Minimum wage, EITC work hand in hand
But Earned Income Tax Credit needs more than just outreach to encourage participation
Workers protest outside a Chicago Walmart. (Shutterstock)
By Ted Cox
New studies find that the minimum wage and the Earned Income Tax Credit work well together to give working families more money in their pockets, but that the tax credit needs more than just outreach to encourage taxpayers to take advantage of it.
The Economic Policy Institute issued a new report Wednesday clearly stating, “The EITC and minimum wage work together to reduce poverty and raise incomes.” It emphasized that the minimum wage and the Earned Income Tax Credit should be not considered either/or initiatives, nor one over the other, but that “the policies complement each other more effectively the more they are designed to overlap.”
The EITC, which grew out of a ‘70s proposal by University of Chicago economist Milton Friedman for a “negative income tax” for the poor, basically provides rebates for low-income parents on their taxes. It applies to federal and some state taxes, and as of 2018 the Illinois income tax has an 18 percent match of the federal EITC, raised from 10 percent just a couple of years ago. It provides a graduated amount of relief to working parents earning up to $55,000.
According to the EPI, in 2018 the federal EITC provided relief to 22 million working families, with an average tax rebate of $3,191. “The additional income is extremely valuable to recipient families,” the report stated, “and evidence indicates that it improves maternal and child health as well as children’s educational outcomes.”
Both are considered tools to raise the standard of living for low-wage workers, but the EPI report points out some significant differences. A higher minimum wage is paid by employers, with a potential impact on hiring (although the EPI study found no connection between raising the minimum wage and lowering employment). The EITC, by contrast, is not paid by workers or employers, and instead offers rebates on employment taxes a worker has already paid come tax time in April.
But there are unintended consequences. The EITC provides tax rebates on wages, and “is available only to those who work,” the report states. Therefore, it is “designed to increase the incentive to work,” and can prompt an increase in the number of people seeking work. That increased supply in workers can potentially cause wages to drop as employers have a choice of whom to hire.
In the 1990s, according to EPI, the tax credit spurred “a dramatic rise in single mothers’ labor-force participation.”
Thus the need for a minimum wage to keep pay from falling below a certain level. As it stands, the report points out, the current federal wage of just $7.25 an hour, which hasn’t changed in more than a decade, provides an annual salary of $15,000, “far too little to support a family.” States like Illinois, however, are increasingly moving to increase the minimum wage, with Illinois passing legislation last year that has already hiked its minimum wage to $9.25 an hour and puts it on a schedule to reach $15 by 2025.
“This maintains take-home pay and reduces the dilution of the EITC’s benefits,” the report states. The two work hand in hand, as “EITC can raise earnings above the floor guaranteed by the minimum wage.”
The EITC was originally intended to provide relief to working families, but the EPI report recommends expanding the EITC to childless workers as well, saying, “This would likely strengthen the interaction between the EITC and the minimum wage, making the two more complementary.”
Economic Security for Illinois is pushing for an increase in and expansion of the Earned Income Tax Credit as a way to give low-wage workers a tax break. “It’s good for the economy, it’s good for society, and it could be an amazing win for the governor,” Harish Patel, director of the organization, told One Illinois last year. The group would like to see the EITC extended to those making up to $75,000 and not just parents, but child-care workers and those providing care to elder citizens as well. It would also like to see the rebate levels increased.
The problem, though, is that as currently implemented the EITC calls for workers to file their tax returns and claim the tax credit basically as an overpayment on their taxes. Just the work page required to apply for the EITC can be confounding, as those who do their own taxes well know. The California Policy Lab issued a report this month finding that extensive efforts to inform low-income workers of the advantages of filing for the EITC, through mailings and social media, had almost no effect in increasing participation.
That study recommended instead “decreasing the administrative burden” of claiming the EITC.
That’s a key initiative of Economic Security for Illinois. Patel has proposed not only making the EITC automatic for workers whose wages meet the application requirements, but also giving them quarterly rebates for a more regular cash infusion instead of one lump sum at tax time.
“The evidence is overwhelmingly clear that the EITC is a successful, effective policy,” the EPI report concluded. “The minimum wage is an effective complement that limits any dilution (in wages) and ensures that workers retain larger shares of the EITC. Though the political system often sees the EITC as an alternative to the minimum wage, incidence considerations suggest that they may be best used together. In fact, all six states that expanded their state-level EITCs in 2019 also already have or will have state minimum wages that are significantly above the federal floor. Both policies reduce poverty and raise incomes and are more effective at accomplishing those goals when working together.”