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A Stronger EITC Can Offset Regressive Sales Tax

Posted on May 11, 2018

The threat of hospital closures, nursing home evictions and cuts to higher education has made it inevitable that the Legislature will soon convene for another special session devoted to revenue-raising. It’s become equally clear that the special session will be focused on a partial renewal of the temporary “clean penny” of sales tax.

The solution to this crisis should rest on two key principles: First, it needs to raise adequate revenue to maintain funding for hospitals, nursing homes, college scholarships and other important needs. Second, it needs to make sure that any revenue-raising measures don’t disproportionately hurt low-income families that can least afford it.

The best way for the Legislature to accomplish these twin goals – adequacy and fairness – is by renewing .75 cents of the “clean penny” of sales tax and pairing it with an increase of the Earned Income Tax Credit (EITC) to 10 percent of the federal credit.

The EITC has a tradition of bipartisan support and is the single most effective policy tool for reducing child poverty. The EITC encourages and rewards work, and incentivizes parents to leave welfare for work. A growing body of research has found it has immediate and long-term benefits for children, who are more likely to complete school and enjoy higher earnings as adults.

A new policy brief by LBP policy analyst Neva Butkus shows how enhancing the EITC can help offset the impact of a partial sales-tax renewal for families in the bottom 40 percent of income earners. This is needed because workers in the bottom income quintile (average income of $12,000 a year) would be spending six times as much of their income on the sales tax renewal than households in the top 1 percent (with a average taxable income of $1.3 million) if .75 cent of the temporary sales tax is renewed.

Legislators have several other options for raising revenue during the special session, such as eliminating sales tax exemptions, limiting tax incentive programs or reducing income tax deductions. But none of those options are likely to raise adequate revenue without a partial renewal of the temporary sales tax. Since we know that sales taxes hit low-income households the hardest, legislators should ensure that the EITC is part of any budget solution.

Louisiana was the first Southern state to enact a state EITC in 2007, which is tied to the federal credit. But  at 3.5 percent of the federal credit, Louisiana’s EITC is now the second-lowest in the country. The credit is currently claimed by nearly 1 in 3 Louisiana households.

Click here to read the policy brief. Click here to learn more about Louisiana’s EITC.

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