Potential Governors? Here's an Acid Test

Governor's Mansion in Illinois

Potential Governors & Budget Wars: Earned Income Tax Credit

The would-be governors’ campaigns this spring, summer, and fall will likely be taken up with attacks and counter charges about sound fiscal management and Illinois’ difficult choices.  Much of the argument will bounce back and forth between increasing revenue vs. cutting expenses - both parties claiming that services can be retained with their respective visions.

In any case, the fiscal issues of Illinois’ structural deficit will stand center stage.

Governor Quinn has outlined his position as of Wednesday, March 26th, with some specificity.  Bruce Rauner, the Republican challenger, has decried Quinn’s outline as “broken promises,” but has yet to flesh out the specifics of his own approach to the difficulties. 

It was not by accident that Governor Pat Quinn evoked the name of Ronald Reagan the other day during his budget speech in front of a joint session of the General Assembly when it came to the Earned Income Tax Credit  (EITC).

In fact, Reagan, although not the architect of the EITC, is often credited (rightfully) with expanding the program into what we have currently on the federal level (and subsequently on the state level in Illinois).  Indeed, as Governor Quinn suggested, Reagan was nothing but enthusiasm about the EITC program, calling it, “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”

Current Governor Pat Quinn

In truth, it was President Gerald Ford who first signed off on the concept of an Earned Tax Credit.

Pat Quinn has called for a doubling of the Earned Income Tax Credit in Illinois.  What does that mean?  

In short, the EITC works to provide a tax credit to those who are working, but who fail to make a living wage - especially families with children.  Colloquially: Instead of providing monetary relief to those who don’t work, the EITC provides relief to those who have a job but one that does not provide them enough money to survive as a family/individual.  

By the way, since 2007, that notorious number has been increasing steadily in Illinois as well as on the national level.  The Great Recession has made this single act (EITC) a lifeline to millions of American families - and the expansions of the act are set to phase out in 2017.

Don’t think for a minute that everyone is on board with this program on the federal or state level; and it will be interesting to see where Mr. Rauner resides when asked or given the opportunity to explain.  

The Earned Income Tax Credit is expensive.  And there are reasons:

Tax credits do not get figured like tax deductions.  In other words, tax credits directly reduce income tax liability.  Okay, that was confusing.  Let’s imagine you have a tax deduction of $300 this year.  That would be figured by your marginal tax rate (the level of taxes you pay).  So if you are in the 33% tax bracket, you’d get back 67% x $300....  That would come to about $201.

But a tax credit is $300 less without any rate, and at a level nearing poverty, that’s $300 back to you.  In other words, even if you have a $100 tax bill and a $300 tax credit, that's $200 back to you.

See the difference?  It’s more money in the pocket of those who receive EITC’s than those who use standard deductions (like me).   Another difference, of course, is that tax credit money will be spent immediately by impoverished families for food and other essentials.

Challenger Bruce Rauner

The expense is also why there’s a large coalition of legislators on the federal level who can’t wait until 2017, and who also argue that we need to eliminate this for any number of reasons.  Some of their charges are as follows:  

(1)  Low Income Workers end up with no skin in the game in support of the common good.

(2)  EITC redistributes income to people who have never paid a dime in their lives.

In Illinois, one (or a family) can only achieve eligibility for an EITC if they have received such a credit in their federal taxes.  After that, as with the taxes federally, there are many forms and requirements to move through, and often people seeking an EITC require the assistance of a sound tax expert.  In Illinois and on the federal level, tax assistance is provided for those who qualify.

EITC  Maximum Receivable Credits (2012):

No Children............................. $475 

One Child …………………...$3169

Two Children……...…………$5236

Three Children……....……….$5891

Single mothers are, as one might have expected, the largest group of recipients for the EITC, and the legislation is tilted toward helping children.  In fact, over half the recipients of relief in this act are children.

Without children a single mother can expect (in 2012 numbers) a much smaller potential amount than one with children.  Required income thresholds break the same way:  

Single mother/no children……………..………$13,980

Single mother/ one child………………………$36.920

Single mother/ two children…………...………$41,952

Single mother/three children…………....…..…$45,060

For married couples, thresholds follow a very similar pattern.

I mentioned earlier that such a program is expensive.  Indeed, it is.  

On the national level, the EITC (2012) cost nearly $59 billion.  The Child Tax Credit (CTC) a tandem program cost an additional $56.8 billion.  Temporary Assistance for Needy Families (another program) cost $16 billion, and SNAP (once called food stamps) cost nearly $80 billion.  

Note:  On the other hand, in the same year exclusion of company pension contributions, and earnings reductions on capital gains & dividends amounted to over $200 billion.

Decisions, decisions…

Philosophies will drive the battle for Governor of Illinois this campaign season, make no mistake about it.  And Quinn has called for a doubling of the EITC in Illinois.  What does this mean?  Sounds extravagant.  Let's take a look.

On the state level, one receiving an EITC receives a percentage of what was provided on the federal level.  Up until 2013, qualified impoverished tax-filers could receive up to 7.5% of the money granted on the federal filing.  It was raised in 2013 to 10% by the Tax Reform & Economic Growth proposal.  That would be maximum of $316 for a single mother with a child in our state.

Quinn wants to double the EITC payout in Illinois.  That same mother may qualify for $732 in EITC from the state, money that will (according to studies) be destined to return to the local economy almost instantaneously.

Expensive?  You decide: Nearly 1 million families received EITC relief in Illinois in 2013.  Total cost?  $160 million.

And yet, Illinois has an aching need to help a great many of its citizens, especially those working but without earning the money to make ends meet.

Here's some sobering information:

(1) 33% of Illinois citizens live in poverty or near it.

(2) Since 2007, there has been a 3.1% increase in number of Illinois citizens in poverty.

(3) 22% of children in the state of Illinois live in poverty.

(4) United States citizens living in poverty total 48.5 million; in Illinois, 1.9 million.

Listen carefully during this voting season to what these two have to say about what to do fiscally for Illinois.  It affects us, but it could destroy many others.

Note: Much of the information in this post was gleaned from the Economic Policy Institute and Illinois’ Government website for those seeking an EITC.