The Tax Credit NC Scrapped and the Federal Government Retained

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On my way to work this morning, I heard a radio advertisement on the Earned Income Tax Credit (EITC) encouraging people to claim it if they were eligible.  Since I just started working on my family’s taxes, I decided to look more into the EITC; I remember it being a topic of conversation during last year’s tax reform debates.

Some of you might have heard about this tax credit on National EITC Awareness Day, which occurs every January 31^st.  This tax credit is a federal program that uses a refundable tax credit to subsidize low-income working taxpayers by refunding some of the taxes they have paid during the year.  It was originally created in 1975 as a small tax subsidy for the working poor with children, yet over the years it has been expanded many times and now includes low-income earners without children.  The amount refunded varies by taxpayer, and is dependent upon income level and number of children.  The President mentioned it in his State of the Union address as a measure that "rewards hard work."

In 2007, North Carolina created its own state-based EITC, offering 4.5 percent of the federal credit.  This tax credit expires at the state level after the 2013 tax year, but continues at the federal level.  While 25 states offer an additional EITC, North Carolina and Virginia are the only states in the Southeast with this tax credit.

According to a Carolina Journal column, 

North Carolina paid more than $110 million in EITC claims last year, issuing checks ranging from $225 to $400.  Almost 63 percent of EITC claimants get their money early with a refund anticipation loan, which carries a fee ranging from $65 to more than $115. The loan and the fee are deducted from the credit. 

The NC Department of Revenue reported that

For tax year 2009, this tax credit was taken by approximately 880,000 taxpayers; of the $99.6 million claimed for that year, 52% exceeded taxpayer tax liability and was refunded.

The tax credit is expected to cost North Carolinians $59.7 million in FY2013-14 and is not expected to cost anything further because the tax credit was sunset in legislation this past year.

The left claims this is a good tax credit because it lessens the tax burden on the poor.  They avoid estimates by the IRS that nearly one-third of EITC claims are fraudulent.  In addition to the fraudulent claims, the amount remaining after the early anticipation loan and associated fees are deducted is not enough to make much of a difference for those families.   In the last ten years there have been up to $133 billion in improper payments made.   The chart below to shows the growing problem with the EITC credit on a national scale.

According to the Tax Foundation, the EITC has grown by $45 billion over the past twenty years. "In the past two decades, the EITC has grown consistently, except for certain years when legislation expanded the program, prompting it to grow more quickly. In total, the program has grown from $18 billion in 1990 to about $63 billion in 2011. It rapidly increased in size in 1990, 1993, 2001, and 2009, years during which Congress expanded the program. The most recent expansion was in the 2009 stimulus package."

See this chart on the Total Cost of the EITC over the last twenty years:

When reviewing the information about this tax credit, it seems the state of North Carolina made a wise decision in sunsetting its EITC.  The highest percentage of filers claiming the tax credit are in the South, yet most of those states do not offer an additional tax credit on top of the federal credit as North Carolina has done since 2007. 

When companies or businessmen look at rejection rates for their production, a rate of 25% is completely unacceptable.  Although the Federal Government does not operate as a business, (though many of us would like it to), the fraud rate is too high for the EITC to be considered effective.  Our tax system is full of unnecessary tax credits and loopholes that allow people to ‘cheat’ the system.  It is time this tax credit gets a major overhaul and either starts doing what it was intended to do or is eliminated.  I’m glad North Carolina eliminated it; maybe other states will start to follow.

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