First in Flight from the EITC

Low-Income Working Families Bid Farewell to North Carolina’s Earned Income Tax Credit

2014 Marks the Loss of a Modest but Vital Support
Unless lawmakers reverse course, close to one million working families in North Carolina will claim the state Earned Income Tax Credit (EITC) for the last time this tax season, bringing pain to individual families and local economies. One year ago, North Carolina lawmakers put an end to the tax credit and subsequently pursued deep tax cuts that primarily benefit the wealthy and profitable businesses. The state EITC goes to families that work but earn low wages, and helps them keep more of what they earn so that they can stay in the workforce, support their children, and avoid poverty and public assistance.

The North Carolina EITC was a vital facet of the state’s tax system, building off of the federal tax credit—one of the nation’s most powerful anti-poverty tools for children. Combined with the income tax cuts, the loss of the state EITC is particularly backwards because the state’s tax system already asked more from low- and middle-income families than it did from those earning the most. The resulting tax shift is neither true tax reform nor good for North Carolina’s economy.

It’s not too late to reverse course, however. State lawmakers can reinstate this proven policy tool during the Short Session of the legislative cycle that begins in May. If they do so, there would be no interruption to the ability of hardworking families to claim this modest but critical support during the next tax season.

State EITC is an Essential Tool Amidst Hard Times
Lawmakers established the state EITC in 2007, in the middle of two economic downturns that occurred during the 2000s. That decade represented a lost decade for families in North Carolina who faced substantial job loss, spikes in poverty, a boom in low-wage work, and prolonged deterioration in household income. Nearly
six years later, working families continue to face high levels of economic hardship. The state EITC plays a critical role by providing a tax reduction to low-income workers, allowing them to keep more of what they earn.

The state EITC provides a modest boost to the wages of low- and moderate-income workers. Preliminary estimates show that nearly 907,000 North Carolinians claimed the state EITC for tax year 2012, benefiting nearly 1.2 million children. It encourages and supports workers, and is only available to people who work and earn income from wages, salaries, or self-employment.

The state EITC is a refundable credit, which means that a taxpayer can reduce their income tax liability to zero and receive a refund based on the additional value of the credit. This refund helps to offset the disproportionate share of income that low-wage workers pay in total state and local taxes—not just income
taxes—compared to their wealthy counterparts. The average credit was $119 for tax year 2012.

The EITC is a proven anti-poverty tool and has lasting, positive effects on children
The EITC is widely recognized as one of the most effective antipoverty tools nationwide, especially for children. The federal EITC lifted approximately 298,000 North Carolinians—half of whom were children—above the federal poverty line between 2010 and 2012. Similar data is not available on the state
EITC, but, like the federal credit, the state credit helps low-wage workers pay for basic needs such as shelter, food, and utilities, as well as work-related costs such as transportation and child care. The state EITC builds upon the success of the federal credit and its loss could push more families into poverty at a time when North Carolina has the 10th highest poverty and child poverty rates in the nation.

The EITC is mostly used as a temporary support. Three out of five recipients claim this tax credit for short periods—only one or two years at a time. As such, this tax credit is an effective way to help families stay on their feet by offsetting short-term struggles resulting from job loss, reduced hours, or reduced pay. The benefits of the EITC are long-lasting and positive too: low-income children in families that get additional income through tax policies like the EITC perform better in school, are more likely to attend college, and earn more as adults on average.

Loss of state EITC is a Losing Strategy for North Carolina and its 100 Counties
Working families in each of the state’s 100 counties benefit from the state EITC, which was valued at nearly $107.7 million in tax year 2012 (see the Appendix). This cost is small: $107.7 million is less than 10 percent of the income tax cuts provided to the wealthy and big businesses under the fully-implemented tax plan. This tax credit helps small businesses that pay low wages, particularly in the eastern parts of the state that have the highest concentrations of EITC recipients.

The state EITC is a small investment that helps local economies and ensures that hard-working North Carolinians are able to meet basic needs and avoid raising their children in poverty, despite low wages. Today, with low-income working families battered by unparalleled economic challenges, the state EITC plays a particularly vital role. Because now is precisely the wrong time to further shift the tax load on the North Carolina’s lowest-paid workers—especially those with children to support—lawmakers should quickly reinstate the state EITC during the upcoming Short Session.