Increasing EITC improves tax fairness, reduces poverty, invests in children

Increasing EITC improves tax fairness, reduces poverty, invests in children

Efforts to modestly raise the minimum wage in Louisiana failed this legislative session — even though the wage isn’t high enough to keep a full-time worker with a child out of poverty. But some opponents of giving the lowest-paid workers a raise have suggested another pro-work, anti-poverty policy as an alternative: increasing the value of the Earned Income Tax Credit (EITC).

While implementing both policies together is the most effective way to give working families a hand-up and strengthen the economy, there are clear benefits to increasing the EITC on its own. Louisiana currently has the lowest state credit in the country, pegged at 3.5 percent of the federal credit. This averages to about a $90 per family.

A new report from the Institute on Taxation and Economic Policy (ITEP) shows how raising Louisiana’s EITC would reduce economic hardship for working families and children. The average state EITC is 16 percent of the federal credit, and some states have credits that are 40 or 50 percent of the federal one.

Increasing the credit would help improve the fairness of Louisiana’s tax structure, where the poorest families pay more than twice as much in state and local taxes, as a percentage of income, than the wealthiest households. This is mainly because Louisiana has the third-highest sales taxes in the nation — taxes that tend to hit the poor the hardest. Increasing the credit would counter the harm of high sales taxes and keep fewer Louisiana families from being taxed deeper into poverty.

Most families who would benefit from a higher credit have annual incomes below $30,000. Parents raising children on $8, $9, or $10 an hour jobs in the service sector often find it difficult to pay bills and save for unforeseen events like an illness or car repairs, much less to save for their children’s college. By boosting income, the EITC helps “make work pay” and has been shown to incentivize workforce participation, while reducing poverty.

Most importantly, the extra income from the EITC has clear benefits for children, who are more likely to do better in school, and work and earn more as adults. This makes the credit not just a short-term anti-poverty measure, but a long-term investment in the future.

Louisiana spends hundreds of millions of dollars a year on tax breaks and subsidies for big businesses, sometimes with a minimal return on investment. Next year, legislators should consider raising the EITC instead. In addition to improving tax fairness, incentivizing work and reducing poverty, the tax credit is an investment with a proven return in Louisiana’s greatest economic resource: our human capital.

The chart below shows how increasing the EITC would help working families:

EITC REPORT State pages and Cost appendix_5.14.xlsx