Maintaining this tax credit in its current form is important not only for the well-being of the families that benefit, but also to save the country from other more costly (and less effective) poverty-reduction alternatives such as minimum wage increases.
The EITC was created in 1975 by President Ford as a small tax credit for low-income families. Subsequent presidents have expanded it far beyond its modest roots. Republicans like the credit because you can only receive it if you have earned income, which provides an incentive to work; Democrats like the credit because it’s refundable, which means you can claim it whether or not you owe taxes.
Even states have been enthusiastic about the EITC: Twenty-four states offer a supplement to the federal payment. The advent of these state payments has provided economists with a rich dataset to demonstrate the EITC’s effectiveness at boosting the employment of people from low-income demographic groups while also reducing poverty rates.
For instance, San Diego State University economist Joseph Sabia has found that a 10 percent increase in a state’s EITC credit is associated with as much as a 1.5 percent increase in employment for single mothers. In another study, Sabia found that a one percent increase in the EITC reduces state poverty rates by one percent.
Compare this track record with that of another popular alternative — raising the minimum wage. When Congress increased the minimum wage by 40 percent between 2007 and 2009, researchers from Cornell and American Universities found that roughly 85 percent of employees who benefitted were not in poverty. Beneficiaries were often second or third earners in households with income levels far above the poverty line.
This targeting problem still exists: Census Bureau data show that if the federal minimum wage were raised to $9.80 per hour (the level proposed by Democrats in Congress), the average family income for a beneficiary of such a hike is over $50,000 per year.
Meanwhile, the EITC is precisely targeted at low-income Americans. For instance, a single parent earning the minimum wage of $7.25 an hour with two children currently receives over $5,000 a year in additional income from the EITC, boosting their hourly wage to nearly $10.
It’s because the EITC is so effective at helping low-income families that it was expanded as part of the tax cut package signed by President George W. Bush, and again as part of the stimulus bill signed by President Obama. But permitting the Bush and Obama EITC expansions to expire would give advocates for a higher minimum wage an opening to push their own policy — a policy that’s poorly targeted, raises hiring costs, and has been proven to reduce employment for exactly those groups (e.g. single parents) that it’s supposed to help. Cooperation hasn’t been the strong suit of Congress or the President these past few years. But on an issue as important as this one, with our country’s most vulnerable families on the line, they should come together to extend expiring EITC provisions and prevent even more harmful alternatives from gaining momentum.
Saltsman is a research fellow at the Employment Policies Institute.