April 11, 2013
The Earned Income Tax Credits (EITC) is widely recognized as an effective, short-term tool for lifting low-income working families out of poverty by encouraging work and supplementing low wages. Rhode Island should enhance the effectiveness of its state EITC by increasing the refund available to low-wage workers. This would put money in the pockets of low-income working households that could help provide for basic needs, pay for extra expenses such as a security deposit or car repair, and build assets for the future.
The federal Earned Income Tax Credit
The federal income tax credit was created in 1975 to provide an incentive to work and offset federal payroll and income taxes for low- and modest-working individuals and families. The credit increases with earned income until it reaches a maximum amount (which depends on the overall income and number of children) and then phases out as income increases. When the credit exceeds the amount of taxes owed, the balance is refunded to the taxpayer.
Recent research suggests that the benefits of the EITC are extensive. Not only does it increase the work effort of those receiving the credit, but their children appear to be healthier, do better in school, are more likely to enroll in college, and earn more as adults. i Between 2009 and 2011, an estimated 18,550 Rhode Islanders were kept out of poverty by the federal EITC. ii
State Earned Income Tax Credits
Rhode Island is one of the twenty four states (including the District of Columbia) that offer their own EITC, but unlike most states, the Ocean State’s credit is only partially refundable. Under the current state law, low-income taxpayers with jobs in Rhode Island can receive a credit worth 25 percent of the federal EITC. iii The credit is applied against taxable income and similar to the federal policy, if the credit exceeds the amount of taxes owed, the balance is refunded to the taxpayer. However, only 15 percent of the unused amount can be refunded. This means that only 3.75 percent of the federal EITC is refundable, for a maximum state refund of $221 for a family with three children.
Close to 83,000 Rhode Island taxpayers claimed the state’s EITC in Tax Year 2011. The average credit was $119.67. Of those taxpayers receiving a credit, 71,520 received a refund, averaging $81.94. iv
Increasing the refund available under the state’s EITC will boost income, reduce inequality and improve tax equity
Increasing the refundable portion of the state’s EITC to fifty percent (50%), as opposed to its current fifteen percent (15%), would help put money in the pockets of the state’s lowest wage working families and single adults. A very low-wage working family with three dependents could be eligible to receive a maximum tax refund of $736 a year, instead of the current maximum of $221. This would not only help families meet their basic needs, but these are dollars that are likely to be spent in our local economy.
An increase in the state’s refund could also help to curb the growth in income inequality in Rhode Island. Income gaps widened more in Rhode Island than in all but eight other states between the late 1970s and the mid-2000s. v The richest fifth of Rhode Island households saw their income almost double, while the poorest fifth saw their income climb by just 12 percent.
This proposal would also help improve Rhode Island’s regressive tax structure. vi Combining all state and local taxes, the poorest 20 percent of Rhode Island households contribute almost twice as much of their income towards taxes (12.1 percent) as the wealthiest one percent of households (6.4 percent). Strong state EITCs can help offset regressive state sales and property taxes. Rhode Island now has the unfortunate distinction of being among the ten states that impose the highest taxes on the poor. vii
Rising poverty rates, record-breaking enrollment in SNAP, and stagnant wages tell us that low-income households in Rhode Island continue to suffer the effects of the Great Recession. Increasing the refund offered through the state’s Earned Income Tax Credit would boost the income of low-wage households, enhance tax equity, and curb growing income inequality in the Ocean State.
i Chuck Marr, Jimmy Charite, and Chye-Ching Huang. “Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School, Research Finds.” Center on Budget and Policy Priorities, April 2013.
ii www.taxcreditsforworkingfamilies.org/working-families-poverty-eitc-ctc-state/ with data from the Brookings Institution analysis of the Supplemental Poverty Measure Public Use Data.
iii R.I.G.L. 44-30-2.6
iv Rhode Island Department of Revenue, Division of Taxation. Rhode Island Statistics of Income Report 2011 Resident and Non-resident reports. http://www.tax.ri.gov/reports/
v Elizabeth McNichol, Douglas Hall, David Cooper, and Vincent Palacios. Pulling Apart: A State-by-State Analysis of Income Trends. Center on Budget and Policy Priorities and Economic Policy Institute. November 15, 2012.
vi Institute on Taxation and Economic Policy. Who Pays? A distributional analysis of the tax systems in all 50 states. January 2013.