New EITC plan still takes from the working poor

The Shumlin administration’s new plan for cutting the Earned Income Tax Credit (EITC) to fund child care expansion doesn’t change one simple fact: the governor’s plan takes money from the lowest income working Vermonters.

The administration has cut back its child care initiative.  It now requires $12 million instead of $17 million.  But, as Secretary Spaulding noted in his memo to the Senate money committees last week, they still want to cut the EITC.  He states: “…and this should not be paid for through new taxes. Rather, this expense should be covered by a reallocation of funds currently used for the State’s supplement of the Earned Income Tax Credit.”

The EITC is a proven and effective tool for helping low-income families make ends meet and for reducing poverty, particularly among children. In 2011, the Vermont EITC, which is 32 percent of the federal EITC, let about 45,000 working households keep more of what they earned. These households included over 100,000 individuals, about half of them children. Only about 5,000-6,000 of these families would benefit from the governor’s child care expansion. Meanwhile, nearly 40,000 low-wage working families who don’t receive child care subsidies would see their tax credits cut.

While the new plan would hold harmless those families with 3 or more children—they would not lose any of their tax credits to pay for this revenue plan—it would take even more than the original proposal from most of the remaining EITC filers.

Cutting income tax breaks—exemptions, deductions, or credits on income taxes—is usually characterized as a tax increase.  It’s a way of increasing income tax revenue without having to raise tax rates. It’s difficult to understand why the administration is singling out the EITC as the tax break to “reallocate” since it targets the lowest wage Vermont workers for this increase.

Vermont could reallocate other tax breaks so this child care cost would be distributed much more equitably.  Public Assets published a report recently showing that adjustments to any of five existing income tax breaks could provide the revenue needed for child care expansion without taking money from those who can least afford to pay.