tank. The analysis projected that a 10 percent, refundable state earned income tax credit would cover 822,000 Ohioans at a cost of $184 million a year. Reduce the refundable credit to 5 percent, and the outlay would drop to roughly $90 million.
The Legislative Service Commission puts the cost of the nonrefundable Ohio credit at $47 million per year, reflecting, in part, a sharp narrowing of the state credit for those with annual incomes exceeding at $20,000. Know, too, that the nonrefundable version largely excludes those with earnings below $10,000 a year, or many of the working families most in need.
What works so effectively about the refundable federal version is the recognition that low-income working families pay a range of taxes, including sales and payroll levies. In Ohio, they pay a larger share of their income in taxes than households at higher income levels. At what point, does a nonrefundable tax credit become so tightly drawn, it falls short of meeting its purpose?
The state now has an earned income tax credit, and the opportunity to make it better.