Archive - Earned Income Credit

Testimony on Emergency Bill 24-99 -
Working Families Income Supplement

Presented by Nick Johnson
Center on Budget and Policy Priorities
and Maryland Budget & Tax Policy Institute
September 28, 1999

Related Reports

Thank you for the opportunity to speak to you today. The Center on Budget and Policy Priorities, a nonprofit, nonpartisan research and policy organization based in Washington that studies the impact of government tax and spending policies and programs on low-income families. For nearly two decades, the Center has been one of the nation's leading organizations in analyzing the federal Earned Income Tax Credit, which is a tax credit and an income supplement for working-poor families.

Over the last several years, my colleagues at the Center and I have worked closely with efforts to establish similar tax credits at the state level around the country. I also am a senior policy analyst with the Maryland Budget & Tax Policy Institute, based in Silver Spring, which was closely involved in the enactment of a Maryland version of the federal Earned Income Tax Credit. The Budget & Tax Policy Institute is a project of the Maryland Association of Nonprofit Organizations.

Summary: A County Income Supplement Would Further the Goals of the Federal and State Earned Income Tax Credits

The problem of poverty despite work is widespread. Some 100,000 Maryland children with working parents are poor. The 1996 federal welfare law and subsequent legislation at the state level stressed the importance of work, yet for many parents, even a full-time job does not pay enough to make ends meet.

Emergency Bill 24-99 would provide aid to those parents. It would create, in effect, a county-level supplement to the Maryland Refundable Earned Income Credit, which in turn is based on the federal Earned Income Tax Credit. Under the bill, Montgomery County would match the state credit for each recipient who lives in Montgomery County. The state Comptroller of the Treasury would administer the program, using county funds.

A Montgomery County income supplement would build on the strengths of the federal and state Earned Income Tax Credits.

• Earned Income Tax Credits reduce poverty among children. EITCs provide direct income support to increase the incomes of poor families. The federal EITC, for example, now lifts more children out of poverty than any other government program -- 2.3 million children per year, according to the President's Council of Economic Advisors.
  
  Despite the strengths of the federal credit, many working families remain poor. State and local governments can fill the need for additional income assistance by enacting EITCs based on the federal credit. Maryland is among 11 states that now offer Earned Income Tax Credits based on the federal credit. This year, some 12,000 Montgomery County families -- nearly all of them with incomes below the federal poverty line -- are benefitting from the state's credit. Maryland's credit is not as large as those in some other states. The maximum credit equals $400 per family, rising to $600 in tax year 2001, compared with maximum credits in other states of over $1,000. But the credit nonetheless provides a substantial boost for families struggling to make ends meet. By matching the state credit, the proposed county income supplement would further reduce the extent of poverty among children.

• Earned Income Tax Credits support welfare-to-work. For families entering the workforce, the value of an EITC rises as a family's work effort increases. Research has shown that EITCs encourage welfare recipients to enter the workforce. Surveys of EITC recipients also show that many working families use their credits to make the kinds of personal investments in education, housing, or paying off old debts that can help them improve their economic opportunities. The proposed county income supplement would expand families' economic opportunities.
  

• Earned Income Tax Credits improve tax fairness. A major role of the federal EITC is to offset the burden of regressive payroll taxes. Similarly, at the state level, state EITCs help offset the burden of sales, excise, and property taxes, which are particularly burdensome on the poor. They can also help ensure that working-poor families receive some of the benefit from tax cuts that otherwise would accrue mostly to higher-income families. The proposed county income supplement would help offset the cost of state and local taxes and would also complement the county tax cuts enacted earlier this year, expanding benefits to include more working-poor families.

To my knowledge, no other local government in the United States offers an EITC or a comparable wage supplement. However, based on the strong interest of policymakers at the state level and the increasing devolution of responsibility for combating poverty to local leaders, it would not surprise me if other local governments follow Montgomery's lead on this issue.

Note: Emergency Bill 24-99 was passed by the Council Council on October 19, 1999 and is expected to be signed by the County Executive. The complete text of this testimony is available by contacting the Maryland Budget & Tax Policy Institute at 301-565-0505.

Related Reports:

• A Primer on Earned Income Credits in Maryland, August 1999.
• An Earned Income Credit for Montgomery County's Working-Poor Families, July 1999.
• Working But Poor in Maryland, January 1998 (update coming soon!).