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EITC bill support illustrates LA's troubled fiscal policy

The debate that surrounded the Louisiana House’s wise rejection of inflating the Earned Income Tax Credit was less a policy discussion and more an expository about the attitudes that produced the budget difficulties of this year that promise to recur.

Representatives narrowly defeated state Rep. Walt Leger’s HB 70, denying it by five votes, which would double the credit to seven percent of the federal version. About half the states have this, with Louisiana’s the lowest and the only southern state on the list. The federal program is particularly generous for families with children: while the 2015 levels mean that a single person working minimum wage full time gets almost nothing from it, a single mother raising three children making three times minimum wage still would qualify for a higher rebate.

And rebate it is, for even making that amount of money, the latter household (assuming the mother’s wage is the only cash income, although this family also likely would qualify for some other assistance programs as well), the size of the credit not only would wipe out all income tax liability but also give back over $2,000 more than that (and this does not include other tax credits that this family would qualify for, such as child care). This is why the current Louisiana credit costs $47 million annually and the federal one yearly now over $60 billion – more than what is spent on the higher-profile, more-criticized Temporary Assistance for Needy Families cash benefits program, making it the most expensive cash benefit program in the nation.

In fact, the EITC does not do a whole lot to address the “poor” if defined as does the federal government relative to its federal poverty limit. For 2015, the adjusted gross income under which the EITC may be claimed in the least generous case, a single person, is about $3,000 over the FPL, while in the most generous case, married with three children, it’s almost $25,000 higher or almost double. As a result, research suggests its benefits end up being exercised as much by households with children that are not defined as “poor” even if they are lower-to-middle income as those defined as being in poverty. In fact, households can be very asset rich, but as long as their incomes are low, they still qualify for the EITC.

Studies also determine that the EITC’s impact on seeking employment is marginal to nil; it provides little motivation to seek work, where compulsory measures end up the main driver of this. It does seem to have a small impact on job retention; that is, after the compulsory measures such as time limits on not participating in an assistance program expire, the EITC discourages quitting working and accessing more cash benefits.

However, its main substantive problem is the disincentive it provides to work past a several level. The rebate acts as a per hour subsidy, so a full-time wage can be earned with part-time work. That also dampens motivation to seek higher-paying work, so together these facets exacerbate underemployment. In short, while the EITC can help reduce the poverty of that subgroup whose abilities would bring little return in the marketplace, it also pays others not to work as much or as well.

Yet worse is its procedural problem, in that the program is rife with fraud because of its lax construction and enforcement. Typically, ineligible recipients or eligible recipients who inflate the value of the credit abscond with a quarter of the money paid out, meaning nearly $12 million annually cheated out of Louisiana taxpayers.

To summarize, the EITC does reduce poverty to a degree, but in a wasteful, inefficient manner when other alternatives exist. More strenuous work requirements – relaxed during the Pres. Barack Obama Administration – would improve the program, or replacing it with a wage subsidization program (otherwise known as a negative income tax) that would subsidize employers offering full-time jobs that operates much more efficiently (including much less fraudulently) and reduces the propensity of EITC recipients to trade work for subsidized leisure.

But from the rhetoric coming from Democrats such as Leger and state Rep. Pat Smith in debate about the bill, you’d never have known any of this. Their support for this increase – when wiser policy would abolish it, as an amendment offered by state Rep. Alan Seabaugh until withdrawn would have done – fits their disturbing pattern of advocating the spending of more of the people’s money on a “solution,” no matter how ill-suited to actually addressing a problem adequately these may be and especially when better options exist, and then accusing opponents to such flawed policy of favoring other interests, such as business. Demagoguery, rather than reasoned analysis, is their stock in trade.

And that’s why Louisiana continues to suffer budgetary troubles. Symbolism trumps substance in fiscal policy: it looks good and may make you feel better to redistribute money to the “poor” regardless of whether they act in ways that deserve taxpayer assistance, and any other view is considered illegitimate and therefore defines opponents as cretins. Or you can claim to create jobs in a glamorous industry such as movies or in a trendy one that allegedly saves the planet regardless of the fact that both the motion picture investor tax credit and the solar installation tax credit costs taxpayers multiple tens of thousands of dollars for each job.

Altogether, these waste hundreds of millions of dollars a year, yet this year barely any legislative effort succeeded in reining them in, much less getting rid of them. And then those who would make the problem worse have the arrogance to call those providing genuine and sustainable paths towards greater budget solvency names instead of having open minds and a willingness to explore all policy options.

Leger hopes to try again with this bill, but its flaws remain unaddressed, and legislators do the state a service by not giving it another chance.

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