Inefficient EITC needs to go to cut LA spending

Concerning the dueling between bills to double or to eliminate Louisiana’s Earned Income Tax Credit, the state’s dire budget situation strengthens the already-compelling case to repeal it.

HB 4 by state Rep. Tony Bacala would end it for next tax year, while next-door HB 5 by state Rep. Walt Leger would send it to seven percent of federal adjusted gross income for next tax year. A House panel heard the bills together last week.

The program, estimated to give out $47 million to Louisianans claiming it this year with about half of that in nonrefundable form, at best represents a crude and inefficient way to alleviate poverty that in theory might work but finds itself in the scope of poverty programs working at cross-purposes. Its wastefulness comes from both inappropriate payouts and treating a symptom rather than the disease.

While the Internal Revenue Service asserts an “error” rate of roughly a quarter, that does not definitively measure actual fraudulent applications that, anecdotally computed, may send the rate much higher. While an argument could be made that better enforcement could prevent both unintended and intentional errors, having to verify every filer’s marriage status, dependents, assets, and investment income makes such a solution cost prohibitive, adding to already substantial administrative costs (at the federal level, 39 percent of IRS audits occur with returns claiming the EITC).

Besides direct bureaucratic costs, society pays another indirectly with the EITC in that it removes money that could go to other government activities, meaning fewer tax dollars paid in at the state level. Separating these dollars from productive individuals that otherwise may find use in investment activities also stunts economic growth that supplies the most reliable way to diminish poverty.

Worse, the EITC’s structure – paying increasingly more as income rises then levels off and subsequently declines to zero at a certain amount – encourages only minimal work and depresses wages for those at the lowest earning levels by acting as a subsidization mechanism for employers, also reducing economic output. It has only a weak impact on coaxing people into in the workforce and in their retention relative to other factors, one of its main selling points often voiced by its proponents.

In isolation, the EITC might exhibit a more positive economic impact. However, its combination with other welfare programs that makes total work effort less attractive only exacerbates the dampening effect, causing an economy less able to provide jobs and higher wages that best helps the poor. Its inherent flaw comes from an erroneous understanding of poverty – this does not come from the able-bodied having a lack of resources, but from their attitudes and the behavior that follows from these that impede accruing these resources without some kind of preferential treatment from government.

Advocates of the EITC also attempt to justify it by arguing that studies show children in families who receive the tax break perform better in school, making them more likely to become taxpaying citizens themselves. But this claim makes the classic mistake of confusing association with causation; the reason those children may do better than their peers in families that do not work is their parents value work more to begin with, as shown by their willingness to take a job that qualifies them for the EITC, and they pass this attitude that encourages achievement onto their children.

In the final analysis, the EITC’s costs outweigh its benefits. Better anti-poverty measures that promote work exist, such as wage subsidization programs – some variants of which, ironically, have received much more discussion about their curtailment than the EITC – and given that next year’s forecast deficit looms exceptionally large, no practical or moral reason exists for continuing this taxpayer expenditure.