Commentary

New policy brief: The tax cut that North Carolina should enact

In case you missed, it there’s a compelling new policy brief out from the NC Budget and Tax Center (“Bring back the state EITC”) that explains a simple and straightforward way that North Carolina can cut taxes and build a better and fairer economy: reinstating the Earned Income Tax Credit. This is from the brief:

“The EITC is a tax credit for working families that reduces poverty and rewards work for low-and moderate-income households. Until recently, these households could claim the state EITC as a way to cover the basics and plan for the future. But In 2013 our state lawmakers eliminated the state credit, which made North Carolina the first state in nearly 30 years to roll back this crucial and effective anti-poverty measure. Nearly one million working North Carolinians claimed the state EITC for the last time in 2014, benefitting more than 1.2 million children and pumping $100.8 million into local economies.

Reduces poverty

Simply put, the EITC is the most effective anti-poverty tool that legislators have at their disposal. This is especially important today, when North Carolina is facing a 16 percent poverty rate (12th highest in the nation) and a 25 percent child poverty rate. One in three workers in the state earns poverty-level wages. We literally can’t afford to ignore this option when one out of every four children in our state live in poverty. The credit works to target low-income households with children, which makes it particularly important for workers early in their careers.

Promotes tax fairness

By converting our state’s personal income tax to a flat rate, expanding the sales tax base, and eliminating credits like the EITC, legislators have created a system that has the lowest-income households carrying a heavier tax load than everyone else. According to the Institute on Taxation and Economic Policy, low-income North Carolinians pay nearly twice the share of their income in taxes as our state’s richest residents. Reinstating the EITC would be a crucial step towards rebalancing the tax load for all North Carolina taxpayers.

Enables and encourages work Individuals must work in order to claim the EITC. For those with very low pay, the credit increases with earnings, which incentivizes more work hours. It allows working households to keep more of what they earn while also paying for the basic essentials.

Creates short term benefits…

In the short term, the EITC boosts the income of working families, and keeps them out of poverty. At the state level, the extra money helps offset regressive taxes, like the sales tax or the gas tax. It also pumps money into local economies, since low-income workers are most likely to spend their money locally. It’s also mostly used as a temporary support system: three out of five recipients use the EITC for just one or two years at a time. That means workers can use it to stay afloat during short-term struggles resulting from reduced hours, or reduced pay; and their connection to the labor market despite low wages gives opportunities to move up a career ladder.

…and long-term gains

While the actual usage can be short-term, the positive effects of the EITC are long-lasting. Low-income children whose families use tax supports like the EITC perform better in school, are more likely to attend college, and earn more on average when they grow up. Bottom-up tax cuts like this provide a ladder out of poverty, a ladder that’s been missing and is sorely needed.”

Click here to read the entire brief and its specific recommendations.

 

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