By Rob Moore and Tong Zhou
The federal earned income tax credit (EITC) is one of the most successful antipoverty programs in the United States, lifting 6 million Americans out of poverty each year by giving low-income families a break on their taxes. Seeing the success of the EITC at the national level, 29 state governments have instituted their own earned income tax credits, including Ohio.
In wrangling over this year’s high-profile gas tax increase, some opponents of an increase worried about the impact of a regressive tax increase on low-income families. To offset these impacts, the Ohio General Assembly expanded the earned income tax credit, increasing the federal match from 10% to 30% and nearly doubling the expected size of the state earned income tax credit.
One feature of the current state earned income tax credit in Ohio is that it is nonrefundable, meaning the value of the credit cannot exceed the taxpayer’s tax liability. While this keeps costs of the program down, it also minimizes the impact of the program. Because of this, some have advocated for a refundable earned income tax credit. On top of this, when Scioto Analysis surveyed the Ohio legislature earlier this year, legislators asked about refundable tax credits more than any other topic.
In order to assess the impact of a refundable earned income tax credit, Scioto Analysis built a model this summer, which resulted in the cost-benefit analysis on refundable credits released last week. In this paper, we model the budgetary and wage impacts of the program, then project and monetize four key economic impacts: tax distortions, labor market distortions, birthweight benefits, and college enrollment benefits.
Using LSC estimates for the cost of the EITC expansion in the transportation bill, we can use our model to predict the impacts the change that was made this year. Tables 1 and 2 below show the monetized impacts of the separate policies. Table 3 shows the impact of the change from 10% nonrefundable to 30% nonrefundable.
Basically, by using past studies on the EITC and its impacts on public health and education, we can estimate that the expansion will lead to a $45 increase in wages per low-income worker, about 2,000 new workers entering the workforce, about 5 less instances of low birthweight per year, and 11 new college enrollees per year. This means the change in the EITC in the transportation budget will generate a net benefit of $4 million per year over the status quo 10% nonrefundable policy.
While the recent policy change likely had net benefits, refundability would yield net benefits anywhere from 3 to 15 times higher than the policy change this year. They also would cost the state much more, creating political feasibility issues for such a change in the future.