A state earned income tax credit would complicate North Carolina’s tax code and offer little benefit to families, a recent John Locke Foundation Spotlight report concludes.
Lawmakers could offer families more help with an expanded state child tax credit and a health insurance purchase tax credit, according to the report.
“State tax credits make sense when they address a flaw in the federal or state tax code,” said Joseph Coletti, JLF fiscal policy analyst. “A state EITC would not fix any flaws. At a cost of $66 million per year, the EITC would offer minimal benefits while extending federal tax code problems to the state tax system.”
The report calls the existing federal earned income tax credit “an effective anti-poverty policy tool.” It has provided significant help to single mothers in the workforce, Coletti said. But the federal credit has some drawbacks, including provisions that penalize married parents. “The existing credit encourages some married women to exit the workforce or cut back on working hours.”
In addition to its mixed welfare effect, the federal EITC is complicated, Coletti said. “The complications make the federal credit open to mistakes and abuse. One IRS publication explaining eligibility is 58 pages long.”
Misunderstanding and fraud linked to the earned income tax credit cost the federal government billions of dollars each year, Coletti said. “A state EITC piggybacking on the federal credit would have the same problems without any compensating strengths. Fraudulent or mistaken federal claims would carry over to state taxes.”
While the state would see much greater chances of fraud and abuse, families would enjoy few benefits from an earned income tax credit, Coletti said. “A North Carolina EITC set at 5 percent of the federal credit would cost $66 million and provide benefits up to $227, though the average amount would be $94. Even at 10 percent of the federal credit, a state EITC would offer maximum benefits of $450 and an average benefit of $187.”
“Whether families get $94 or $187, the state credit would not have a significant impact on their poverty status,” he said.
A state earned income tax credit makes even less sense for North Carolina in 2007 than in prior years, now that the state has increased its minimum wage, Coletti said. “The two policies are not complementary. First, the minimum wage makes it harder for low-skilled workers to find jobs that might help them qualify for the EITC. Second, a person with no children working full time at the new state minimum wage would earn too much money to qualify for the earned income tax credit.”
North Carolina families would fare better if lawmakers eliminated tax biases and replaced existing income- and sales-tax revenues with a consumed-income tax, Coletti said.
Even with the current tax structure, a couple of different tax credits would prove more helpful than a state earned income tax credit, he said. “Doubling the $100 nonrefundable state child tax credit would ease the burden on middle-class parents created by the federal tax code. And a refundable credit of $1,000 per person, up to $4,000 per family, would help families purchase high-deductible health insurance policies while setting aside money for health savings accounts.”
“The state should never adopt a tax credit that creates more problems than it solves,” he said. “North Carolina needs a simpler tax system that’s fair to families.”