Emerging unscathed so far amid this year’s increasingly contentious budget talks is a plan to boost funding for a widely praised tax break that benefits more than half a million low-wage workers in New Jersey.
A three-year ramp-up of the state’s Earned Income Tax Credit (EITC) was established last year in legislation approved by the Democratic-controlled Legislature, and Gov. Phil Murphy’s proposed state budget fully funds the next scheduled increase in the coming year.
The size of the average credit would rise above $1,000 for the first time as a result of the increased funding. The tax break has won support from both Democrats and Republicans since it is thought to be a strong incentive for keeping low-wage workers employed and off government-assistance programs.
The cost of providing the more generous EITC in fiscal year 2020 is fairly modest, but advocates say the state will get a big bang for its buck. As proof, they point to studies that show the EITC consistently helps lift families out of poverty while also reducing their reliance on more costly assistance programs.
And even as they’ve engaged in high-profile disagreements over other tax-policy issues, such as the future of corporate-tax incentives and a proposed millionaire’s tax, the governor and key lawmakers appear to be in lockstep when it comes to expanding the EITC.
“It’s very encouraging,” said Brandon McKoy, president of New Jersey Policy Perspective, a liberal think tank based in Trenton that has long advocated for the EITC.
State program builds on federal credit
According to the Washington, D.C.-based Center on Budget Policy Priorities, New Jersey is one of 29 states that offer their lowest-wage workers a state EITC. The states typically base their credits as a percentage of a federal version of the same tax break, which in 2017 helped to keep an estimated 5.7 million people out of poverty nationwide, according to CBPP’s latest analysis.
New Jersey has one of the nation’s most generous EITC credits, and last year’s increase pushed it from 35 percent of the federal benefit to 37 percent. The increase provided an average benefit of roughly $986 to an estimated 510,000 taxpayers in tax year 2018.
Under Murphy’s budget proposal for FY2020, the size of the state’s EITC would rise again for tax year 2019, up to 39 percent of the federal credit. The administration estimates it will boost the average state credit by more than $100, to $1,089.
There are a range of income qualifications that must be met in order to receive the state credit. The annual income limit is at $15,270 for individuals age 25 or older who have no children, and rises to up to $54,884 for married couples with three or more kids, according to the state Division of Taxation. The tax break works as a refundable credit for low-wage workers, meaning they can get a refund even if their credit is larger than what they owe in taxes.
Popular through the years
In the past, the EITC has won praise in New Jersey from Republicans like former Gov. Chris Christie, who increased the credit to 30 percent of the federal benefit in 2015. Democratic legislative leaders also made another EITC increase a key element of tax-cut legislation enacted a year later as part of a broader plan to offset an increase in the state gas tax. Murphy, a first-term Democrat, has also touted the benefits of the EITC, and it was his signature on the 2018 legislation that triggered the current, three-year ramp-up to 40 percent of the federal credit.
According to the Department of Treasury’s latest Tax Expenditure Report, EITC funding is projected to rise from $545 million in FY2019 to $602.7 million next year, as the overall budget is expected to grow to near $39 billion. By contrast, the cost of corporate-tax incentives is projected to increase from $466 million to over $1 billion in FY2020 as more companies are expected to redeem their pledged tax breaks, Treasury officials said.
During budget committee hearings in Trenton last week, lawmakers gave state Treasurer Elizabeth Maher Muoio a tough time on issues like the corporate-tax incentives and the millionaire’s tax, and they continue to be a source of discord between the governor and legislative leaders. But no one questioned the wisdom of boosting state funding for the EITC as Muoio said the increased tax relief would go to “working families in New Jersey who need it most.”
In an interview yesterday, McKoy said the EITC expansion is more likely to provide a direct boost to the state economy since research shows low-wage workers typically put their refundable credits right back into the economy, on things like bills, car repairs and investments in their homes. He called it an example of “Main Street economics.”
“Definitely that’s a more effective way to improve the economy,” McKoy said. “It’s growing the economy from the bottom up.”