Show

A stronger EITC can mitigate sales tax increase

Posted on February 2, 2016

By Grace Reinke

The Legislature will soon start the long process of patching up the state’s bleeding budget. With a mid-year deficit of at least $700 million and a $1.9 billion shortfall for the next fiscal year, it is clear that a cuts-only approach will simply not work. But as lawmakers consider their options for raising necessary revenues, they should make sure that low-income and working Louisianans aren’t disproportionately hurt by any tax increases. The best way to do that is to expand Louisiana’s Earned Income Tax Credit.EITC uodated graphic

 

Gov. John Bel Edwards has laid out a broad menu of revenue-raising ideas to fix Louisiana’s long-term structural budget gap, including some long-overdue reforms to the state personal and corporate income tax structure. But legislators have far fewer options when it comes to plugging the mid-year budget gap, since most changes in tax policy wouldn’t bring in revenue quickly enough to help the state pay the bills that are due by June 30.

One exception to this is the state sales tax, and that’s a major reason why Edwards has proposed a 1-cent increase in the 4-cent sales tax. If the Legislature agrees to the change, it would raise an estimated $216 million in the current budget year and more than $900 million next year. But if the Legislature refuses to go along, the alternative is deep cuts to public colleges and health-care services for the state’s most vulnerable residents.

As a stopgap measure, a one-penny increase in the sales tax is clearly better than devastating cuts to healthcare and higher education. But sales taxes are also regressive, meaning they hit low-income families harder than the wealthy. This is why it’s critical that any sales tax increase be paired with an expansion of Louisiana’s Earned Income Tax Credit (EITC) to offset some of the impact on poor families.

Who pays in Louisiana?
A sales tax increase would affect every Louisiana household, but the hardest hit would be those with the lowest incomes – who already pay the most state and local taxes in Louisiana when measured as a percentage of overall income.

The Institute on Taxation and Economic Policy (ITEP) calculates that the poorest 40 percent of Louisiana households paid 10 percent of their family income in state and local taxes last year. The richest 1 percent of households paid only 4.2 percent of their total income in state and local taxes.

The main reason for this upside-down tax burden is sales taxes, as Louisiana’s combined (state and local) rate is the third-highest in the country. A sales tax increase would make the tax code even more unequal at a time when policymakers should be looking for ways to create a more fair system for struggling households.

The EITC has bipartisan support
The Earned Income Tax Credit is for people who work but don’t make enough to make ends meet. It’s a refundable credit that helps workers provide basic needs for their children. The EITC incentivizes work by phasing-in the benefit amount as workers earn more, flattening at a maximum level as workers’ earnings continue to rise, and phasing-out slower than it phased-in.

Married couples and families with children benefit the most from the EITC, which is one reason it has enjoyed strong bipartisan support in Congress since it was first established in the early 1970s.

Louisiana is among more than two dozen states that have enacted their own EITC programs to complement the federal credit. The state EITC helps to supplement the benefit filers receive through the federal version and helps put more money back in the pockets of the working poor.

Of the states that have enacted their own versions of the EITC, Louisiana’s is the smallest, set at only 3.5 percent of the federal benefit. Doubling the state credit to 7 percent is the easiest way to offset some of the sales tax increase for families on the lower rungs of the income ladder. A stronger EITC would not only help working families afford basic needs, but it would help local businesses as people spend their added income.

A penny is a lot for poor families
According to ITEP, a 1-cent sales tax hike translates to a $98* per year in additional taxes for workers in the bottom-fifth of income earners, who make an average of $12,000 per year. For workers in the next quintile – who make between $19,000 and $32,000 per year, it means $210* per year in additional costs.

But if the higher sales tax is coupled with a stronger EITC, roughly half the households in the two bottom brackets would qualify for an offsetting credit of more than $100 for most families.

Doubling Louisiana’s EITC would also allow the new governor to fulfill one of the key promises he made as a candidate as part of his broader anti-poverty agenda.

Louisiana’s budget crisis is the most severe test our leaders have faced in a generation, since the oil bust of the 1980s. Re-balancing the state budget and preventing cuts to vital services will require sacrifice from businesses and families across the state. But equally important is making sure low-income families aren’t disproportionately hurt by a sales tax increase – even if such a tax is necessary to prevent catastrophic cuts. The most effective way to do that is to double the state EITC.

*Editor’s note: These numbers have been changed slightly from an earlier version of this post.

Comments are closed

  • LBP is Hiring!

    Click here for more information on our Economic Opportunity Analyst position.

       

    Click here for more information on our Director of Operations and Development position.

  • Connect with LBP
    follow us on twitter like us on facebookDonate
  • Daily Dime Signup
    Sign up to receive the Daily Dime.

  • LBP in the News
  • LBP on Twitter
  • Our Partners