A Bottom-Up Tax Cut to Build Georgia’s Middle Class

An Updated Case for a State Earned Income Tax Credit

An Updated Case for a State Earned Income Tax Credit, October 2018

Building a more prosperous Georgia with communities that thrive requires a larger, more resilient middle class and a smoother path for low-income families to work their way into it. One evidence-based policy with a long track record of success toward that goal is a state Earned Income Tax Credit (EITC).

Created in 1975, the Earned Income Tax Credit is a federal policy that serves as one of the nation’s most effective tools for low- to middle-income families. It cuts federal taxes for low-wage workers like cashiers, mechanics and nurses – providing a wage enhancement for families striving toward the middle class. Twenty-nine states and the District of Columbia build on the EITC’s success with their own state-level versions of the credit. State EITCs piggyback on the federal version by providing a limited credit against state and local taxes, up to a value determined by each state. By enacting a refundable EITC, or Georgia Work Credit, state lawmakers can provide families in the Peach State the following benefits:

• Provide a bottom-up tax cut to more than a million Georgia families. About 1.1 million Georgia families, or 25 percent of all Georgia households, received the federal EITC in 2016.^[1] State EITCs provide a modest yet critical boost to those same families. A refundable Georgia Work Credit set at 10 percent of the federal EITC would cut taxes by a few hundred dollars a year for eligible workers, up to a ceiling of around $630. The largest value goes to families earning from about $10,000 to $24,000 a year, though families making up to about $39,000 to $54,000 (depending on number of children) still benefit. An estimated 19 percent of white families and 32 percent of families of color stand to gain from a state-level version of the credit.
• Help Georgians with jobs afford the basics and work their way into the middle class. State EITCs are available only to people who work. The credit also grows in size, up to a point, as wages rise. That combination encourages able-bodied people to stay employed and work more hours, rather than rely on public assistance. The extra funds help working families afford basic necessities like food and child care, as well as larger investments that smooth the path to the middle class.^[2]
• Give an economic booster shot to local businesses and communities. A Georgia Work Credit would pump about $300 million each year into local communities by giving families more disposable income to spend locally. Studies indicate the federal EITC delivers an economic multiplier effect, with every $1 of tax credit claimed by local taxpayers generating up to about $2 of local economic activity.
• Put Georgia’s children on a firmer pathway to success. Decades of research and evidence from other states show that children whose families receive more income from the EITC are likelier to grow up healthy, excel in school, graduate high school, attend college and earn more as adults.^[3] Studies also indicate that young children, boys and children of color benefit the most.^[4]

The EITC Helps Families Across Georgia’s Diverse Communities

The federal EITC is a credit against income taxes designed to supplement the wages of low- and moderate-income people. It is available only to people who work, providing a strong incentive for people to enter the workforce and put in more hours. Established in 1975, the program developed a base of bipartisan support which led to subsequent enhancements under Presidents Reagan, Clinton, W. Bush and Obama. EITC expansions in the mid-1990s helped move half a million families from cash welfare to work, according to a landmark study.^[5] Roughly half of all taxpayers with children make use of the EITC at some point in their lives, usually for a year or two at a time.^[6]

The size of the credit depends on a family’s income, marriage status and number of dependent children. The largest value goes to families making from about $10,000 to $24,000 a year, though families making up to about $39,000 to $54,000 (depending on number of children) still benefit. The federal credit is refundable, which means that if a family’s credit exceeds their income tax liability, they receive the spillover as a refund. A detailed explanation of how the credit works is provided in the Appendix.

About 1.1 million Georgia families, or 25 percent of all Georgia households, claimed the federal EITC in 2016. These families include an estimated 2.6 million individual Georgians, including 1.2 million children.^[7] An estimated 770,000 working mothers, 410,000 working fathers and 80,000 military families were in Georgia households that received the credit in 2012.^{[8] [9]} And the additional income from the EITC keeps about 250,000 Georgians above the federal poverty line each year, according to national research.^[10]

Georgia families who claim the federal EITC reflect the state’s diverse makeup, as shown in the chart. An estimated 19 percent of white families and 32 percent of families of color received the benefit in 2016, amounting to about 664,000 families of color and 439,000 white families who currently benefit. Looking at Georgia’s communities of color specifically, an estimated 36 percent of black families, 28 percent of Latino families, 19 percent of Asian families and 20 percent of other[11] families benefit. Overall, families of color account for about 60 percent of EITC recipients in Georgia, with white families comprising a sizable minority of 40 percent. A detailed table of current EITC recipients in Georgia broken out by race and ethnicity is available in the appendix.

