At the end of 2021, Gov. Ned Lamont enacted a temporary increase to Connecticut’s Earned Income Tax Credit (EITC). Republicans criticized the expansion as handout to Lamont’s base. But a permanent EITC expansion could make good on Lamont’s 2018 campaign promise to provide lasting tax relief to the working class.
The EITC helps the working poor, and is one of the most successful anti-poverty programs we have. Lamont and other politicians should view the EITC as an investment in the people of Connecticut. Research shows the EITC improves children’s education, workers health, and the long-term earnings of single mothers; without some of the potential drawbacks of the minimum wage.
The EITC is designed such that each dollar of tax credit eliminates a dollar of tax liability. The credit is fully refundable: this means that with the EITC, if a family’s tax-liability goes below zero they (usually) get the remaining amount in lump sum of cash with tax returns. The ETIC is usually a federal program, but many states – like Connecticut – have their own ETICs, where the state benefits are indexed as a fraction of the federal EITC amount.
Lamont expanded the Connecticut program using state covid relief money, retrospectively increasing the credit for 2020 tax returns from 23% to 41.5% of the federal amount. This could come up to an additional $1,245 dollars per family. The current budget only guarantees the credit will remain at 30.5% through the 2023 tax year. The additional money can be of substantial benefit to a family. Research shows the EITC is usually spent on helping families life circumstances: reducing debt, improving housing, buying a car, and improved food and nutrition. Sometimes the money goes to building assets such as home ownership or education. Such investments end up benefiting the entire community: not only those who directly qualify for the program.
The EITC is particularly effective for three reasons. First, the EITC incentivizes work. Since the amount of the credit phases in as income increases, those who do not work get zero benefits with benefits increasing with each dollar earned (up to a set maximum based on family size). Since receipt of the benefit is contingent upon work, this addresses the concern of conservatives that social programs foster dependency. Studies have further found that those who qualify are more likely to work after the EITC is expanded.
Such incentives could directly help with recent labor shortages. Since the wage subsidy is paid for by the state, the burden of paying workers more will not fall on small businesses, many of whom have struggled with recent increased costs of labor. For the same reason, the EITC offers an alternative to the minimum wage: which, because it squarely falls on employers, can inadvertently increase unemployment in certain circumstances.
Second, unlike many social programs, the EITC provides direct cash benefits to workers. Skeptics dislike the idea of giving the poor money, viewing it as a handout. But that is a paternalistic view: giving families money empowers them to make their own decisions on how to better their lives. Marring families in government bureaucracy and oversight ultimately results in worse outcomes.
Third, research shows that this approach works. When families get additional cash transfers through the EITC their children do better in school. Infants whose families get the EITC end up having higher academic achievement when they grow up: a testament to the value of additional resources during a child’s earliest years.
Improvements in schooling naturally lead to an increased likelihood of going to college and higher incomes when these young adults do start a career. Mother’s stress levels (as measured by cortisol) also decline after EITC expansions; and my own research shows marked improvements in infant health. By incentivizing entry into the labor market, younger single mothers exposed to the EITC have greater job tenure and higher earnings as they move into middle age.
One concern is that making the EITC expansion permanent will require taxing the wealthy. Governor Lamont is, perhaps rightfully, worried that this could in turn diminish the tax base by driving the highest earning residents from the state. But we must take a broad view on prosperity: the tax base can also be expanded by making sustained investments in working class families. Research shows the EITC leads to lasting and intergenerational improvements in education and income: which in turn leads to a more productive work force that provide a larger tax revenue.
Given the upcoming election, it seems inevitable that governor will use the current richness of the state coffers to cut taxes. But Lamont should not forget his 2018 campaign promises to improve the lives of the poor and middle class. Making the EITC expansion permanent rewards work, benefits children, and makes a long-term investment in the state.
David Simon, PhD, is an Associate Professor of Economics at the University of Connecticut and a member of the Connecticut Scholars Strategy Network.