Make earned income tax credit a more effective anti-poverty tool: Guest commentary

Wednesday, May 24, 2017

The earned income tax credit stands out as the most effective pro-work, anti-poverty policy the United States has devised.

California is among 27 states that offer an additional state EITC on top of the federal credit. However, due to its unusual structure and the new statewide minimum wage increase, its effectiveness will soon be undermined as people work fewer and fewer hours to qualify for large EITC payments.

An increase in the minimum wage should be matched by an increase in how much families can earn and still qualify for the Cal EITC. Assembly Bill 225 sets forth just that.

The magic of the EITC is that it creates work incentives strong enough to reduce poverty even before families receive income from the credit. Evidence shows that a more generous EITC increases the number of families who earn their way out of poverty, reduces the number of single mothers below the poverty line, and delivers benefits to parents and children in a way that is likely to pay future dividends.

he federal EITC does this for people across a wide income range. For a family with 2 children, it adds a substantial 40 percent to the first $14,040 of earnings, up to a maximum credit of $5,616. The credit amount then stays flat until earnings reach $18,340, and phases out gradually until it is eliminated when income exceeds $45,000. This boost to earnings gets people into the work force. The potential downside is that higher income families facing the phase out might work fewer hours. However, under the federal EITC, that sets in at fairly high income levels and does not undermine the strong anti-poverty effects of the credit.