Why Another Earned Income Credit Won’t Help

MORE LAYERS OF GOVERNMENT PROGRAMS WON’T ADDRESS
THE PROBLEM OF POVERTY. BUT SOMETHING ELSE WILL.

South Carolina is among the poorest states in the nation. That’s no secret. But with a comparatively high sales tax and personal income tax, South Carolinians also endure some of the highest taxes in the nation. The state’s top marginal tax rate of 7 percent kicks in at just over $14,000 of income, meaning it has the highest marginal tax rate on the lowest level of taxable income in the Southeast (and third in the nation).

Many of the state’s poorest citizens, then, are paying the highest possible tax rate – a major disincentive to the state’s workforce.

One of those solutions discussed recently is a refundable Earned Income Tax Credit (EITC) implemented on the state level. The program currently exists on the federal level, and it provides income tax credits to low- and moderate-income earners, the amounts varying based on family size and income. The idea is to give low income earners the incentive to work and provide them with extra cash, ostensibly to get them out of poverty. The state version would do the same thing on a smaller level.

Rep. Gilda Cobb-Hunter (D-Orangeburg) has promoted the idea. Rep. Kenny Bingham (R-Lexington), a member of the House Ways and Means Committee, has recently said he’d consider it. According to a study by the SC Board of Economic Advisors, a 10 percent refundable EITC would provide 500,000 South Carolinians with a $279 check each year.

While $279 is in no way a negligible amount, it’s about 76 cents a day. It wouldn’t come close to lifting anyone out of poverty. Bear in mind that most people in poverty in South Carolina pay no income tax, so a refundable EITC would effectively be a cash handout rather than a tax cut.

Like many similar solutions, this one overlooks the real problem in favor of a quick fix.

The “War on Poverty” and the numerous taxpayer-funded welfare programs that came with it have failed, with hardly any drop in poverty after 50 years and hundreds of billions of dollars. Given that a state EITC program is essentially another welfare program – even with the incentive to work attached – there is no reason to believe it would make any long- or medium-term difference in the lives of recipients. Moreover, to say that states with an EITC program have reduced the number of those receiving assistance from other social programs is misleading since the state EITC is itself a welfare program.

Adding new layers of programs to an already broken system is not the solution to providing all South Carolinians with the opportunity to prosper, let alone helping individuals out of poverty.

The solution, rather, is to remove the barriers that prevent economic progress in the first place – barriers generally created by government. Addressing the systematic problem and not focusing on one segment of the population will create benefits for all South Carolinians. Lowering or eliminating state and local taxes such sales, property, gas, vehicle, and other taxes and fees would allow all citizens to keep more of their money to spend on necessities for their family – and in turn allow businesses to use consequent income as capital to expand and create new jobs. Further, more job opportunities would be available if state and local governments cut regulations and licensing laws that barricade entrances to the workforce. They’d be given more opportunities for employment and pay increases if the state cut personal and corporate income taxes that inhibit companies’ ability to hire and promote.

While it’s naïve to think poverty will ever be eliminated outright, it’s far more naïve to think that adding more programs to a inefficient and counterproductive system will improve anything. If state politicians are serious about lifting people out of poverty, they’ll be proactive in removing the barriers to a free market that gives the poor more opportunities to succeed.

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