March 25, 2011
Walker Proposes Cuts to the Earned Income Tax Credit (EITC)
The Governor’s budget proposes cutting the state Earned Income Tax Credit (EITC) for low-income working families by $74 million in 2011-2013 (and another $37 million cut in FY ’11 in the budget repair bill). Additionally, the budget proposes using $37 million more per year of TANF funding for the state EITC, removing a total of $74 million from other programs to serve families in poverty. (Executive Budget pp.103 & 476)
The state EITC supplements the federal EITC as an income support for low-income working families. A single mom who has two children and is making the minimum wage would lose $302 per year (43% of her current credit.) A family with three or more children would lose up to $170 per year. Families with just one child would actually get slightly more – an increase of up to $31 per year. (From the Wisconsin Budget Project blog.)
The EITC has achieved significant public support from both conservatives and liberals because it encourages and rewards work. The EITC provides a refundable tax credit that increases with each additional dollar of wages until it reaches its maximum value. In this way, the EITC provides an incentive for people to leave welfare for work and for low-income, part-time workers to work more hours. In a 1996 Business Week article, conservative economist and Nobel laureate Gary S. Becker wrote that the EITC “rewards rather than penalizes poor families with working members….Empirical studies confirm the prediction of economic theory that the EITC increases the labor force participation and employment of people with low wages because they need to work in order to receive this credit.”
Studies have consistently found substantial positive effects of EITC on work. Over half of the expansion between 1984 and 1996 in the proportion of single mothers in the labor force nationally is attributed to growth in the EITC. When low-income families increase their earnings, they face reductions in benefits from programs like food stamps. These reductions, combined with the costs incurred while working, such as child care and transportation, can cause families to feel like increased work effort has not significantly increased their overall well-being. Therefore, programs like the EITC are vital for promoting work and enabling families to work their way out of poverty. The EITC is pivotal in the effort to raise working families and their children out of poverty. In 2009, the EITC lifted an estimated 6.6 million people out of poverty nationally, including 3.3 million children.
The EITC expands beyond a simple anti-poverty program, however. As the income gap continues to widen between the rich and poor, programs like the EITC are ever more important in reducing this gap and ensuring that low-income workers are rewarded for their work. Nationally, the EITC offsets 29 percent of the decline that occurred between 1976 and 1996 in the share of income that the poorest fifth of households with children receives. As income disparity in the United States continues to rise, the EITC is necessary to ensure that economic growth is distributed more equitably.
For more detail on the statistics presented in this post, see the Center for Budget and Policy Priorities’ report on the EITC.
Wisconsin Women's Health Budget Project 