One proposal in President Obama’s budget could double the effect of low-income assistance in 15 states and boost it in many more, according to a new analysis. And economists on both sides of the aisle support it.
Even Bill Gates touted it when he spoke last week at the American Enterprise Institute. It is the Earned Income Tax Credit, which eases the tax burden on the poor, and Gates argues that expanding it would more clearly serve low-income Americans than a minimum wage hike.
He fears that the mechanization of labor — i.e. people being replaced by robots and software — combined with minimum wage hikes could discourage firms from hiring. The EITC, instead, helps people on the back end: labor stays cheap so businesses are willing to hire, but the poor get a boost through tax relief. (Some argue that it’s also a veiled boon to businesses: “if the minimum wage is a tax on low-wage employers, then the tax credit is a pretty hefty subsidy,” writes Jared Bernstein, former economic adviser to Vice President Biden.)
But the EITC has been backed by economists who have advised President George W. Bush and Republican presidential candidate Mitt Romney. They say it’s preferable to a minimum wage hike, while President Obama and Democrats, including Bernstein, argue for both. Whatever your view, it’s viewed by many an effective tool in fighting poverty. (Read more about Obama’s proposal from our colleague Zachary Goldfarb.) And an expansion, at least as outlined in the president’s budget proposal, would double the number of beneficiaries in at least 15 states and provide big boosts in many others, according to a new Brookings Institution analysis.
The Brookings analysis looks at a few plans, but we’ll stick with the president’s for the sake of simplicity. It raises benefits for 7.6 million people and expands to include an additional 6.6 million, bringing the total number of tax filers who benefit from the EITC to 14.1 million, according to Brookings. The plan achieves its expansion by broadening the number of childless workers eligible. It would lower the minimum age to receive the credit from 25 years to 21, while raising the upper limit from 65 to 67. It also increases how the tax is phased in and out, doubling the maximum benefit to $1,000. (See chart below, which also includes an analysis of a proposal from Senators Sherrod Brown and Dick Durbin.)
The president’s proposal would boost the number of eligible filers by 85 percent or more in 26 states, with Vermont, Rhode Island, North Dakota, and Iowa seeing the largest relative increases from their current levels. In Vermont, the pool of eligible filers would grow to 155 percent of its current level. Alaska would see the smallest boost. The number of eligible filers there would grow by only—only—65 percent.
The largest benefit increases would come to childless workers in Nebraska, Wisconsin and Wyoming, where benefits would grow an average of $370 each to just over $600. California, Texas, Florida, North Carolina and Pennsylvania would see the lagest increases in overall benefits, with additional federal credits valued at nearly $725 million going to filers in California and roughly $265 million in Pennsylvania.
The proposal would also have a big impact on the nation’s 100 largest metropolitan areas, where 61 percent of affected filers live. In Chicago, for example, 371,000 filers would see benefits rise or would be newly eligible for them. In Los Angeles, a total of about 565,000 would be affected. In New York, the total affected is 642,000.