Federal EITC should reflect cost-of-living disparities across U.S. cities
WASHINGTON (March 1, 2016) – The Earned Income Tax Credit has been shown to be an effective incentive to work, but those benefits are lost in cities with higher costs of living, and average wages, according to a new study from the R Street Institute.
While 20 percent of taxpayers nationally claim the EITC, claim rates range from 5.5 percent in Los Alamos, New Mexico to more than 50 percent in Rio Grande, Texas. Meanwhile, the credit’s real value for a single taxpayer with one child ranges from $4,131 in Harlingen, Texas to $1,531 in New York City, where it’s much more expensive to live.
Study authors Andrew Hanson and Zackary Hawley likewise find a typical single working parent in a metropolitan area like San Francisco sees EITC benefits phase out after far fewer hours of work than that same parent in Brownsville, Texas.
“Differences in the purchasing power of the maximum credit mean the EITC is less likely to induce the out-of-work to look for a job in high-cost cities, especially considering that many forms of assistance are cost-of-living adjusted,” Hanson and Hawley write. “It also means the policy extends the least help to those potentially in the most need – the working poor who live in high-cost areas.”
A simple and effective fix, the authors argue, would be to adjust the credit for local labor-market and cost-of-living conditions. Adjusting the national maximum allowable credit and national income limits would mean that workers in similar living situations would be treated equitably.
“Adjusting the EITC for local conditions also may help to slow the migration of working poor families out of expensive cities, allowing them to maintain workplace and family networks without sacrificing quality of life,” the authors write.
The authors also suggest further improvements to the EITC could be made by reconfiguring its phase-out schedule, dispensing payments throughout the year instead of one lump sum and addressing how the EITC is impacted by federal and state minimum-wage policies, which make the EITC less effective as a means to expand job opportunities for the less fortunate.
