Yesterday, the Senate passed House Bill 82 that would reduce the Earned Income Tax Credit from 5% of the federal credit to 4.5%. The reduction will impact more than 900,000 working families who earn low-incomes and pay taxes. This decision occurs at the same time policymakers are maintaining tax policies that benefit the wealthiest taxpayers and provide no broader economic benefit.
While this type of bill is entered every session in order to make decisions about how the state tax code will align with the federal tax changes made in the past year, policymakers made some telling decisions in this one. First, policymakers reduced the Earned Income Tax Credit in order to offset the cost of improvements to the credit that were extended in 2012. Improvements that the state has conformed to in the years since many of those improvements passed under the Bush administration. Second, policymakers decided to conform to a more costly federal tax change that would put in place a higher income threshold on limiting itemized deduction, which will mostly benefit higher income taxpayers.
On the floor of the Senate, an amendment that would have capped a costly and ineffective business tax deduction passed in 2011 so that taxpayers earning more than $500,000 could not deduct their first $50,000 in pass through business income failed. That amendment would have eliminated the Earned Income Tax Credit reduction, roughly paying for the improvements to the credit for working families by capping the deduction to benefit only taxpayers with less than half a million in income. Such a cap would have also gotten the business tax exemption closer to targeting those that policymakers who proposed the original legislation claimed to be helping– small businesses.
In the first movements on tax policy this session, it is clear that policymakers shifted the tax load to low-income working families.