Amid the debate nationally over raising the minimum wage lies a different solution that raises living standards for hard-working families without distorting the labor market, spiking inflation, benefitting teenagers in mid- and upper-income households or reducing employment of those with the fewest skills and greatest needs. And this solution is staring us right in the face.
It's the Earned Income Tax Credit (EITC), the federal tax credit system devised during the 1990s to reform and eventually replace welfare while encouraging work. It has bipartisan support in Washington D.C.
Created by economists and patterned after similar systems in Europe, Canada, Australia and New Zealand, the EITC is only available to people who work and earn low to moderate income.
Just as the federal government provides an incentive for homeownership in the ability to deduct interest payments, this provides incentive for people of low to moderate income continue to work. Since its inception, more than half of U.S. states have instituted their own state EITC. Our legislators in Columbia ought to take note.
Unlike other federal benefits, the Earned Income Tax Credit is structured so that it is never possible for a family to increase its income by working less and reducing its earnings while collecting more benefits. In addition, much of the $56 billion cost of the program is recouped in state and federal income taxes, sales taxes and reduced benefits that result from the higher income and continued employment of family breadwinners.
Even better, families of modest means benefit from both the added income and the nobility of work. The credit averages around $2,000 and can top $6,000, depending on income and family size, and is available to families with income as much as $52,000.
Local beneficiaries, in turn, spend their income in our local economy, benefitting everyone. Some employers, like the City of Charleston, have arranged for their employees to collect their tax credit over the course of the year, adding as much as $200 in each bi-weekly paycheck. For a $12-an-hour retail worker, that's another $2.50 an hour. The result, according to the Census Bureau, is that 5.4 million people rose out of poverty in 2010, without any corollary decrease in employment.
Locally, Trident United Way and several other organizations - Charleston Trident Urban League, AARP, the IRS and The Benefit Bank of S.C. - provide free tax preparation services to help local residents claim the credit.
From 2009-2012, Trident United Way invested $200,000 that leveraged a matching IRS grant to support this initiative. That small sum brought $3.44 million in Earned Income Tax Credits to hard-working families in our three counties, a leverage factor of 17. These efforts support Trident United Way's public policy priority of helping low-to-moderate income families build assets as they work to achieve and maintain financial stability.
The Earned Income Tax Credit has its flaws, to be sure. The IRS estimates 15 to 25 percent of families that qualify fail to claim their credit. United Way and its partners are increasing our outreach to bring more families on board.
There is a cost to the federal treasury with this program, though significantly less than the original price tag because of sales tax offsets and the like. And not all families make wise decisions with their tax windfalls, limiting the value of the credit. For them, the financial education provided by organizations like Family Services, Inc. in Charleston County, the Berkeley and Dorchester Prosperity Centers and others is playing a key role in helping families make better financial decisions.
Increasing the Earned Income Tax Credit has so many benefits, particularly compared to hiking the minimum wage, that it can appeal to the entire political spectrum, and to business as well.
Perhaps that's why Warren Buffet is one of its leading advocates.
Chris Kerrigan is president and CEO of Trident United Way.
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