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Op-Ed: A State Earned Income Tax Credit Should Be Part of a Budget Deal in 2024

By Policy Briefs, Press Statements

A State Earned Income Tax Credit Should Be Part of a Budget Deal in 2024

by Marc Stier, Executive Director, Pennsylvania Policy Center

The Pennsylvania state budget for fiscal year 2024–25 is now officially overdue, so we’re still left wondering: What might a deal look like?

There are two critical components that need to be addressed.

The first is enactment of year one of the Basic Education Funding Commission’s plan to adequately and equitably fund education.

Enacting this plan is a moral and constitutional requirement. Failing to meet it would leave the General Assembly to answer to both the voters and the courts. Public opinion polls show overwhelming support for meeting this goal. And while courts are generally reluctant to tell legislators how exactly to spend money, for three reasons this barrier is lower in Pennsylvania right now than in other times and places.

  • Neither Democrats nor Republicans sought to appeal Judge Jubelirer’s ruling that our current system of K-12 school funding is unconstitutional.
  • The Basic Education Funding Commission has put forward a plan that is tailor-made to meet Judge Jubelirer’s concerns.
  • And with a surplus of $14 billion in the bank, a Pennsylvania court can order implementation of that plan without taking the even bolder step of requiring new taxes to fund it.

The second component is the implementation of a state earned income tax credit.

I make the second point with some reluctance. I am concerned—as the Governor and state legislators should be—about using up the state surplus with a tax cut. That surplus is needed to pay ongoing operating expenses and the entire education plan.

Until recently, Senate Republicans seemed to agree. But Republican senators recently enacted, with some Democratic support, a tax cut that would cost the state $2.7 billion in fiscal year 2025–26.

In doing so, Republicans acknowledged that it is entirely legitimate to use the surplus to fund ongoing expenses. A tax cut is as much an ongoing expense as funding for K-12 education.

If we start with the Republican proposal to use $2.7 billion of the surplus in fiscal year 2025–26 for ongoing expenses, the question is how to divide it between the K-12 funding and a tax cut.

The Republican plan to cut taxes by reducing the personal income tax by half a point and eliminating the gross receipts tax is not acceptable for two reasons.

One: it is far too large. The state is going to need $2 billion in fiscal year 2025–26 to fund the second year of the K-12 education plan.

And, two: the plan is heavily weighted to the rich and the corporations that generate electricity. A half-point reduction of the PIT would reduce taxes for the top 1% of taxpayers by $5,435 per year. It would reduce taxes for the middle 20% of families by only $181 per year. And because of the tax forgiveness program, it would most likely not reduce taxes for people in the bottom 20% by more than $20 per year.

In a state and local tax system that already takes 11.8% of the income of the bottom 99% and only 6% of the income of the top 1%, a tax cut weighted so heavily to the richest Pennsylvanians and corporations is unacceptable.

What would be acceptable, however, is a state earned income tax credit (EITC) set at 30% of the value of the federal EITC already received by Pennsylvanians.

Why might Republicans accept this?

Well, for one thing, it’s a Republican plan that was initially proposed by Richard Nixon and expanded with bipartisan support many times.

It is a program that has been proven to encourage work.

It reduces poverty more than any other federal program except Social Security.

It is simple to administer, requiring no new bureaucracy but only an additional line on the PA-40 tax form.

By encouraging more Pennsylvanians to file for the federal EITC, it could bring as much as $40 million in federal funds to Pennsylvania at no cost at all.

It helps working people, not with government spending but with a tax credit and would benefit 1.45 million families. The average tax cut for those who receive it would be $773. More than 88% of the benefits would go to Pennsylvania families earning less than $52,100 (and those above that level who get a tax credit have three or more children.) By a small margin, these families disproportionately live in Republican House and Senate districts.

And it would only cost the state $770 million—far less than the tax cut passed by the Senate.

If a tax cut is a necessary part of reaching a budget deal by June 30th, a state earned income tax credit should be part of it.

July 9, 2024

Create a State Earned Income Tax Credit in 2024!

By Blog Post

In our first post in this series, we argued that if the Pennsylvania General Assembly chooses to cut taxes in the budget that begins on July 1st, it should limit the cut to less than $1 billion per year and focus the benefits of the cut on low- and moderate-income Pennsylvanians.

There is one plan that meets both of these criteria perfectly: a state earned income tax credit.

The federal earned income tax credit (EITC) is a program that puts more money into the pockets of low- and middle-income families by giving them a credit against the taxes they pay. It was a program created by the Nixon administration and expanded under subsequent Republican presidents. It has traditionally been supported by Republicans who believe, correctly, that it encourages and makes it possible for people with low incomes to enter and stay in the job market.

No federal program, other than Social Security, reduces poverty as much. Twenty-nine other states have expanded the benefits of a federal EITC by enacting a state EITC. Pennsylvania should follow their lead. A state EITC is a relatively inexpensive program. And it is a program that would be easy to implement.

The federal earned income tax credit gives workers a credit against their taxes. And the credit is refundable, which means that even if they pay no taxes they can still receive the benefit. The tax credit begins when workers earn their first dollar and increases to a maximum income of about $12,000 for a one-worker family with one child and about $17,000 for a married couple with three children. Then it gradually declines when families hit a higher threshold, so there is no benefit cliff.

The state tax credit is simple to claim and administer. We propose that Pennsylvania’s earned income tax credit be set at 30% of the federal credit. Claiming it would require taxpayers to simply enter their federal tax credit on one line on the PA-40 tax form, which would be done automatically by tax software.

The program would benefit 1.45 million families in the state. The average tax cut for those who receive it would be $773. Almost all of EITC benefits—88.5%—would go to Pennsylvania families earning less than $52,100 (and those above that level who received any benefit typically have three or more children). The average income of those who receive EITC benefits is $27,500.  Roughly 40% of the families who would benefit from a state EITC do not currently benefit from the state’s tax forgiveness program.

While it would be a good idea to increase the benefits and lift the income limits on the state’s Tax Forgiveness program, the state EITC would provide greater benefits to families with lower incomes because it is refundable.

We estimate that a Pennsylvania earned income tax credit would cost the state $775 million.

An additional benefit of the state earned income tax credit is that it would encourage more families who are eligible for the federal EITC to claim it—right now, about 15% of those who are eligible fail to do so. An added incentive to claim the federal credit could bring about $43 million federal dollars into the state that are now left on the table.

June 14, 2024