The EITC Delivers Big Bucks to Georgia Communities

In 2015, the most recent year available at the county level, the federal EITC injected $3.3 billion into local Georgia economies. In 147 of Georgia’s 159 counties, at least 20 percent of households filing a federal income tax return claimed the credit that year. The share of recipients exceeds 30 percent in a majority of counties, as shown below. The average benefit for EITC families in 2016 was $2,721 per year, money which recipients often spend locally.^[12]

A Georgia Work Credit Can Build on the Federal EITC’s Success

Twenty-nine states and the District of Columbia enhance the considerable value of the federal credit by providing their own state match. These state credits provide a modest yet critical boost for taxpayers who already receive the federal EITC. State EITCs are typically claimed as a percentage of the federal credit’s value, ranging from a low of 3 percent in Montana to a high of 40 percent in Washington, D.C.^[13] Here is one example of what this means in practice. In a state with a 10 percent EITC, a family with a $3,000 federal credit receives a $300 state match. Hawaii, Montana and neighboring South Carolina each enacted new EITCs in 2017.

In all but six states with an EITC, that extra $300 would help to reduce the full range of state and local taxes that low-income families pay. That’s because most states allow working individuals and families to keep the full value of the credit, even if it exceeds their state income taxes. This is important because lower earning households spend a greater share of their income paying other taxes, like sales taxes and fees, than do affluent households.^[14]

A refundable state EITC helps correct that imbalance and lets working people keep more of what they earn. The extra funds help working families afford basic necessities like food and child care, as well as larger investments that smooth the path to the middle class. A 2015 survey of tax credit recipients estimated that 87 percent of EITC dollars went to either paying bills, saving, affording basic needs or making personal investments such as course tuition, reliable transportation or more livable housing.^[15]

A Georgia Work Credit Can Cut Georgians’ Taxes from the Bottom Up

A state EITC would reduce taxes for Georgians who need it the most—workers in low-wage jobs and their families. Through its unique design, a Georgia Work Credit can reduce income taxes from the bottom up, rather than the top down. That stands in stark contrast to the more common tax-cut approach of reducing income tax rates, a tactic that disproportionately benefits people at the top.^[16] Consider three hypothetical cases of Georgia families can benefit from a Georgia Work Credit. These examples, which account for changes made to Georgia’s income tax in 2018[17], assume lawmakers create a refundable state credit set at 10 percent of the federal level.

• Single Mom, One Child

Imagine a single mother of one in Macon who works full-time as a cashier, making $8 an hour. She earns about $16,000 annually before taxes, so in 2019 she would owe an estimated $128 a year in Georgia state income taxes. A refundable Georgia Work Credit at 10 percent of the federal credit comes out to $340 for her, delivering her an estimated state refund of $212. That offsets the working mother’s state income bill and also delivers a meaningful boost to her annual budget for basic needs such as child care, transportation and school supplies.

• Married Couple, Two Children

Take a young Atlanta couple with two children. She works part time as a home health aide; he tends bar at a local restaurant. Their combined income is $35,000. They owe an estimated $676 a year in Georgia state income taxes. A 10 percent Georgia Work Credit comes out to an estimated $329 for them, cutting their state income tax bill roughly in half. They use additional dollars to save and plan for investments that can help families move to the middle class, such as a downpayment on a first home.^[18]

• Married Couple, Three Children

Or imagine a married couple in Athens with three kids, just on the cusp of securing their grip on the middle class. He works construction almost full time, while she puts in a few hours as a substitute teacher. With an income of $48,000, they owe Georgia about $1,276. Because they’re nearing the middle class, this family’s EITC benefit is in the process of gradually phasing out. But a 10 percent Georgia Work Credit still reduces their state income tax bill by $125.

