SADOW: The Coming EITC Retention Mistake

When Gov. Bobby Jindal reveals his fiscal year 2016 budget tomorrow, it looks as if he will continue the trend of advocating tepid solutions to Louisiana’s pressing budgetary difficulties and bypassing substantial reform of an inefficient and ineffective fiscal system.

As a consensus builds that the state must rein in overgenerous tax exceptions, Jindal offered that the state should cap tax credits that paid out beyond tax liability incurred at that liability. This week his administration estimated this amount at around $590 million. Retaining some portion in that neighborhood would go a long way to closing a budget gap between forecast revenues apportioned to dedicated purposes plus those going into the general fund and current expenditures plus an inflation factor that equals $1.6 billion.

But the Jindal Administration also indicated that some of this “excess” amount would end up off limits to retention, citing approximately $3 million in the form of the School Readiness Tax Credits and $21 million in the Earned Income Tax Credit that would continue to go to eligible recipients beyond their tax liabilities. The former, actually several related items with the one in question the only of five payable to families, kicks back money for a child under the age of six that attends a decently-rated or better child care facility, which essentially could be 150 percent of its federal version (unreduced by federal income tax liability, if any) for a family making $25,000 or fewer, with a $2,100 maximum credit. The latter allows for as much as 3.5 percent of its federal version, graduated by filing status and number of children; for example, a married couple with no qualifying children would have to earn less than $20,330 of which less than $3,400 could be investment income, and some of it would have to be earned through at least part-time work. A family with three or more children could be credited for $218.

The SRTC presently among the states is unique to Louisiana, as a form of preschool provision with the rating scale attempting to reflect in part learning potential of children afforded by the facility in question (which also draws tax credits). The basic idea is not objectionable if policy-makers agree this is a cost-effective way to pay for preschool education (whether that is so is another matter) but the refundable portion subverts it by permitting capture of dollars above liability; a refusal to parcel that out would encourage breadwinners to work more by making that extra income tax free. As such, the rebate should be ended permanently.

About half the states have an EITC, most being refundable and all higher than Louisiana’s (which is the only state in the south to have it). While the EITC does create an incentive to work as opposed to living entirely off of government programs, that’s more of palliative to a symptom rather than addressing the disease that assistance programs are too generous and/or do not distinguish well enough between the deserving poor, who try to the best of their abilities to earn sufficient income and/or who through bad fortune temporarily or permanently cannot, and the undeserving poor, who have the capacity to work and earn a subsistence living but who choose not to and/or make poor lifestyle choices that hamper that ability. As a result, the EITC (which also has a substantial fraud problem at the federal level that therefore becomes replicated at the state level) is a poor substitute for a negative income tax and the negatives of which, its discouragement of working more and more productively, outweigh its positives.

And it doesn’t even hit its target of the deserving poor. For example, a household could be enormously asset-rich, with these assets appreciating noticeably year after year, but as long as these don’t pay much investment income (interest, dividends, or capital gains), its members still qualify for the EITC even if working minimally at their leisure. It’s just a crude and inefficient tool to fight poverty when better, less costly means exist. Not only was it a mistake that Louisiana instituted one in the waning days of all-Democrat control of state government, but it is further entirely counterproductive that it should rebate any money related to it, whether offset by tax liability.

Therefore, if policy-makers really want to cut expenditures via refunds and eliminate an unproductive and ineffective tax break, not only should the refund portion go, but also as well the entire credit. But the Jindal Administration has signaled it’s not willing, mimicking legislators who have proposed a mild paring of the enormously wasteful and costly Motion Picture Investor Tax Credit instead of its withering away.

In the case of the legislators, their watered-down effort may have come from trepidation dealing with a well-heeled industry unafraid to throw its clout around through legislative elections coming up this fall and in capitol corridors. In the case of Jindal, it may stem from an increasing infatuation with running for president for next year and the belief that proposing the entire abolishment of these credits might somehow look “uncompassionate,” consistent with his reluctance to have it appear that taxes could go up on lower-income individuals that made his attempted reform so complex as to doom it in 2013.

Possibly with the SRTC, but certainly in the case of the EITC, which costs state taxpayers nearly $50 million annually, with its net negative policy impact the state can’t afford to let a bad decision continue. The EITC needs not only permanently to have excised its refund portion, but also its discontinuation in its entirety as a first step to curing Louisiana’s inefficient and convoluted fiscal structure that has ushered in recurring budget-making difficulties.

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