Earned Income Tax Credit for Chicago?

New study explores six proposals that would benefit up to 1 million working families; Lightfoot receptive if noncommittal

Workers rally near the Haymarket Riot Memorial Sculpture in Chicago on May Day last year. (Wikimedia Commons/Charles Edward Miller)

Workers rally near the Haymarket Riot Memorial Sculpture in Chicago on May Day last year. (Wikimedia Commons/Charles Edward Miller)

By Ted Cox

Should Chicago put some money back in the pockets of its overburdened working families?

A new report released Thursday tries to advance the notion of a city Earned Income Tax Credit by exploring six proposals for implementing it. The report suggests it could benefit between 500,000 and 1 million working families in Chicago.

The new report comes from the Institute on Taxation and Economic Policy. It builds on a report issued earlier this year by the Chicago Resilient Families Initiative Task Force, a panel that grew out of former Alderman Ameya Pawar’s proposal for Chicago to adopt a pilot program for Universal Basic Income.

That report, “Big Shoulders, Bold Solutions: Economic Security for Chicagoans,” proposed expanding the Earned Income Tax Credit as a way to achieve many of the same goals as Universal Basic Income.

The new report, “Promoting Greater Economic Security Through a Chicago Earned Income Tax Credit,” puts some flesh on the bare bones of those proposals. It studies six different concepts for implementing the EITC in Chicago. “The more modest proposals would boost Chicago families’ after-tax income, on average, between $108 to $210,” according to a news release on the report, “and the more ambitious proposal would boost incomes from $898 to $1,426 on average.” The more modest plans would affect 546,000 or 630,000 working families, while the more ambitious plans would affect more than a million.

The EITC grows out of an idea going back to the ‘70s first proposed by University of Chicago economist Milton Friedman as what he called a negative income tax. As current U. of C. econ lecturer Allen Sanderson explained in a debate last year with Pawar, it restores a portion of federal tax withholdings to low-income workers come tax time. As he described it: “Given the choice between giving people things and giving people money, economists would rather give them money.”

The idea is that it would not only ease the economic burden on struggling workers and their families, but it would refuel the economy as that money is more likely to be spent on basic needs, as compared with, say, a tax cut to the rich who are more likely to simply pocket it or use it to pay down debt.

According to ITEP, refundable tax credits, including the federal EITC, “lifted 7.9 million people out of poverty in 2018. State and local EITCs help build on that success.”

The EITC was adopted by the federal government in 1975 for low-income families with children, and eligibility and tax return rates for the program have been regularly expanded ever since. According to the new report, 29 states have joined the U.S. government in adopting their own EITC programs, including Illinois, usually as an additional percentage of the federal allotment. Three local governments have also adopted it: New York City, the District of Columbia, and Montgomery County in Maryland.

“State- and city-level EITC expansions build on the success of the federal credit and increase economic security for even more working families,” said Lisa Christensen Gee, director of special initiatives at ITEP and lead author of the study. “For cities such as Chicago that are exploring ways to improve family economic well-being, implementing an EITC is a proven policy option.”

The first two proposals would take New York City’s program giving eligible workers 5 percent of the federal EITC and fit that to Chicago, then double it to see what that would achieve. In both cases, it would affect 546,000 workers, or about 22 percent of city residents, and 276,000 children, or about 40 percent of the city total. New York’s 5 percent program would return $41 million to eligible workers, or between $108 and $292 for each eligible family. Doubling that would put $83 million in the local economy and give between $216 and $584 to eligible families.

The D.C. program enlarges that to 40 percent of the federal EITC and expands eligibility. Adopted to Chicago, it would be worth $225 million and would affect 630,000 workers, who would get back between $417 and $1,229 — “a much more significant infusion of cash that could help families stay afloat in the face of financial emergencies,” the report states.

Then it examines three more extensive proposals, tweaking the percentage of the federal EITC, eligibility, and the basic credit. The cheapest would cost $224 million, set an $800 minimum credit, and affect 689,000 workers, while the “high scenario,” or most expensive, would call for a $588 million investment, but affect more than 1 million workers, with a basic credit of $1,200 and benefits rising up to $1,426.

“Combined with the federal credit, a Chicago EITC could potentially provide a meaningful income boost for families, particularly the more expansive approach,” Christensen Gee said.

In spite of the daunting bottom line on those proposals for the city, Chicago Mayor Lori Lightfoot was receptive if noncommittal toward funding them, while giving a hardy endorsement to the EITC in general.

“Mayor Lightfoot understands that when we invest in supporting our working families, we strengthen our communities and make Chicago more successful for the long term,” said spokeswoman Lauren Huffman. She cited the mayor’s support for new workplace schedule regulations, fines and fees reforms, and “other initiatives that help mitigate the costs of being poor in our city. We applaud ITEP for bringing this study forward and for their and many other Chicago organizations' leadership on policy work that will help put money already earned back into the pockets our low-income residents. While the city faces significant financial challenges, the mayor is taking a look at everything our government can do, including expanding the well-documented benefits of the Earned Income Tax Credit, to help free more residents from poverty.”

Mayor Lightfoot understands that when we invest in supporting our working families, we strengthen our communities and make Chicago more successful for the long term.
— Spokeswoman Lauren Huffman

The report acknowledges that the city already faces a budget crunch largely driven by pension obligations, but it proposes a few appropriate funding sources, including “a payroll tax like those employed in California, New Jersey, New York, Rhode Island, Washington state, and the District of Columbia or increasing property taxes on high-valued homes.”

“Moving from the concept of a city-level EITC in Chicago to greater economic security for more residents will require a comprehensive vision of city priorities and a finance plan that moves the city forward on all of its critical needs,” the report states. “It will also require leadership to shift the political will from the status quo toward a new vision of what is economically possible, socially and politically desirable, and morally called for as well as emphasizing the role city policy can play in bringing about a more secure future for more Chicagoans.

“The Chicago Resilient Families Initiative Task Force took the first steps in identifying underlying challenges and pointing toward promising policy solutions. We hope that envisioning and analyzing what a city-level EITC could look like for Chicago continues this important conversation.”

“The Chicago Resilient Families Initiative Tax Force outlined a vision of a Chicago that is better able to help residents achieve economic security,” said Harish Patel, director at Economic Security for Illinois. “A city-level EITC clearly could help the city meet that critical goal.

“As the ITEP analysis shows, not only would a city EITC help families, it could benefit hundreds of thousands of the city’s children, infuse much-needed cash into our neighborhoods, and benefit our small-business community,” he added. “As Chicago examines its budget and priorities, we have an opportunity to make bold changes that improve economic well-being of our city’s families.”

Patel and Economic Security for Illinois had a role on that task force. Pawar, of course, is founder of One Illinois.