The State Earned Income Tax Credit: R.I.P?

(How Trumpism might play out in Massachusetts. One of a probably lengthy series.) 

Governor Charlie Baker, back from a meeting of the Republican Governors Association, held a press conference yesterday to offer his first extended remarks after the presidential election.

If, like Attorney General Maura Healey, you were hoping for a forceful denunciation of the presence of a white nationalist in the West Wing, you were disappointed: Governor Baker is willing to hold the record open for more evidence against Steve Bannon before issuing a judgment.  On most other subjects Baker took refuge in the comforting words of Mike Pence (!), who called for a “very deliberate and significant dialogue,” yada-yada.

Baker’s strategy of not confronting the President-elect was, if not courageous, probably fiscally prudent. After all, more than one-quarter of revenue for the state’s annual budget ($39 billion this year) comes from federal reimbursements. Much of that federal funding supports our universal health care plan. That health care money was on a track to expire, but fortunately four days before the election, the Baker administration secured a commitment from the Obama administration to provide nearly $60 billion over the next five years. Good news for sure — although it’s alarming that the feds’ promise is now reliant on a president who in the past has considered defaulting on the nation’s debt as a nifty solution to budgetary problems.

Health care is not the only program under threat from Trump administration policies. Our state Earned Income Tax Credit Program, which helps more than 400,000 families in Massachusetts who earn $50,000 or less, is, as a practical matter, in jeopardy as well. Governor Baker is a big supporter of the state EITC, and an increase to that program (the first in 16 years) was one of his first year policy successes. The state EITC program is still a modest one even with the increase (the average benefit will rise to $500 per family this year), but it’s nevertheless a step toward reducing income inequality, a disorder that Massachusetts suffers from in the extreme.

The tax overhaul that Trump is proposing is especially generous to the wealthy and especially hard on lower-income families, including those who receive the Earned Income Tax Credit. His plan would entirely eliminate the head of household filing status and the deduction for dependents, both of which help to reduce the tax burden owed by EITC families.

The Trump tax proposals, to take just one example from the Tax Policy Institute, would increase the federal tax bill of a couple with four children making $50,000 a year from $210 to $1090. That result would swallow the benefit of the family’s state EITC several times over.We’re looking, in other words, at the prospect of a state EITC program that in many cases no longer helps low-income families directly but instead simply goes to help to pay their (newly-increased) share of federal taxes. How many things are wrong with that picture?

“Breaking Faith” with the Voters: A Tale of Two Ballot Questions

The Justices of the Supreme Judicial Court have ruled that the income tax proposal the Senate included in its budget is not unconstitutional, ending the legal controversy, but not the political controversy.

The Senate’s income tax plan would freeze the personal income tax rate at its current rate (5.15 percent) rather than allowing a formula to remain in place that year by year automatically lowers it to 5 percent. The plan would also increase the personal income tax exemption and the state earned income tax credit, thus providing a modestly progressive adjustment to state income tax collections.

Opponents of the plan have taken to saying that the proposed freeze amounts to “breaking faith” with the electorate that voted back in 2000 to reduce the rate to 5 percent. The Herald used the phrase in a recent editorial. And Governor Baker repeated the charge in an interview on Boston Public Radio last week.

“Breaking faith” — that sounds grave. It’s a phrase that might lead you to think, for example, that the Legislature has never before tampered with a ballot question that the voters had passed. Well, that’s an assumption easily disproved. We can start with a pair of ballot questions, one from 1998 and the other from 2000.

In 1998, voters approved with 58 percent of the vote a ballot question providing for public financing for political candidates who agreed to fund-raising limits. The Legislature, whose leadership abhorred the new law, refused to provide the revenue necessary for its operation. The law remained on the books for a while, but the lack of funding kept it from taking effect.

In 2000, two years after the voters approved the public campaign financing initiative, a question to reduce the state income tax from 5.85 percent to 5 percent over the course of three years was on the ballot. Republican Governor Paul Cellucci strongly supported this proposal, and his administration worked hard to convince skeptical voters that the state could afford this enormous tax cut without cutting state services. The Governor’s Secretary of Administration and Finance was dispatched to proclaim that, far from resulting in service cuts, the tax rate reduction would stimulate economic activity and produce more revenue. In what was likely one of the last straight-faced invocations of the Laffer curve, the Secretary promised: “when you cut taxes you have a stimulating effect” (Globe, 10/31/2000). As it happens, the Secretary was Stephen Crosby, the current chair of the state Gaming Commission, who today promised that casino gambling will bring as much as $400 million annually to the state.