Enacting a bottom-up tax cut rather than a top-down approach such as cutting the top rate responds to two key drawbacks in Georgia’s tax system.

First, as in most states, low- and middle-income Georgians pay a greater share of their income in state and local taxes than do the wealthy. This is known as a regressive tax structure. The poorest fifth of Georgia taxpayers pay an average 10.7 percent of their annual income in state and local taxes and the middle fifth pays 9.8 percent, while the wealthiest 1 percent pays only 7 percent on average.^[19]

Second, Georgia’s income tax contains a design flaw that causes it to fall more sharply on workers with small paychecks than do other states’ systems. Georgia’s income tax brackets are mostly unchanged from the 1930s, when $10,000 a year was considered a high-wage salary. As a result, the state’s income tax starts applying to families at unusually low levels of income. A Georgia family of three with two children living in poverty faced the third highest income tax in the country in 2016.^[20]

A Georgia Work Credit Can Boost Main Street Businesses and Communities

The EITC also helps communities thrive by putting more money in the pockets of those who earn low wages and are most likely to spend additional money in local businesses, creating a ripple effect throughout the economy.^[21]

A refundable Georgia Work Credit set at 10 percent of the federal credit would provide about $300 million to Georgia consumers. Those additional funds can further enhance the economic value of the federal credit, providing a needed boost for local businesses and communities.^[22] The table below shows the potential value of a Georgia Work Credit in some of the state’s most populous counties. Estimates of how many dollars a work credit could send to all Georgia counties are available in the appendix.

Studies indicate that the federal EITC delivers a multiplier effect, with every $1 of tax credit claimed by local taxpayers generating between about $1 and $2 of local economic activity. For example, the city of San Antonio estimates each additional EITC dollar generates another $1.58 in local economic activity, and each $37,000 of activity results in one additional job.^[23] A similar analysis in Michigan finds an estimated $1.67 worth of economic benefit for each EITC dollar.^[24] And a rigorous study in California suggests that in some communities the credit can create economic impacts equivalent to at least twice the amount of EITC dollars received.^[25]

A Georgia Work Credit Can Help Put Children on a Path to Success

The potential value of enacting a new Georgia Work Credit extends beyond the workers who directly receive the credit. Decades of expert research and evidence from other states shows that children living in EITC households receive outsized benefits from the extra money provided by the policy. By providing a targeted boost to families straddling the line between poverty and self-sufficiency, the credit helps stabilize family finances and provide better opportunities for children to thrive in adolescence and escape poverty as adults. Studies link the EITC to several key benefits that strengthen children’s foundation for success as students, workers and eventually parents.

Healthier from the start. Researchers cite links between larger EITCs and improvements in infant health indicators such as birth weight and premature birth. A refundable credit set at 10 percent of the federal credit could result in 1,047 fewer low-weight births in Georgia each year, according to an Emory University study.[26] Expert studies also suggest receiving an expanded tax credit may improve maternal health, including positive outcomes such as lower mental stress, lower likelihood to smoke during pregnancy and higher likelihood to seek out prenatal care. More details on potential health benefits of a Georgia Work Credit are available in GBPI’s August 2018 policy brief “State Earned Income Tax Credits – A Proven Tool to Improve Health.”[27]

Better school performance. Nationwide the EITC is linked to higher test scores, especially in math, for low-income students in elementary and middle-school. A credit worth around $3,000 during a child’s early years may boost performance by about the equivalent of two extra months of school.^[28]

Graduate high school and attend college. Rates of high school graduation and college attendance are also higher for students in EITC families, compared to young people in poor families not getting the credit. One study estimated a $1,000 boost for an EITC-eligible family with a high school senior raised the likelihood of college attendance the next fall by 10 percent.^[29] For working families, even a small amount can mean the difference between affording the cost of classes or not.

