Tax Time, Part I: The Continued Promise of the EITC

As we enter tax season, Bay State Brahmin is going to have a series of posts on the federal, state, and local tax codes—identifying a variety of changes that can benefit the working class and the need for additional regulatory structures to protect vulnerable taxpayers.

Today, we’ll take a look at the Earned Income Tax Credit (EITC)—both its remarkable success since its launch under President Reagan, and the opportunity for New York City to use its municipal EITC to help the most vulnerable New Yorkers.

First, the good news: the EITC continues to be one of the most effective anti-poverty programs in U.S. history (alongside Social Security, Medicaid, and Food Stamps). According to the Census Bureau, the EITC lifted some 6.5 million people above the poverty line, in 2012—including over 140,000 residents in Massachusetts and nearly 550,000 New Yorkers—roughly half of whom are children. All told, in Massachusetts, more than 394,000 tax filers received $784 million in EITC credits in 2012, while 1.7 million New Yorkers qualified for $3.9 billion in support.

The EITC is particularly valuable because its effects are more highly concentrated among the very poor. The Congressional Budget Office (CBO) found that 15 percent of wage benefits from a federal minimum wage hike would go to households living below the poverty line, while 60 percent of expanded EITC benefits would reach poverty level earners. Furthermore, the EITC has been shown to encourage work and improve the health and academic performance of poor children.

Despite the success of the EITC at the State and Federal levels, many poor NYC residents continue to face considerable City income tax burdens. According to the Drum Major Institute, 224,200 low and moderate-income New York City households (about 720,000 people—including many children) paid New York City income taxes in 2008 even though they owed no federal and/or state income taxes. These families accounted for $71.9 million in NYC taxes in 2008— less than two-tenths of one percent of total city revenue for the year.

This effect is due largely to the fact that New York City’s income tax lacks the broad exemptions in the state/federal tax codes and that the City EITC (which took effect in August 2004, joining San Francisco as the only other major U.S. City with a municipal EITC) is worth only 5 percent of the federal credit. 

Indeed, while the City EITC has grown in recent years (see chart, above), providing $93.1 million to over 882,000 households in 2010, the average credit was only $105.

NYC should target relief to the working poor by increasing its municipal EITC. If the City can afford a dramatic cut in the corporate tax rate ($2.7 billion in savings to 27,000 companies, including many of the city's largest, over the first 10 years, starting in FY 2010), surely it can do something to help New York households struggling to make ends meet.