A proposal to raise the standard personal income tax deduction is being touted as a boon to working class North Carolinians, but that sales pitch doesn’t tell the whole story. The Senate is right to worry that too many working families are struggling to make ends meet and that their tax choices haven’t helped, but instead of developing a targeted response to the state’s upside down tax code, the Senate is reaching for an old blunderbuss they have lying around.
As many states (including North Carolina) have already learned from experience, there are much more effective ways of putting money into the pockets where it will do the most good. In the realm of tax policy, the Earned Income Tax Credit (EITC) would address the problem that legislative leaders claim to have in mind, but in a much more efficient and effective way, by helping working families keep more of what they earn and offsetting the increasing reliance on the sales tax in our state.
As shown here (described in more detail in a recent Prosperity Watch), increasing the standard deduction will mostly benefit people who are already earning above the statewide median wage. On the other hand, the overwhelming majority of assistance that would be provided through a state EITC would go to working North Carolinians who are struggling to get by on marginal wages.
In contrast, legislative leaders in Minnesota spent their week finding ways to expand the Working Families Tax Credit and the Child and Dependent Care Tax Credits. Instead of blindly shelling out larger standard deductions at a high cost to the services and systems that support vibrant communities for working families, the Minnesota approach is a much more effective means of designing a tax code that works for working families and the economy.
At least legislative leaders are acknowledging that working and middle class families weren’t well-served by the first round of tax changes; too bad their chosen policy response will create more noise than impact.