In the wake of the state comptroller’s scathing audit of the Economic Development Authority, New Jersey lawmakers are faced with a critical question: Do tax credits actually work? And if so, for whom?
If the goal is to reduce poverty and expand economic opportunities, corporate subsidies have fallen short with dubious returns on investment. Fortunately, there are other tax credits better suited to support workers and promote shared prosperity.
Enacted in 2000, New Jersey’s Earned Income Tax Credit (EITC) accomplishes many of the same goals as the state’s corporate subsidy programs, except it cuts out the middleman and provides a direct benefit to low-paid workers who need it. Historically, the EITC has received bipartisan support, with governors and legislators of both parties increasing the credit amount. On its way to 40 percent of the federal credit, New Jersey’s EITC is now among the highest in the nation.
In 2018 alone, New Jersey’s EITC contributed almost half a billion dollars to over 500,000 households. And the economic benefit of these investments extends beyond the credit amount, as low-paid workers typically spend their tax credits immediately and locally on things like clothes, groceries, car repairs, and furniture.
A win for workers, businesses and state
Economists estimate that this spending gives the EITC a multiplier effect between 1.5 and two in the economy, meaning that every dollar of tax credit generates between $1.50 and $2.00 in economic activity. That’s a win for workers, local businesses, and the broader state economy.
Despite the EITC’s effectiveness, far too many New Jersey residents miss out on this important resource. Young adults, who need a strong foundation as they start their careers, are often excluded from the credit despite facing barriers to success, such as massive student loan debt and prohibitively high costs for homes. That’s because eligibility for the credit is narrow — it depends on income, family type and size, immigration status, and residence. For workers without children at home, it’s also tied to age.
A 28-year-old single parent of one child who earned $12,000 in New Jersey in 2018, for example, would have been eligible for a state EITC of $1,281. While this is still too little to cover basic needs in New Jersey, a worker under the same circumstances without children at home would receive a mere $92 credit. That’s a huge difference of $1,189. Because eligibility for the childless EITC is limited to workers between the ages of 25 and 64, a 23-year-old single worker without children with the same income would not qualify for any EITC.
This disparity persists as New Jersey’s EITC follows the same structure as the federal credit. With a few minor changes, however, state lawmakers could significantly improve the EITC’s eligibility requirements and provide a stronger foundation for New Jersey workers.
Several recent federal proposals, including one introduced by New Jersey’s own U.S. Rep. Bonnie Watson Coleman (D-12th), include provisions to improve the accessibility and amount of tax credits for workers. New Jersey does not, however, need to wait for federal legislation to act.
Other states have made improvements
In 2014, D.C. increased its childless EITC from 40 percent to 100 percent of the federal credit and raised its income caps above federal limits. In 2017, Minnesota expanded eligibility by reducing the minimum age for childless workers from 25 to 21. In 2018, Maryland eliminated the minimum age requirement for childless workers altogether, and California expanded its eligibility rules to include all childless workers over 18.
New Jersey could join the states that have already expanded the impact of their EITCs by increasing benefit rates and opening eligibility beyond the federal rules. Removing the age restrictions for the childless EITC and increasing the amount to 100 percent of the federal credit would increase support for New Jersey’s workers — especially those who struggle to meet their basic needs — and provide a stronger foundation for young people beginning their careers. New Jersey should also make its tax code more equitable by making the Child and Dependent Care Tax Credit fully refundable and adding a Child Tax Credit.
If New Jersey lawmakers want to tackle poverty and create a stronger and more equitable economy, they should support investments in tools that are proven to benefit workers who need it. Expanding the EITC to younger workers without children is the next, most impactful step that New Jersey can take, and lawmakers should seize the opportunity.