On the day that Republicans in the House rejected Rep. Warwick Sabin‘s proposal for an earned-income tax credit (EITC) to help low-income workers, here’s a recommended read: The case from Arkansas Advocates for the EITC as a superior policy to the governor’s proposed tax cut.

Thankfully, Governor Asa Hutchinson is putting some of his tax-cutting energy toward the the state’s low-income working families after ignoring them in the previous rounds of tax cuts, with a plan that will help some who make less than $21,000. However, the Arkansas Advocates report notes that most of the state’s poorest are still left out: Only 12 percent of the bottom quintile — those who make less than $18,000 a year — would benefit at all.

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The report notes two major problems with the governor’s approach. First, it is poorly targeted to help low-income workers, giving as much impact higher up the income scale as it does at the bottom. The governor cuts marginal income-tax rates for folks who make below $21,000 — but keep in mind that in practice that means taxable income, even if folks make significantly more than that prior to deductions, exclusions, etc.:


Hutchinson’s plan does technically reduce the tax burden for people earning less than $21,000 a year, but that fact is misleading. If you ask any accountant, you’ll find that there is some fantastic breadth in the variations of what “making money” can mean. Hutchinson’s bracket changes are based on “taxable income,” not wages, salary, or even adjusted gross income. That means we would be cutting refund checks based on what your reported income is after subtracting itemized deductions, capital gains exclusions, business losses, etc. There are always going to be taxpayers with a lot of income and little “taxable income” for various reasons. You can “make” quite a lot of money, and still easily come in under $21,000 in taxable income.

Hypothetically, a tax filer with $100,000 in gross income could end up with a “taxable income” of only $15,000 a year after reducing their tax liability with various deductions. Those deductions include things like mortgage interest deductions, business losses from previous years, charitable contributions, IRA contributions, deductions for personal and dependent exemptions and deductions for business expenses and costs associated with working from home. This person could be within the “low-income” range, despite earning a gross income well above the median in Arkansas.

Second, the Hutchinson plan offers nothing whatsoever to very low wage earners who have no income tax liability. They already don’t pay state income taxes, so the tax cut doesn’t help them (however, it’s important to keep in mind that even if they have no income tax liability, they do pay all sorts of other taxes, so they’re just as in need of relief):

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The flip side of this “taxable income” flaw is that it leaves out a lot of people who actually do earn very low wages. Many truly low-income families making minimum wage or living below the poverty line will gain nothing because they already have zero income tax liability. This is due to 2011 tax code changes that amended the “low-income tax tables” and eliminated or greatly reduced income tax liability for most taxpayers in this income group. That doesn’t mean they aren’t paying a large share of their income to taxes, though. The lowest income pay twice the rate in state and local taxes as compared to the top one percent in Arkansas (as a share of income). That is because, although their income taxes are low, they spend a much higher share of their paycheck on other state and local taxes like the sales tax, property tax, the fuel tax etc. In short, it is hard to help people earning less than $21,000 a year by reducing their income tax. To efficiently reduce their tax burden we need to use a tax credit.

Because of these two factors, Hutchinson’s tax cut isn’t very well targeted if the goal is to help low-income workers. The Arkansas Advocates report notes that about half of the savings go to the top 40 percent of earners in the state. Meanwhile, only 5 percent of the savings go to those making less than $18,000. So much for a low-income tax cut!

The result is an approach that is more expensive but offers less help to low-income families. This chart below from the Advocates report below is a little wonky, but it shows how stark the difference is between the EITC and the Hutchinson plan. The average tax break under the EITC for those making less than $18,000 would be $108.79, compared to $67.24 under the Hutchinson plan; for those making $18-32,000, it would be $159.38 compared to $111.77. The EITC is an approach that is simply much more heavily weighted toward helping those families most in need, whereas the Hutchinson plan gets a lot of its bang by giving bucks back to people higher up the income scale.
 

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