A state Earned Income Tax Credit (EITC), which is included in Governor Beshear’s tax proposal, would help several hundred thousand of Kentucky’s low- and moderate-income working families make ends meet—among many other important positive effects. Those who would benefit include single mothers, children and military families.
The federal EITC, which currently lifts about 6.5 million individuals—half of whom are children—out of poverty each year, has been shown to help working families afford basic necessities and provide long-term benefits to children. It also supports local economies. In 2013, the federal EITC returned approximately $923 million to Kentuckians.
A state EITC in Kentucky would build on these benefits by:
- Helping Kentucky’s working families cover basic living expenses
With the ongoing erosion of wages, many people struggle to pay for even the basics like food, housing and transportation. Research shows that families typically use their EITC refunds on such necessities, although some use these funds for longer-term investments such as education that can help boost their employability and earning power.
- Improving health and education outcomes for Kentucky’s children
A Kentucky Youth Advocates brief notes that state EITCs are associated with healthier babies, lower rates of maternal smoking and better health outcomes across the course of children’s lives. In addition, the federal EITC has been shown to improve children’s performance in school and their rates of employment and earnings as adults.
- Stimulating Kentucky’s local economies
A state EITC would also result in more money being spent in local stores and businesses, which stimulates the local economy. According to one estimate, every increased dollar received by low- and moderate-income families has a multiplier effect of one-and-a-half to two times the original amount in terms of its impact on the local economy.
In addition to the above benefits, a state EITC would be easy for Kentucky to administer and would make Kentucky’s tax system fairer. Lower-income Kentuckians currently pay a greater share of their incomes in state and local taxes than higher-income Kentuckians. A state EITC would create more balance and partially offset the impact of regressive sales taxes on low-and moderate-income people.
Twenty-six states (counting the District of Columbia), including several of those neighboring Kentucky, already have a state EITC. In states with refundable EITCs, the credits range from 3.5 to 40 percent of the federal EITC.
The governor’s tax plan proposes a Kentucky EITC that is 7.5 percent of the federal EITC. That is half of the 15 percent credit recommended by the Governor’s Blue Ribbon Commission on Tax Reform. The average federal EITC return in Kentucky was $2,299 in 2013. If the state EITC was 15 percent of the federal, the average state EITC benefit in Kentucky would be $344.85. At 7.5 percent of the federal EITC, as proposed in the governor’s tax plan, the average benefit in Kentucky would be $172.43.
A state EITC would provide a much-needed boost to the financial security of Kentucky’s low- and moderate-income families and is essential to any tax reform package.