Arizona doesn’t have an Earned Income Tax Credit (EITC), which mostly gives straight cash to those who don’t earn enough money to obtain a state tax refund, but Gov. Doug Ducey wants to change that. He is supporting SB 1018, sponsored by State Senator Sean Bowie (D-Phoenix), which would create one, joining 30 other states which have adopted one patterned after the federal EITC.
A state EITC would take $74 million from the state’s coffers annually and give it to low earners. In order to qualify, income levels would face the same ceilings as the federal credit. Both families and singles are eligible, with a family of four children earning $20,000 maxing out the most with $325.
Critics say the EITC does little to alleviate poverty or help low-income workers. Timothy Jeffries, owner/CEO of ChemResearch Company, the largest metal finishing provider for aerospace and defense in Arizona, who previously served as director of the Arizona Department of Economic Security under Gov. Doug Ducey, told The Arizona Sun Times, “The legislation for an Earned Income Tax Credit in Arizona is well intended, but off the mark. Various studies and sources clearly highlight the existence of an EITC does not tangibly reduce poverty and actually can provide a disincentive to work. Government social programs have a role to play in our country, but expanding them does not serve our country well. People need good jobs, not more handouts.”
The Cato Institute conducted a study in 2015 and found that “the costs of the EITC are likely higher than the benefits.” There is a disincentive to work, the report found. For example, “for every additional $1,000 the parent earns, she loses $210 in EITC benefits.” It similarly creates a disincentive to work for a spouse who may not be employed, since the credit is based on families.
It may coerce low earners into working fewer hours. This is called the “income effect.” Lawrence Mead, a professor of politics and public policy at New York University and an adjunct scholar at the American Enterprise Institute explained in a paper entitled “Overselling the Earned Income Tax Credit,” “But as economists have long known, the subsidy also raises the wages of those already working. They can now cover their needs with fewer working hours than before and may cut back work effort.”
Mead interviewed 60 welfare officials in Wisconsin at a time when the state’s welfare caseload was plummeting, asking them why the situation was improving. “They mentioned a wide range of factors, especially welfare reform, good economic conditions, and child-support enforcement,” he said. “Not a single one cited the EITC.”
Similarly, he asked senior welfare administrators in Wisconsin and New York whether they had seen or heard of an EITC effect on recipients going to work. They all found no correlation. In fact, they told him that “recipients became interested in the credit only after they had been ‘working for a while’ and saw what they could get from it.”
Cato noted that between 1987 and 1994, the numbers of people taking the EITC soared. In the late 1990s, that number stayed the same. “Yet the years from 1994 forward were precisely the years that labor force participation by single mothers was growing strongly.”
A study by Professor Henrik Kleven of Princeton University published in 2019 came to a similar conclusion; almost every time the EITC has been expanded, there was no improvement in employment for single mothers.
The Cato study specifically addressed the effects of state EITCs. “By boosting the credit, state EITCs increase marginal tax rates during the phase-out range, and thus add to work disincentives.”
A study from the John Locke Foundation analyzed state EITCs and concluded, “Because a state EITC would simply piggyback on the existing federal credit, it would have the same problems as the federal credit without any compensating strengths.”
A report by the Heritage Foundation issued in 2020 that looked at workers without children receiving the credit found that it failed to increase earnings or employment for them. “Poor recipients have low earnings because they work little, but raising their EITC benefits would not increase that work and would not significantly reduce poverty.”
The EITC is replete with fraud. The IRS estimates an error rate of 27% on EITC returns, amounting to $18 billion paid out in error. The John Locke Foundation pointed out that “fraudulent or mistaken federal claims would carry over to state taxes.”
Last year, State Representative Shawnna Bolick (R-Phoenix), who heads the House Ways & Means Committee, did not schedule the bill for a hearing, killing it after it had passed the Senate. Bolick told The Sun Times, “I have killed a lot of bills.”
Despite the negatives, the IRS celebrates the EITC. There is an EITC Awareness Day at the IRS on January 27. There is nothing on the IRS website about why the EITC is so important that it has its own day, and nothing about its success rate or any benefits.
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Rachel Alexander is a reporter at the Arizona Sun Times and The Star News Network. Follow Rachel on Twitter. Email tips to [email protected].
Photo “Sean Bowie” by Senator Sean Bowie and photo “Doug Ducey” by Arizona Governor Doug Ducey Office of Education.
