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LA EITC negative impact increased by virus

Just as Medicaid expansion exacerbated the coming fiscal crisis Louisiana will face for the next year or so, so does the presence of and 2018 increase to the state’s earned income tax credit.

With Louisiana’s unemployment claims shooting up to a third of a million this week because of the Wuhan coronavirus pandemic, which could produce an unemployment rate of 22 percent, more income tax filers than ever will find themselves in a position to claim this. Essentially, at lower earnings levels it refunds income tax liability. For many, it can act as a rebate greater than that liability, resulting in government subsidization lauded by some as a form of welfare that rewards willingness to work.

A minority of states offer this, which piggybacks onto the federal income version. Louisiana for most of the history of the credit offered it at 3.5 percent of the federal level, but as part of legislation that renewed partially the 2016 tax increases in 2018 for five more years, it also received a temporary hike, to 5 percent.

At that time, supporters claimed the increase, which took the average credit from $119 to $170 per filer, would act as a buffer against the sales tax increase for lower income households. At best, that was overstatement – because of exemptions generally on unprepared food and utilities and most services, only a small portion of these households’ typical expenditures even face state sales taxation – but the theory that the EITC irons out the regressivity of taxes holds true.

The research also shows that the EITC increases willingness to engage in work, but definitively only for single parents at the lowest income levels. By contrast, as constituted it tends to discourage increasing the amount of work undertaken once working or to work more productively, and hardly if at all encourages the assumption of work by those married and/or without children even at the lowest levels. Further, it has an error rate of 25 percent, which at the expected fiscal year 2020 payout that should come in around $68 million means $17 million wasted.

In short, the high level of inefficiency inherent to the mechanism makes it unsuitable as a salutary policy instrument. Despite that, the temporary increase of 2018 occurred, and that will redound negatively for most of the state’s taxpayers in the near future.

With widespread unemployment causing drops in income (taxable, that is; for example, the federal recovery checks of typically $1,200 per person aren’t), far more filers this year will claim the EITC. Assuming state unemployment averages 20 percent for three months (and not even counting workers still with jobs but with reduced hours), with the state’s median adjusted gross income around $30,000 annually, that means 15 percent of the workforce will see only three-quarters of their income this tax year to drop that more like to the $23,000 level.

Having 2019 federal EITC qualifying levels anywhere from $15,820 to $56,844 (depending on marriage and children), for 2020 given the distribution of AGI in returns from the $20,000 and below level at least 25,000 more filers will qualify for the Louisiana maximum of $27 to $333. Assuming all have a child for a $179 payment, that’s $4.5 million more in fiscal year 2021 payouts – $1.3 million more because of the 2018 rate hike.

That amount easily could double depending upon the AGI distribution for above $20,000 and the decreasing value of the credit as income levels go higher. Louisiana having an EITC – much less one it increased two years ago – only will aggravate the tough budget position the state will find itself in over the next two or three cycles, all for a policy that largely doesn’t do what it promises.

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