At the state level, Indiana is talking about tax cuts, given its projected budget surpluses. Gov. Mike Pence has proposed a reduction in the marginal income tax rate from 3.4 percent to 3.06 percent. If I were king, I’d reduce income taxes overall but specifically would eliminate state income taxes on the working poor and expand the state’s “Earned Income Tax Credit” (EITC).
The EITC is a “tax credit” for “earned income” — monies paid to those in lower-income families who earn wages. The idea is to subsidize those who are working but earning an income that is too low to support a family.
Often, people embrace the minimum wage as a policy to reach this goal. But a higher minimum wage also increases the cost of hiring low-skilled workers, making it more difficult to employ them. The EITC has the merit of keeping low-skilled workers attractive to firms, allowing them to build job market skills and pick up valuable job experiences, while subsidizing their earnings to help them support their family.
The federal government has a significant EITC that offsets some or all of the FICA tax on low-income households. About half of the states offer an EITC. States might embrace or expand an EITC to further offset the federal income tax policy — or beyond that, to subsidize those who are working but struggling to make ends meet. Indiana’s EITC is set at 6 percent of federal credit (and refundable if one’s tax liability is reduced below zero), but it could be expanded.
Indiana imposes income taxes on parents and children at and near the poverty line. For a two-parent household of four at the poverty line, Indiana has the 12th-highest burden in the nation at $108. Looking at 125 percent of the poverty level, a one-parent household of three pays $206 (16th highest) and a two-parent household of four pays $413 (11th highest). In this last category, our neighbor Kentucky takes $1,021 — tops in the nation. (I guess it’s good to see Kentucky No. 1 in something.)
The EITC and eliminating taxes on the working poor should make sense to liberals and conservatives. Those on the political left claim to care about the poor, although this is usually more about posing than policy. Those on the right want to encourage hard work, efficiency and so on. How can those on either side be fond of income taxes on those trying to survive on an income near the poverty line?