Succeed in the workforce. Children in EITC families are likelier to work more hours and earn more when they enter the workforce as adults. One study says for each $3,000 a year in added income a child in a poor family receives from the EITC before age six, earnings as an adult rise by 17 percent.^[30]

A Georgia Work Credit is an Ambitious yet Affordable Investment

Enacting a Georgia Work Credit is an ambitious investment in more than 1 million hardworking families. As such, it carries an attendant cost in lost state revenue. A refundable Georgia Work Credit set at 10 percent of the federal EITC costs about $300 million a year, while one set at a 5 percent state match costs half that. State lawmakers can exercise complete discretion over the size of a Georgia EITC and can control the budget impact by selecting the state match with which they’re most comfortable. In order to keep the program affordable, some other states started small and then built on the program over time. Lawmakers can also consider phasing in a refundable credit’s value over a few years, as is common with other state tax credits.

A nonrefundable option also carries lower costs. But letting families keep the credit’s full value is critical to its success. Workers with very low wages pay little in state income taxes, despite significant contributions through sales taxes and various fees. Taking away the option for a refund significantly limits whether a state EITC can reach those hardworking families who need a hand the most. A better option for lawmakers concerned about potential costs is to select a lower percentage for Georgia’s state match, rather than removing refundability.

Several options exist for offsetting this investment, such as reviewing unproven business tax breaks[31] or extending Georgia’s outdated sales tax to cover some personal services, including home renovation or appliance repair. Below are additional details on two of the most sensible possibilities.

Two Options to Offset Cost of New Georgia Work Credit

Leverage new revenue from online sales taxes – The U.S. Supreme Court recently delivered a decision that offers Georgia lawmakers a chance to better fund the needs of the state’s people and communities.[32] In the case known as South Dakota vs. Wayfair, the Court repealed some obsolete rules that prevented the nation’s state and local governments from collecting sales taxes already owed on many purchases made over the internet. Now the Supreme Court’s decision makes it possible for Georgia and other states to do so after they institute specific administrative procedures and safeguards for small sellers.

Although the scope of the revenue gain is uncertain, experts estimate the change could net the state treasury as much as $125 million in 2019 and up to about $400 million by 2023.^[33]

Close the double-deduction loophole – Georgia is one of four states that allow taxpayers to claim a particularly unusual tax break which is only available to households that itemize their deductions. Oddly enough, Georgia taxpayers who choose to itemize can now write off their state income tax payments when calculating how much state income tax they owe. Georgia lawmakers inherited this accidental quirk in the code because the state offers the same package of itemized deductions made available at the federal level. Forty-six states disallow this practice, including Oklahoma where Republican Gov. Mary Fallin successfully pushed for its repeal in 2016.^[34]

The deduction used to cost Georgia several hundred million dollars a year in lost revenue, though its scope is now smaller due to changes stemming from the large federal tax revisions signed by President Trump in December 2017. But ending the policy, as state legislators nearly did in 2017, could still net Georgia an estimated $145 million a year.^[35]

Conclusion

State legislators can seize the opportunity to invest in Georgia’s future prosperity by enacting a state Earned Income Tax Credit, or Georgia Work Credit. It is a targeted, ambitious and affordable way to cut taxes from the bottom-up, keep people working toward self-sufficiency and help local communities thrive. The experience from other states is clear that EITCs can help build the middle class, strengthen local economies and keep young people on the path to the workforce. It is a smart way for Georgia to chart a better course forward.

This report is part of an ongoing series of work tied to GBPI’s People-Powered Prosperity initiative, a comprehensive vision for how Georgia lawmakers can bolster support for education, health, child care and other investments that help all Georgians thrive. A statewide poll conducted earlier this year showed nearly two-in-three Georgians support enacting a state Earned Income Tax Credit. Learn more at gbpi.org/peoplefirst.

Appendix: How the EITC Keeps People Working and Helps Families with Kids

The federal EITC boosts the wages of low- and moderate-income workers and their families. It helps keep them on the job, off welfare and moving toward the middle class. The size of each taxpayer’s credit varies based on their annual income, marriage status and number of dependent children.