Voters approved the tax rate cut that November, although by a lesser margin than the public campaign financing initiative had received two years earlier. But even before the year was out, state tax collections had begun to drop precipitously: the tech stock bubble was bursting. Only weeks after promising no cuts in services, Secretary Crosby was rethinking the entire situation. “That’s a colossal drop” in tax collections, he said. “That’s like falling off a cliff. That gives the message that we need to be ready” for spending reductions (Globe, 12/24/2000).

And the next few years would bring even more problems — the tragedy of 9/11 and the additional economic bad news that followed. The Legislature turned to paring programs and services and they also used the fiscal crisis as an opportunity to repeal the public campaign financing law. Said Governor Mitt Romney in okaying the repeal — “I do not want to put in our budget, particularly in a year with the financial challenges we have, money going into a Clean Elections fund.” In addition to cutting services, the Legislature also halted the voter-approved income tax reduction at its then-current level of 5.3 percent and put in place a formula tying future rate reductions to growth during the prior year, which is how we arrived at the 2015 tax rate of 5.15 percent.

In order to pave the way for the repeal of public campaign financing, the Legislature placed a non-binding question on the ballot in 2002 asking voters whether they approved of using taxpayer funds to pay for political campaigns. Money raised from large corporations funded an ad campaign that persuaded voters to reverse their prior vote in support of public campaign financing. No comparable effort was launched with respect to the income tax cut, so we don’t know whether voters would have favored significant reductions in funding for their schools, libraries, police and fire departments.

In the 15 years since the voters approved the income tax cut on the basis of a promise that it would increase revenue, that cut has been responsible for much of the reduction in funding for important state services: higher education is down 20 percent; early education down 23 percent, public health down 25 percent; local aid down 44 percent. (Hat tip for the stats to MassBudget.)

So what does it mean to “break faith” with the voters? To freeze the income tax rate and provide a small governmental counterweight to the growing problem of income inequality? Or to continue to peddle a promise made the better part of a generation ago that never could have been kept?

Charlie: You Can Help Barack Preserve the EITC!

Here’s an idea for Charlie Baker: Congress is now considering a bill that would make permanent many tax credits and deductions that are now only temporary. How about supporting President Obama’s threat to veto that legislation because it fails to extend expansions of the Earned Income Tax Credit program?

A quick recap: this tax bill was negotiated between House Republicans and the office of Democratic Senator Harry Reid (who will no longer be the Senate majority leader when the Republican majority takes over in January). The $440 billion worth of tax breaks that it would make permanent include some programs that are popular with Democrats as well as Republicans, such as the American Opportunity Tax Credit for higher education costs, but two thirds of the tax benefits in the bill would go to businesses. Last week, President Obama threatened to veto the bill because it does not give permanent status to expansions of certain tax provisions, including the Earned Income Tax Credit Program, that are important to low-income families with children. In a provocative display of candor, the Republican negotiators said that the exclusion of the Earned Income Tax Credit program from the bill was “payback” for the president’s executive order on immigration.

The EITC expansions at issue were put into place five years ago, as part of the economic stimulus bill to counter the Great Recession. They provide, for example, a higher credit for larger families (those with 3 or more children). The expansions are scheduled to expire in 2017, and if they do, the credit for these larger families will fall by more than $700 per year. According to the Center on Budget and Policy Priorities, allowing the expansions to expire will push a quarter-million Massachusetts residents into poverty or make them poorer.

Allowing these expansions to expire would affect not only the federal EITC program, but also the 25 state EITC programs that provide some portion (currently 15 percent in Massachusetts) of the taxpayer’s federal credit. Which is where the Governor-elect comes in. Baker’s campaign platform proposed to increase the state’s EITC program — a more specific anti-poverty agenda than anything his opponent offered. (It must be said, however, that Baker was most likely to talk up this idea when campaigning in urban areas and communities of color. In the rest of the state, one heard far less about this “carrot” of encouraging work and far more about the “stick” of welfare reform.)

