Columns » Jay Barth

An Arkansas EITC

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Half the states now have a state Earned Income Tax Credit (EITC), reinforcing the benefit to the working poor provided by the federal EITC in place since the mid-1970s. Despite efforts in recent years in Arkansas, a state EITC has not been created here, though a flurry of other laws have provided tax cuts benefitting higher-earning Arkansans. There are some signs that the time may be ripe for a real discussion about the creation of an Arkansas EITC. It's a policy change that makes sense in terms of economic benefit to the working poor and to the state as a whole.

The EITC is that rare bipartisan tax provision. Progressives like the EITC because of its impact in cutting poverty and in lessening inequality, citing the fact that each year approximately 6 million Americans (over half of them children) are propelled above the poverty line annually by the federal tax credit. Indeed, many contend that the real secret to dramatic poverty reduction in the United States during the Clinton administration was not the better-known 1996 welfare reform legislation, but was instead the significant expansion of the EITC included in Clinton's 1993 deficit-reduction legislation. While some grumble (cue Mitt Romney's "47 percent" comments) that the federal EITC means that a significant portion of Americans who receive government benefits pay no out-of-pocket taxes, many conservatives are drawn to it because of its explicit rewarding of work and family; President Reagan called the federal EITC "the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress."

State EITCs typically are set at a fixed percentage of the federal credit that takes into account workers' income and number of dependents (it now nears $6,000 for a poor family with three or more children), making it relatively easy to administer. In almost all cases, as in the federal program, states allow taxpayers to actually receive a refund that can immediately be used to take care of their family's pressing economic needs. Such families are not just living "paycheck to paycheck," but instead are too often living "payday lender to payday lender." Thus, the benefits from an EITC (federal or state) are typically plowed right back into the economy, unlike tax cuts for wealthier individuals or for corporations. As a result, with the economy healthier and state budgets more flush, more states are looking at adding EITCs.

The primary legislative proponent of an Arkansas EITC, Rep. Warwick Sabin (D-Little Rock), will definitely introduce his "Working Families Opportunities Act" again. The question is whether that will be in the 2016 fiscal session or in the 2017 full session. Sabin knows he needs visible Republican support in the GOP-controlled legislature to have any chance of moving the legislation. Moreover, it is crucial that the state EITC be reframed from a benefit to the poor to a benefit to the broader Arkansas economy. Support from the business lobby becomes vital to that reframing. Corporations such as Entergy (which knows working families often have to make choices between paying an energy bill and buying food) and Walmart (from which many EITC beneficiaries purchase the necessities of life) have in recent years promoted (and hosted) free tax preparation services for the working poor to help them gain the federal EITC. The question is whether that charitable spirit will morph into lobbying support for a state EITC.

The creation of an Arkansas EITC makes particular sense for two reasons. Because of the large percentage of Arkansans, especially kids, living at or near the poverty line, a state EITC here would have immediate impact on hundreds of thousands of Arkansans, much like the private option. Moreover, Arkansas's overall tax system is graded the 11th most regressive in the nation by the Institute on Taxation and Economic Policy.

The price tag on an Arkansas version of the EITC is not inconsequential — up to $70 million annually (depending upon the percentage of the federal EITC employed*) in a tight budget. However, as Ernie Dumas wrote last week, there will be concern about any increase in a gas tax that must be at the heart of a new roads program for the state. A state EITC could partly balance out the impact of a gas tax both in terms of the tax increase itself as well as its regressive nature. The passage of an Arkansas EITC remains a long shot, but the pay off would be a significant one for the state.

*This parenthetical was added to an earlier version of this column.

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