What the heck is the EITC?

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A bunch of states are throwing around the idea of eliminating the Earned Income Tax Credit. Why do they want to get rid of it, and what is it anyway?

Today, a simple primer on the credit--whom it's for, what it does, why it works, and why it's on the chopping block.

To start with, the credit was enacted 35 years ago, in the mid-1970s. The purpose was to provide an incentive to work for very poor families--the idea that, if you worked, you would get a yearly tax bonus that welfare benefits wouldn't provide. Former President Bill Clinton doubled the credit during his administration, trying to ensure that people making minimum wage could support their family working full time.

Who gets it? Very low-income families. Single people without children making low incomes are also eligible, although their tax benefit is much smaller. For a family with two children to get the credit, they must be making less than $40,000 a year. That limit expands or contracts based on how many children you have. They get it as a refundable credit on their tax return --meaning that if the family owes taxes, it cancels them out, and anything left over gets refunded back to them.

The interesting thing about the credit is how it works. It's very different from how traditional welfare is structured. On welfare, the less you make, the more you get. Any additional dollar that you receive means less benefits, up to a certain dollar amount, and then you're cut off. Opponents of welfare claim that it makes working less desirable--families know they will get less as their incomes rise, and so it makes financial sense for them to not get a job.

The Earned Income Tax Credit is different. It phases in, plateaus and then phases out. Here's a graph of payments from 2006 from the Internal Revenue Service. You can see the shape of the tax credit--how a family earns more as they make more, and then the credit phases out as they need it less.

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Eventually, the tax credit does cut off when you make too much. But the phase out process is much slower and longer.

Also unlike welfare, the credit hasn't been so divisive along party lines. In fact, Former President Ronald Reagan called it "the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress." The Center for Budget and Policy Priorities says a family of four with one parent working full time at the minimum wage can't rise over the poverty level without the credit and food stamps. "There is broad bipartisan agreement that a two-parent family with two
children with a full-time, minimum-wage worker should not have to raise
its children in poverty," says the center.

The federal credit is pretty safe, having been put into the tax structure over 30 years ago. But many states have an additional credit, giving families an extra 10 percent boost of what they're getting from the feds. As states wrangle over budgets, states like Michigan and North Carolina have proposed cutting their credits, worrying poverty advocates. Kansas is looking at reducing the amount of its credit.

But cutting state benefits has been contentious. A new poll showed 76 percent of Michigan voters oppose cutting the credit. An organization has even sprung up there, Save our EITC, to fight ending the tax credits for poor, working families. They put together a pretty compelling video of Michiganders receiving the credit:

Illinois also has a state credit, but at 5 percent of the federal level, it's the smallest of all the state benefits. In the past, people have proposed the increase, but with our current epic budget deficit, it seems unlikely to happen.

Right now, states have to make tough decisions. There's not enough money in anyone's piggy bank. Certainly, cuts are going to have to come from anywhere. But when it comes to families living under the poverty line, I have to wonder--how many more cuts can they make?

Photo credit: Alan Cleaver

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