One of the most effective and widely recognized paths out of poverty is the Earned Income Tax Credit or EITC. EITC programs let low-income families keep more of the money they earn by offsetting payroll and income taxes. This type of anti-poverty tool is so effective because it encourages work; the credit increases for every additional dollar earned until it hits a plateau, then levels off as workers approach a living wage on their own. Arkansas has the tenth highest tax rate for the poor, yet unlike about half of the states in the US, there is no state-level EITC to help balance out the bottom-heavy tax system.[i] The federal EITC has been in place since 1975 and has been proven to encourage considerable numbers of single parents to leave welfare and enter the workforce. In fact, the federal EITC was the single most important factor in increasing employment among single mothers in Arkansas.[ii]
The bottom 20 percent of Arkansas earners make less than $15,000 a year, but they pay twice as much in taxes (as a share of their income) as the top one percent (who make over $311,000 a year).[iii] A new report released from the Institute on Taxation and Economic Policy (ITEP)shows that a state-level EITC in Arkansas would dramatically reduce this unfair burden placed on our poorest taxpayers (the report shows refundable state EITCs at 16, 20, 30, 40 or 50 percent of the federal credit). With refundable credit at 50 percent of the federal amount in Arkansas, the poorest Arkansans will still pay a higher share than the top 1 percent, but by a much smaller margin. The difference in tax rates between the very rich and the poorest Arkansans would be reduced from six percentage points to less than two percentage points with a 50 percent state-level EITC.[iv]
Tax credits are an important for working families, but should not be thought of as a substitution for an increase in the minimum wage. EITC programs help low-income earners by decreasing unfair tax burdens, and the minimum wage laws make sure wages don’t dry up just as families are feeling relief from the EITC. Because of money from the EITC, low-income workers are able to survive on even smaller hourly wages than before the tax credit. This has the potential to put downward pressure on wages because employers would be able to attract the same workers with a lower wage. To balance this effect and keep wages from shrinking for working families, it is important to pair EITC programs with a fair minimum wage. Arkansas’s minimum wage is too low at $6.25 an hour, a dollar less than the federal minimum and in the bottom ten lowest minimum wages in the country. You can read more about the impact of the Arkansas minimum wage and the upcoming November ballot here.
The EITC is an effective tool with a history of increasing employment among parents, strengthening the economy, and promoting long-term academic achievement for kids. Enacting an Arkansas EITC would significantly improve the lives of our poorest workers and their children. We know that EITCs encourage parents to enter the workforce and increase their work hours, and we know that putting money into hard working parents’ pockets means a stronger local economy for everyone. When low-income parents do better, their kids and their entire communities do better too. It’s time for Arkansas to give low-income workers a ladder out of poverty with a state-level EITC.
[i] https://www.cbpp.org/files/policybasics-eitc.pdf
[ii] https://apps.cbpp.org/3-5-14tax/?state=AR
[iii] https://www.aradvocates.org/assets/PDFs/Tax-and-budget/A-Better-Foundation.pdf
[iv]ITEP