In a previous scholar reflection, I encouraged Connecticut representatives to make permanent the expansion to the Earned Income Tax Credit (EITC), which at the time was temporarily funded with pandemic stimulus money. Such legislation is currently being considered.
While the EITC is principally a federal tax program: most states have a version that gives additional tax credits to the working poor; typically offered as a percent of the federal EITC amount.
The new legislation would increase the state’s proportion from 30% to 40% of the federal credit, making Connecticut’s EITC one of the most generous in the country; and come close to matching the emergency expansion of the program under the pandemic. The research on the EITC is clear that this is an investment in workers, and one I think Connecticut should make.
However, during a recent public hearing, some voiced concern that tax breaks for the working poor ultimately come at the cost of higher taxes for higher earners, which would in turn drive them from the state. This concern is not supported by evidence, and I’d like to address why, instead, the EITC would be positive for Connecticut families and workers.
The EITC is designed such that every dollar of tax credit eliminates a dollar of a family’s tax liability. If a low-income family’s tax liability is reduced below zero, they receive any remaining amount of the credit as a cash payment. Since the EITC operates through the tax system, it is a highly efficient (i.e., well targeted) way of providing cash to families. Further, since it is processed with tax returns there is little administrative burden beyond filing of taxes. Key to the successes of the EITC are two of its features: 1) it rewards work as a wage subsidy, and 2) the EITC provides cash to families in need.
The EITC rewards work by paying more for every dollar of a family’s earned income; that is, families receive an additional tax credit per dollar of earned income, up to a legislatively mandated maximum amount. Families that do not work do not receive any of the benefits of the program. Studies have consistently found that following an EITC expansion, single mothers are more likely to be employed.
Why does a relatively obscure part of the tax code promote work? Possibly because turnover from low wage jobs may fall as workers stay at jobs that now reward them significantly more for their time. A recent study shows that increases in work among single mothers have occurred for every major federal expansion of EITC as well as the state expansions.
The second reason the EITC is effective is because it puts cash directly into the pockets of qualifying families. Usually received with tax returns in February, families can anticipate the money coming in every year, and there are few restrictions on the money beyond the fact that it is tied to work. This means that it enables families to make their own decisions to improve their wellbeing based on their own life circumstances. Research shows the EITC is typically spent on durables such as a car, home amenities (such as air conditioning), or a down payment on rent at a new apartment (thus improving housing conditions).
Both recent and established research has documented the positive impacts of the EITC on a wide range of social outcomes. The EITC increases the academic achievement of children. Better performance in school leads to increased college attendance and ultimately higher earnings in adulthood. A recent strand of the literature shows improvements in health.
One influential paper I wrote shows that pregnant single mothers who qualified for the EITC are less likely to give birth to a low-birth-weight infant. Recent work has isolated the cash transfer aspect of the benefits, showing cash on hand from higher tax returns improves long term outcomes when received in the first year of life. Children whose families receive tax return payments in their first year of life also experience lower rates of child maltreatment that lasts at least through age 8. One of my own recent papers on the topic offers one explanation; the EITC empowers women within the household to escape abuse as seen by declines in domestic violence.
Social problems such as domestic violence and poor infant health are themselves extremely costly to the state. Those concerned about the cost of the tax credit need to also weigh how reducing poverty offers real financial returns. One skeptic submitting public testimony on the bill pointed out that that low-income earners already pay substantially less in taxes than higher earners. While this is true, this view also misses the points.
Overall, this body of research shows that the EITC is itself an investment– leading to a productive, healthy, and working state — place where we would all be happier to live. The new legislation, introduced by State Sen. Martin Looney, shows important political momentum. Connecticut residents on both sides of the political isle should applaud this policy as one that both helps those in need and promotes self-reliance through making work pay.
David Simon, PhD, is an Associate Professor of Economics at the University of Connecticut and a member of the Connecticut Scholars Strategy Network.