Given the state’s current budgetary red ink, it will be challenging enough to deliver an increase in the state EITC program. If the federal EITC expansions expire, any state increase would go in part toward making up for those federal cuts. So maybe Governor-elect Baker will repeat, for the benefit of the Republicans in Congress, what he told the Globe the day after his election:

“I would hope that one of the lessons that some of the Republicans nationally would take from this race is that it’s a good idea to chase 100 percent of the vote and to make the case in as many forums and as many places as they possibly can.”

Send them back to the drawing board to include the EITC. How about it?

Charlie’s EITC Increase Has Gone Missing!

Update: the Baker campaign points out that the candidate still favors an EITC increase and a mention of that fact can still be found on his website. That’s true. But this assistance for low-income working parents has been dropped from the economic plan, “Great Again Massachusetts,” his campaign wants to talk about now.


Charlie Baker was out yesterday with an economic plan to support small business and increase opportunity. It’s been a full three months since he last announced an economic plan to support small business and increase opportunity. Let’s see what’s changed.

Back in June, you’ll recall, the Baker/Polito ticket toured the state touting an economic plan that was a three-legged stool: (1) an increase in the minimum wage, (2) a package of tax cuts for businesses, and (3) a 100 percent increase in the state Earned Income Tax Credit, which Baker said, “would help the people the state should be helping most –- low-income, working parents.”

The new plan, packaged in a glossy brochure with the title “Great Again Massachusetts,” does not mention increasing the minimum wage, for the obvious reason that bipartisan legislation accomplishing that goal was enacted over the summer.

The package of tax cuts for business is still there, including tax credits to offset the cost the minimum wage increase will have on business.

But the doubling of the state Earned Income Tax Credit? It’s gone from the new plan. Although the new Baker plan talks about “opportunity and growth everywhere,” you won’t find a mention of an EITC increase anywhere.

Maybe it was eliminated because the Baker campaign wants to lowball costs. At yesterday’s event, Baker said the tax cuts he was proposing would cost the state only $250 million to $300 million, an amount so small, in his view, that he hadn’t even bothered to develop a plan to pay for them: “we can figure it out.” Doubling the state EITC would add about $130 million to those costs, making a plan to pay for them a rather more urgent matter.

And maybe another reason it was eliminated was that, as November approaches, the Baker campaign is returning to its roots and reconsidering whether the “people the state should be helping most” are low-income working parents.

The “Five Stages” of Opposition to a Minimum Wage Increase

The 2014 Legislative session has gotten underway, and employer groups opposed to an increase in the state’s minimum wage are firing warning shots and charting diversionary tactics to try to keep this very popular proposal at bay.

For example, on Monday, Associated Industries of Massachusetts, popularly known as AIM and one of the largest employer trade groups, endorsed a version of the familiar “Walmart Strategem” — that a better approach to alleviating poverty would be for the state to pick up the tab by increasing its Earned Income Tax Credit. But even if the state doubled the size of this program, eligible families would see an average increase of maybe $400 or so, almost nothing compared to an increase in the minimum wage. (Also, does anybody really recall AIM making a big priority of expanding this taxpayer-funded program before? ed. – AIM says they have supported in past but not claiming “big priority”)

For the upcoming minimum wage battle, it seemed to me that those of us in support ought to have a guide to the various lines of attack we may anticipate. And so, borrowing from the work of Dr. Elizabeth Kubler-Ross to track the grieving process and a variety of other human ailments, here are the “Five Stages” of Opposition to a minimum wage increase.

First Stage: Denial. In this stage, the subject is given to repeating statements such as “this can’t be happening,” and “it is impossible that the order of the universe might be altered.” An example from our friends at Mass. Fiscal Alliance, who cannot contemplate such a development:

[Employers must] develop a campaign plan that addresses their largest two concerns: making payroll and knowing where their income is going to come from…by increasing the minimum wage rate, you are making it almost impossible for many to win; the rules are being changed for them.

Denial generally proves to be only a temporary defense and is soon followed by the other stages.

