RALEIGH (May 15, 2014) – It comes as no surprise to working families that North Carolina’s tax system is fundamentally unfair. Low- and middle-income workers pay, on average, nearly two times more of their income in state and local taxes than the highest income earners. But taxpayers don’t have to accept this fundamental unfairness. One of the best ways for North Carolina to improve the fairness of its tax structure is by reinstating the refundable Earned Income Tax Credit.
A new report, Improving Tax Fairness with a State Earned Income Tax Credit, by the Institute on Taxation and Economic Policy shows just how effective a refundable Earned Income Tax credit (EITC) can be in counteracting North Carolina’s unfair tax code.
Twenty-five states and the District of Columbia already have some version of a state EITC. Most state EITCs are based on some percentage of the federal EITC. The federal EITC was introduced in 1975 and provides targeted tax reductions to low-income workers to reward work and boost income. The federal EITC has targeted income limits to restrict eligibility and better support beneficiaries. By all accounts, the federal EITC has been wildly successful, increasing workforce participation and helping 6.5 million Americans escape poverty in 2012, including 3.3 million children.
In the same vein, states should look to the EITC to improve tax fairness. There are basically two buttons states can push when designing their EITC. The first is whether or not the credit is refundable. Refundable EITCs are more effective than the non-refundable credit, because they work to offset all taxes paid by low income families. The second design decision state policymakers must make is how large their state EITC will be. The average refundable state EITC is equal to 16 percent of the federal credit, but the credit percentage varies widely by state and in most states it would take a fairly significant EITC to begin to offset the upside down nature of state tax codes.
“There are more than 900,000 working families who received North Carolina’s EITC for the last time this tax season unless policymakers reverse course this session,” said Alexandra Sirota, Director with the Budget & Tax Center. “This rejection of a proven tool to address the state’s upside down tax code and support children’s healthy development and academic success is not an effective way to support the economy.
As discussed in this report, lawmakers in Raleigh can take immediate steps to address the inherent unfairness in the tax code by reinstating a refundable state EITC. Should policymakers continue to pursue tax cut proposals, they would be wise to target cuts to those most in need. Reinstating the state EITC is among the best ways to do this. But combining large income tax rate reductions with a small EITC increase will likely not be a good deal for low-income families, disproportionately benefitting high-income taxpayers and starving the state of necessary resources. While it does cost revenue to expand or create a state EITC, such revenue could be raised by repealing tax breaks that benefit the wealthy which in turn would also improve the fairness of North Carolina’s tax system.
To read ITEP’s full report click here.
FOR MORE INFORMATION CONTACT: Alexandra Forter Sirota, firstname.lastname@example.org, 919.861.1468.