BTC Reports; Vol. 13, No. 2; March 2007
by Meg Gray, Policy Analyst
- Governor Michael Easley’s recommended state budget set aside $63 million to reduce the income taxes paid by low-income taxpayers to be delivered through a “no-tax floor” plan. In fact, hundreds of thousands of the proposed 1.2 million taxpayers his plan claims to help already pay no income tax and would see no new benefit.
- The governor’s proposal exposes the inherent difficulties in attempting to reach low-income taxpayers through non-refundable credits. A widely-supported alternative for helping low-income taxpayers is through refundable credits such as a state Earned Income Tax Credit (EITC). A state EITC would not only offset state income taxes owed, but also help offset sales and property taxes which hit North Carolina’s lowest-paid workers disproportionately hard. An estimated 825,000 taxpayers and their families would benefit from a state EITC at a cost of $67 million for a 5% state EITC or $134 million for a 10% state EITC.
- In addition to not benefiting very low-income taxpayers, the governor’s “no-tax floor” also has numerous design flaws that make it inferior to a state EITC. The “notax floor” does not adjust for number of dependents, does not adjust with inflation, and does not offset sales taxes (which is the largest tax expense for low income families). It also has a steep drop-off effect, so earning one dollar over the floor would trigger a significant amount of tax. Finally, the “no-tax floor” is less targeted and does not reach the taxpayers who need help the most.
- Eight out of the fourteen states that currently have “no-tax floors” also have state EITCs, so the two options are not mutually exclusive. When well-designed, the two approaches can be used simultaneously to achieve the broad-based impact desired by the governor and to target low-income working families who need the greatest support.
High costs of basic necessities, stagnant wages, and a regressive state and local tax system underscore the need for helping low-and moderate-income North Carolina families make ends meet. Fortunately, two such proposals are currently being seriously considered: the governor’s “no-tax floor” plan and a state Earned Income Tax Credit. Both would help a significant number of taxpayers , however, the governor’s plan has major structural flaws and does not benefit the number of new taxpayers claimed, nor as many as would a state EITC. Taxpayers with adjusted gross incomes below the proposed “no-tax floors” (with the exception of working dependents) already have no income-tax liability after taking personal exemptions and the standard deduction. Therefore, more taxpayers and their families would benefit from a refundable state EITC that would offset state income taxes and provide a refund to the lowest-income taxpayers with no income-tax liability but who pay a significant portion of their income in other state and local taxes. This issue of BTC Reports examines both proposals in detail with a special focus on how each proposal would impact low-income workers and their families.