Low-Income Workers Feel the Pinch of Tax Credit Cut

Hank Kalet | August 8, 2012 | Budget
Decision to trim Earned Income Tax Credit by 20 percent means a smaller safety net

Jennifer Rosado used to receive about $1,250 from the state in the spring, which would help her pay her bills and deal with unexpected expenses.

That was before Gov. Chris Christie cut a tax credit program aimed at low-income workers — the Earned Income Tax Credit — in 2010. The governor, as part of the budget that ended in 2011, reduced the payment by 20 percent, which resulted in a loss of $300 in each of the past two years for Rosado.

Overall, according to an analysis by New Jersey Policy Perspective, a liberal think tank based in Trenton, nearly half a million families — 1.5 million individuals — lost a total of $100 million in tax credits the past two tax years, or an average of $200 per family.

Both the federal and state governments offer the EITC to low- and moderate-income working people. Workers whose income falls below the eligibility threshold –between $36,900 and $50,300 for families with children and $13,900 for an individual — receive a credit of up to nearly $6,000 from the federal government and a similar credit of up to $1,200 from the state. The money is “refundable,” which means that workers receive the difference between the credit and what they might owe in state or federal taxes.

The New Jersey credit, before 2010, was set at 25 percent of the federal credit, but was cut to 20 percent when Christie signed the 2010-2011 budget. Christie, during his January State of the State speech, had proposed restoring the full EITC, phased in over two years beginning with the budget year that ends in 2014. The Democratic budget included a companion bill immediately restoring the full credit. Christie vetoed the EITC legislation, as he did in 2011, because the Legislature did not approve the across-the-board tax cut he proposed.

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“I support the concept of this bill and indeed proposed an increase in the EITC as part of my February 2012 proposal for a balanced budget,” Christie said in his veto message. “That budget proposal, which was not acted upon by the legislative majority, would have also delivered all taxpayers in the state the tax relief they deserve.”

Ann Vardeman, a regional organizer at NJ Citizen Action, questioned the governor’s thinking.

“On a personal level, I find it absolutely despicable that the governor would hold the EITC money hostage to advance a political agenda,” she says. “These are real people and this is a real thing that would help them. To say, ‘I am not going to do this unless I get my tax cut’ is wrong.”

It also is bad economic policy, she says, because it takes money away from people who will spend it immediately.

“What happens is that people who receive the EITC get this large chunk of money all at once,” says Vardeman. “There is one time during year when this happens, and it goes to pay rent, buy clothes for kids, transportation. If they’ve fallen behind, then they catch up with the bills.

“It is a good economic stimulus. It puts money into the hands of people who will spend it. The effect has been, when Christie cut back the EITC, he took $100 million out of the economy.”

The Great Recession

Ray Castro, senior policy analyst for New Jersey Policy Perspective, says about one in seven New Jerseyans receive the EITC, which has become extremely important during the current recession.

“There has been a 25 percent increase in the number of families below the poverty line since the recession started,” he said. “The EITC is a good way to deal with it.”

The cut also amounts to a tax increase on the working poor, for whom the cut can equal as much as a week’s salary, Castro said.

“They are the only group paying more in taxes than they were since Christie took office,” Castro said. “The credit is used to defray state and local taxes. The average low-income person pays $2,700 in all of these other taxes. The EITC defrays that.”

Castro says the EITC should be uncoupled from the tax cut debate.

“Working class people should not be held hostage to budget negotiations,” he said. “There have been $1.5 billion in tax credits to corporations over the last several years, and there are questions about how effective they are. “

Vardeman said the recent revenue estimates — a $200 million shortfall for the just-ended budget year — could further endanger the EITC reinstatement because it makes approval of the governor’s proposed tax cut even more unlikely.

“One hopes that he would stick to his word and at least put the $25 million in that he said he would put in next year, though he is in no way required to do it,” she said.

For Rosado, 26, a single mother of two who lives in Lawrenceville, the refund has helped her stay afloat, despite some difficult economic times. She gave birth to her daughter at age 16 and a son three years later and found herself homeless at age 21, after she left her mother’s house in East Windsor. She spent six months in a transitional program and now works two jobs — at the Mercer Alliance to End Homelessness and a local car dealership — and is attending school.

For several years, she earned just $1,100 a month through the Americorps Vista program, which helped her get on her feet, but was nowhere near enough to do anything more than live paycheck to paycheck. She now earns about twice that, but still has difficulty making ends meet.

A Cold Winter

That’s where the Earned Income Tax Credit comes in. If the winter is especially cold and her heating bills exceed what she anticipated, she said, the EITC covers the difference. The same goes for her water bill, her sewer bill and other expenses.

“If financial aid didn’t cover my books, if I spent extra on gas or with the kids, I had the backup,” she said.

The state and federal credits allow her to cover expenses for which she had not budgeted, such as when her car died recently. She was able to use the state refund for a down payment. Without a car, she said, she would be forced to take a series of buses to work and to get her kids to childcare and school and it would make it difficult to respond if there is an emergency.

It also helped her pay off previous debt and get herself established after she was homeless.

“The money has kept me from going back into the homeless situation,” she said. “Every point, I’m on the brink. The money helps with what my income can’t cover.”

That was the point of the EITC when it was created, says Castro, who worked in the Whitman administration at the time. The EITC was intended as an incentive to keep people off welfare.

“An EITC gives low-income workers more incentive to continue working and to not go on welfare,” he said. “If you are making minimum wage, paying childcare, taxes, it hardly pays for you to work. What we thought was that we would provide additional incentives for people to work.”

It also makes it easier for low-wage people to live in one of the most expensive states in the country.

“In New Jersey, if you’re making less than $50,000, it is hard to live here,” Castro said. “The EITC supports those families and encourages them to work. It helps them with respect to recession, and there is a lot of research that it gives a lot of benefits to kids. It allows parents to better support their children, to give them shoes, the clothes they need. Because some of these parents get it in lump sum, they invest in education and other things.”

That’s what Rosado has been able to do, using some of the money to pay for activities for her kids, in addition to the day-to-day expenses it has helped defray.

“I want my kids to live a good life,” she said. “I grew up in a nice suburban area. I want them to have the same.”

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