The EITC’s value grows up to a certain threshold based on income and family size, at which point it plateaus and then begins to phase down. The largest credit goes to families with children making about $10,000 to $24,000 a year. It gradually phases out as workers begin to earn more, decreasing to zero at about double the poverty level of income. The credit fully phases out between $39,000 and $54,000, depending on marriage status and number of children. This unique structure is designed to help families the most as they escape poverty but still provide some value as they gain a firmer economic footing.

The credit is refundable, which means a family gets the full value of the credit even if it exceeds their income tax liability. Technically referred to as refundability, this is arguably the most critical component of the policy because it allows the credit to still reward work even if workers have small state income tax bills. Without this component, the EITC does far less to reduce poverty and encourage work, particularly among workers earning the least.

Appendix: Potential Georgia Work Credit Recipients, by Race and Ethnicity

Appendix: Georgia Work Credit Value by County

ENDNOTES

[1] Internal Revenue Service SOI Tax Stats – Historic Table 2. Georgia, 2016.

[2] A 2015 survey of tax credit recipients estimated that 87 percent of EITC dollars went to either paying bills, saving, affording basic needs or making personal investments such as course tuition, reliable transportation or more livable housing. “The EITC: A Powerful Savings Program for Low-Wage Workers,” CFED. July 2015. Also see Sarah Halpern-Meekin et al., “It’s Not Like I’m Poor,” 2015.

[3] “EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds,” Center on Budget & Policy Priorities. April 3, 2015.

[4] “State Earned Income Tax Credits Help Build Opportunity for People of Color and Women,” Center on Budget & Policy Priorities. 7/24/2018.

[5] “The Earned Income Tax Credit and Transfer Programs: A Study of Labor Market and Program participation,” Tax Policy and the Economy, Vol. 9, MIT Press, 1995.

[6] 61 percent of EITC recipients from 1989 to 2006 got the credit for only one or two years at a time.

[7] “Characteristics of the EITC-Eligible Population,” Brookings Institution. 2015. Precise estimates are 2,629,549 people living in EITC-eligible homes, 1,172,480 of whom are children.

[8] Data provided upon request from the Washington, D.C.-based Center on Budget and Policy Priorities. More details available in the following two reports, which combine EITC recipients with parents receiving a separate federal tax benefit – the Additional Child Tax Credit – resulting in a higher overall number. “21 Million Mothers Benefit from Tax Credits for Working Families,” CBPP. May 2015. And “13 Million Fathers Benefit from Tax Credits for Working Families,” CBPP. May 2015.

[9] Data provided upon request from the Washington, D.C.-based Center on Budget and Policy Priorities. More details available in the following report, which combines EITC recipients with parents receiving the Additional Child Tax Credit, resulting in a higher number overall. “Pro-Work Tax Credits Help 2 Million Veterans and Military Families,” CBPP. June 2015.

[10] “State Estimates of People and Children Lifted out of Poverty by the EITC and CTC Each Year, 2011-2013,” Brookings Institution analysis of Supplemental Poverty Measure Public Use Data. 

[11] The source of these data, the Brookings Institute, notes that the ‘Other’ category simply includes any remaining EITC recipients who do not fall into one of the largest four groups (White, Black, Latino and Asian). Generally speaking, it is reasonable to assume that in Georgia this group mostly consists of families who classify as multiracial, alongside a small number of Native American and Native Alaskan recipients.

[12] “Using EITC to stimulate local economies,” Brookings Institution. 11/1/2006.

[13] “States With EITCs,” Tax Credits for Working Families. Accessed 8/20/2018.

[14] A Georgia household with earnings under $19,600 paid an average of 10 percent of their income in sales and property taxes in 2018, compared with 2.5 percent paid by the wealthiest 1 percent of Georgians—making more than $481,200 a year. For more details, see “Who Pays?” Institute on Taxation and Economic Policy (ITEP). October 2018.

[15] “The EITC: A Powerful Savings Program for Low-Wage Workers,” CFED. July 2015. Also see Sarah Halpern-Meekin et al., “It’s Not Like I’m Poor,” 2015.

