The John Locke Foundation released my report on proposals for a state Earned Income Tax Credit (EITC) last Monday. The federal EITC has been an effective anti-poverty measure for single-parent families, with its average payment of $1,870, but has discouraged some married women from working because of a high marginal rate and steep marriage penalty. I also found that the federal EITC is complicated, which contributes to a large rate of errors and fraud.

A state EITC would piggyback on the federal credit, cutting down some of the administrative burden but inheriting some of the problems, too. I suggested two alternative state tax credits that would offset problems in the federal tax code ? a larger child tax credit or a health insurance tax credit.

Rob Schofield of NC Policy Watch dedicated a Setting the Record Straight column to my piece. He provided his own background on the EITC, which had nothing to do with my paper, then set about pointing out six ?errors and inaccurate or misleading assertions.?

While Schofield did find that I misattributed a quote about the need to overhaul the federal EITC to the GAO instead of Sen. Tom Coburn (R-Okla.), his other claims are off the mark as I?ll explain.

I should have caught the misattribution, and have since fixed it in the Spotlight available online. Coburn made the statements in a question to the GAO about improper EITC payments.

 

Schofield wrote: Coletti alleges that 28% of EITC payments are improper. This is also wrong ? the actual number was 25.5%. ? [T]his figure includes both overpayments and underpayments to taxpayers. ? In 2003, the EITC accounted for only 2.8% of uncollected federal taxes.

Response: Schofield does not provide a source for the 2.8 percent, but an Urban Institute scholar testified before Congress in 2003 that in 1998 the EITC accounted for 2.8 percent of the tax gap. The gap in the EITC itself was $7.8 billion that year. Another Urban Institute report put EITC payments in 1999 at $31.1 billion. In other words, the net overpayment was 25 percent of the total that year, which was not 2003. The gross improper payment rate in 1999 were between 27 percent and 31.5 percent, so underpayments were between 2 percent and 6.5 percent of the total.

Schofield?s 25.5 percent is the average of the range (23 to 28 percent) provided by the IRS Commissioner to the panel, although Schofield himself provides no source. What makes 25.5 percent more of an actual number than 28 percent? Schofield does not explain. Assuming the same underpayment rate of 2 percent to 6.5 percent as applied in 1999, the net overpayment would still be roughly $8.75 billion, or 21.5 percent of total EITC claims. In FY2004 EITC was second only to Medicare as a share of total improper payments.

On a related note, the Treasury Department (not Congress) instituted programs in 2002 to improve compliance. There are no reports yet on how well these have worked. Treasury in 2005 managed to recover most of the overpayments that met certain criteria, but these totaled just $2 million of the nearly $7 to $10 billion of improper payments in FY2003.

Call this one a draw. We are both right.

 

 

Schofield?s other criticisms lack any substance.

He opened his column with three straw men and one point that I acknowledged at the start of my paper ? the federal EITC has been an effective anti-poverty tool. I will ignore the straw men that have nothing to do with my report and move on to the four other specific criticisms of points in my report.

 

1. Schofield writes: The Locke Report asserts that ?the federal EITC is extremely complicated.?

Response: A state EITC need not add any complications to the federal EITC, since the latter is already extremely complicated. A presentation by GAO Director David Williams? in April 2005 noted: ?Qualification requirements are confusing? and ?Proving eligibility requires a large quantity of non-uniform data that is not easy to capture.? That the complication is a result of trying to limit fraud is an argument against the program, not an argument for complication. Piggybacking on a flawed federal tax credit may be easy, but it is not good policy.

 

2. Schofield writes: [A]ccording to one the experts cited in Coletti?s report, the old system had no clear effects on marriage patterns.

Response: In my report, I note that the EITC affects hours worked and workforce participation among married women. These are both adversely affected by the EITC. To the extent that working is a better anti-poverty measure than not working, the EITC fails with this subgroup. This has nothing to do with Schofield?s straw man argument about marriage patterns.

 

3. Schofield writes: Neither of the report?s suggested alternatives (a new state health insurance credit and a new child tax credit) is a viable substitute for an EITC. The point of an EITC, after all, is to provide targeted tax reductions to low income people. Both of his alternatives would spread tax benefits to people of all incomes.

I freely admit that the two credits I suggest would not be direct substitutes for a state EITC. I recommend them as superior alternatives to an EITC. They are preferable to the EITC because they are not complicated at either the state or federal level, address a flaw in the tax system, and do not penalize middle class parents ? a downside of the federal EITC. They are also large enough to actually have an impact. My rough calculation of $500 million is a maximum based on the total number of people who purchase insurance on their own or are uninsured and the actual amount would likely be much lower. Given that many of the uninsured already qualify for Medicaid or NC Health Choice, the state would save money if these individuals purchased insurance rather than taking advantage of the Medicaid benefits for which they already qualify. This would mean more spending by the state compared to the status quo, but would put people in control of their own insurance and care purchases.

 

3a. Schofield writes: It?s not surprising that he never specifies which Medicaid and Health Choice services and recipients he would eliminate.

In fact, I did recommend that the most recent expansion of both programs be rolled back. Health Choice crowds out private purchases of insurance and includes four-person families that earn up to $40,000 per year. I found a way to purchase insurance for my family while earning that much, so it is not a question of ability to pay.

 

4. Schofield writes: The suggestion in the report that a state EITC has been rendered unnecessary as a result of the recent bump in the state minimum wage and that groups supporting an EITC are doing so ?because the minimum wage is not efficient at improving the welfare of families? is simply and demonstrably untrue.

Response: I never suggested that a higher minimum wage makes a state EITC unnecessary. A higher minimum wage undermines the very purpose of an EITC. The minimum wage increase makes it harder for individuals with low skills to find work, which an earned income credit is supposed to reward. The state?s higher minimum wage it impossible for an individual without children working full-time to qualify legally for the federal EITC.

 

I made a mistake, but it was not intentional. Schofield has made some mistakes, too. I look forward to him setting the record straight on those.