Second Stage: Anger. In this stage, the subject wants someone to blame and lashes out in anger that is often misdirected or displaced onto others. An example from our friends at AIM, in which anger is displaced onto the co-workers of those who would benefit from a minimum wage increase:

[Increasing the minimum wage] causes multiple problems for employers. It can erode morale among workers as existing employees become angry that newer or lower-skilled colleagues are making nearly as much or, in some cases, more than they are. That anger can in turn accelerate turnover as the result of employees quitting.

Third Stage: Bargaining. In this stage, as it becomes evident that the unwanted event might nonetheless occur, the subject attempts to negotiate conditions under which it might be acceptable. An example from our friends at the Mass. High Technology Council:

[Although employers] do not support the Senate’s approach to raising the minimum wage as a stand-alone proposal, there is a considerable change in opinion when cost-reducing reforms to the Unemployment Insurance system are considered as an inseparable component of the minimum wage proposal.

Fourth Stage: Depression. In this stage, the subject feels despondent and bleak about the future. As the debate progresses, we may expect to see evidence of this stage in the form of a downturn in business confidence as employers are surveyed about their outlook and the prospect of a minimum wage increase clouds their horizon.

Fifth Stage: Acceptance. In this stage, the subject finally begins to feel that things are going to be okay after all. Those of us who support a minimum wage increase hope that with acceptance also comes the realization that employers and employees are not engaged in a zero sum game, and instead, we all do better when we all do better.


Let’s Increase State Assistance to Working Poor Families, says — Charlie Baker?

Last week’s second most surprising story about the 2014 Governor’s race: one of the candidates wanted to discuss poverty in Massachusetts and how to alleviate it.

Last week’s most surprising story about the race: that candidate was Republican Charlie Baker.

In a Boston Herald Radio interview, Baker endorsed the idea of providing more state assistance to poor working families by increasing the state Earned Income Tax Credit.

A little background: the Earned Income Tax Credit program (EITC) is one of the nation’s most effective anti-poverty measures. It began as a federal program, and President Ronald Reagan, who loved the idea of using the mechanism of a tax credit to assist working poor citizens, expanded it significantly. The key to the program’s success is that the tax credit is refundable: a low-income taxpayer who qualifies for a credit of, say, $2500, uses part of the credit, say, $250, to satisfy his or her federal income tax obligation, then receives the remainder of the credit in cash. Particularly during this Great Recession, the EITC has helped to keep families housed, fed and able to get to work. (If you wondering whether any of the tax credits that help businesses are similarly refundable, the answer is yes.)

About half of the states, including Massachusetts, have built on the success of the federal EITC by offering their own state EITC programs, which provide a percentage of the federal credit. In Massachusetts, the state EITC is 15 percent of the federal amount.

In his Herald Radio interview, Baker doubted the wisdom of raising the minimum wage, contending that it would eliminate jobs and hurt small business. That position was not a surprise, but what he said next was: “What I would much rather see us do is put some real, sort of turbo, into the Earned Income Tax Credit.”

The radio hosts countered with the recent report that fast food workers in the U.S. are so woefully underpaid that the government must offset their living expenses to the tune of $7 billion annually through programs like Medicaid, Food Stamps and the Earned Income Tax Credit. Asked whether assisting these underpaid workers should be a government responsibility, Baker said yes:

If we really want to make work pay here then I think the state ought to put its money where its mouth is and really bump up in a big way the earned income tax credit so that people can significantly enhance what their take-home pay would be. through what would in effect would be a tax cut.

So what would putting some turbo into the Massachusetts EITC mean? Let’s say, doubling it from 15 to 30 percent (the state with the highest credit is Vermont, at 32 percent). That would mean that the 395,000 Massachusetts working families who qualify would get an average $330 increase annually (the highest state EITC amount for this tax year is $883). Doubling the credit would cost the state $132 million.

By contrast, an increase of one dollar in the minimum hourly wage for a 35-hour per week job would result in gross income increase of $1800 annually, some of which would be paid as payroll taxes, increasing state revenue. But you certainly don’t have to agree with Charlie Baker that increasing the minimum wage is a bad idea in order to agree with him that increasing the state EITC is a good one. (It also happens to be an idea that our current Governor has never proposed.)

My advice to the Democratic candidates: see him and raise him.