[16] For more details, see “Tax Shift Plans Chart Wrong Path to Reform,” GBPI. 8/2015.

[17] In 2018, Georgia lawmakers approved several revisions to the state’s personal income tax through House Bill 918. Most notably, the plan doubled the state’s standard deduction to $4,600 for a single person and $6,000 for a married couple filing jointly, and reduced the top rate to 5.75 percent for the 2019 tax year from its long-standing level of 6 percent. The top rate is scheduled to fall further to 5.5 percent starting in 2020, though that second step requires legislative approval during the 2020 General Assembly. For more details see “Lawmakers Might Come to Regret Georgia’s Risky Tax Plan,” GBPI. 2/22/2018. 

[18] For more examples of the types of ways families spend their EITC, see “When Tax Credits are About More than Money,” The Atlantic. April 2015.

[19] “Who Pays? A Distributional Analysis of Tax Systems in All 50 States,” Institute on Taxation and Economic Policy. 2018.

[20] For the full list of states with data available through 2016, see the 50 State Policy Tracker at the National Center for Children in Poverty. Further details on how personal income taxes affect families in poverty are available in “Taxing the Poor: State Income Tax Policies Make a Big Difference to Working Families,” National Center for Children in Poverty. November 2014.

[21] Low- and moderate-income families tend to spend most of their income on basic needs, whereas affluent families are more likely to save or invest. “Using the EITC to Stimulate Local Economies,” Brookings Institute. 2006.

[22] The additional local funds may also lead to slightly higher local tax revenues, which can help officials support core needs including schools and roads. The previously mentioned study in Baltimore found that about 0.4 percent of EITC were recaptured as new tax revenues.

[23] “Using the Earned Income Tax Credit to Stimulate Local Economies,” Brookings Institution. 2006.

[24] “Economic Benefits of the Earned Income Tax Credit in Michigan,” Anderson Economic Group. 2009.

[25] “The Economic Impact of the EITC in California,” California Journal of Politics and Policy. 2010.

[26]  Markowitz S, Komro KA, Livingston MD, Lenhart O, Wagenaar AC. “Effects of state-level Earned Income Tax Credit laws in the U.S. on maternal health behaviors and infant health outcomes.” Social Science and Medicine, 2017; 194, 67-75. Estimates for improvement in birth weight for Georgia were generated by authors of the study Markowitz, et al using data from the National Center for Health Statistics’ Linked Birth / Infant Death Records database for 2007-2014, accessed at http://wonder.cdc.gov/lbd-current.htm.

[27] “State Earned Income Tax Credits – A Proven Tool to Improve Health,” GBPI. August 2018.

[28] “EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds,” Center on Budget & Policy Priorities. April 3, 2015.

[29] Ibid.

[30] “Early-Childhood Poverty and Adult Attainment, Behavior, and Health,” Child Development. January/February 2010, pp. 306-325.

[31] “This Year’s Flurry of Tax Breaks Highlights Need for Better Process,” GBPI. 5/19/2017.

[32] “Supreme Court’s Online Sales Tax Decision Provides Georgia a Welcome Boost,” GBPI. June 2018.

[33] The Georgia State University Fiscal Research Center estimates that if effectively implemented, the state’s new online sales tax collection law could result in up to $125 million in fiscal year 2019, $285 million in 2020, $322 million in 2021, $360 million in 2022 and $398 million in 2023. More details: “An Analysis of Georgia’s Economic Nexus Legislation,” GSU Fiscal Research Center. September 11, 2018.     

[34] “OK Senate Passes Several Bills To Chip Away At Budget Deficit,” 5/17/2016.

[35] Estimated revenue provided by email upon request by the nonpartisan Institute on Taxation and Economic Policy. Elimination of the double deduction loophole was included in a broader tax package that nearly passed the General Assembly in 2017, House Bill 329. More details on that proposal as it was introduced are available in “Income Tax Bill Offers Earned Income Tax Credit Upside, Flat Tax Downside,” Georgia Budget & Policy Institute, February 2017.