Facing large budget shortfalls, a small number of states are scaling back tax credits for low-income working families, which not only harms some of the families hardest hit by the recession but also weakens the economy by lowering overall demand. States have other budget-balancing strategies that are better for both vulnerable families and the state economies.
Millions of low-income working families and individuals are relying on federal and state tax credits, such as Earned Income Tax Credits (EITC), to help them endure the recession. The economic crisis has increased unemployment and reduced work hours and wages. Credits offered by states help to alleviate this hardship and stabilize incomes.
The benefit of such programs also extends to the economy at large. State tax credits for lowincome families put money into the hands of people most likely to spend it, and most likely to spend it in their local economy.
Most states are maintaining these important programs. But a few have recently taken steps to cut back their credits. For example:
• Virginia enacted a cut to its EITC that would raise taxes by $6 million on an estimated 114,000 low-income working families. (This cut might be reversed before it takes effect.)
• Minnesota cut back a renters’ credit affecting 300,000 low- and moderate-income households and eliminated a gas tax credit.
• Georgia is considering eliminating $22 million in wage support for 1 million workers earning less than $20,000 per year.
Similar measures have been proposed in New Jersey, the District of Columbia, and Montgomery County, Maryland.
Supporters have presented these reductions and proposed reductions in other states as budgetbalancing measures. Yet raising taxes on low-income working families is not the best option for raising state revenue. In some cases, proposals and legislation to roll back low-income tax credits are being made alongside proposals to cut taxes for wealthy individuals and corporations, which likely would neither strengthen the economy nor create jobs. On balance, it would be far better for working families and for state economies if states would maintain existing refundable low-income tax credits, cancel other costly tax cuts, and raise needed new revenue from higher-income families and profitable corporations.
This is an excerpt of a report from the Center on Budget and Policy Priorities. See the full report here.