Two Pillars of Making Work Pay: Minimum Wage Increase and a State Earned Income Tax Credit
September 3, 2014
Increasing the state minimum wage and instituting a state Earned Income Tax Credit (EITC) and are two policies that complement each other and can help working families better make ends meet, as outlined in a new Center on Budget and Policy Priorities (CBPP) report. In combination, these policies (which we have previously promoted for Kentucky here and here) boost income, widen the path out of poverty and reduce income inequality.
As described in our recent report The State of Working Kentucky 2014, Kentucky families have experienced an erosion of wages over the past decade, making it increasingly difficult even for those with jobs to make ends meet. But increasing the minimum wage and establishing a state EITC can help address the economic insecurity created by low wages. One in four of the state’s workers would be helped by an increase in the minimum wage to $10.10 an hour, and more than one in five Kentucky families would benefit if the state created an EITC.
As emphasized in the CBPP report, a state EITC and a higher minimum wage each help working families meet basic needs and improve children’s life chances. The federal EITC lifts about 6.5 million people out of poverty, about half of whom are children, and low-income children in families that receive additional incomes through programs like the EITC do better and go further in school—and may work more and earn more as adults. Increasing the minimum wage also boosts income, lifts workers and their children out of poverty, and puts kids on a better path in life.
According to the report, the two tools are most effective when implemented together. They reach overlapping but different populations—for example, the minimum wage targets the very lowest-wage workers, regardless of family status or age while EITCs mostly benefit families with children and are available to some working families with higher incomes than provided by the minimum wage. Increasing both at the same time provides added support to the working families who need it most, together moving families beyond poverty and further down the road to economic security. The different timing of the two tools is beneficial—a larger paycheck can help with routine expenses, while the EITC is received at tax time and can be used for bigger expenses like car repairs or a security deposit. And improving both together allows the public and private sectors to share the cost of boosting incomes for workers.
Twenty-four states—including the District of Columbia—have a higher minimum wage than the federal minimum, and eleven states increased their minimum wage in 2014. Twenty-six states already have an EITC, and a few states have recently enacted EITC improvements. Three states recently both increased their minimum wage and strengthened their state EITC.
Kentucky has done neither. Proposed legislation to raise the state minimum wage to $10.10 and increase the minimum wage for tipped workers did not pass the 2014 General Assembly, although a local effort to increase the minimum wage in Jefferson County is currently under consideration. Similarly, proposals to create a state EITC have been introduced in the Kentucky General Assembly since 2002—often as part of broader tax reform plans—but are yet to pass.
In order to move Kentucky forward, state lawmakers should pursue these two important strategies for helping Kentucky families and growing the state’s economy. Here are some KCEP resources on these important tools:
Raising the Minimum Wage
“Increasing Kentucky’s Minimum Wage Would Help One in Four Workers Makes Ends Meet”
“Higher Minimum Wage Is Good for Kentucky Workers and the State’s Economy”
“Increase in Tipped Minimum Wage Is Long Overdue”
Creating a State EITC
“State EITC Would Make a Regressive Tax System Fairer”
“Infographic: A State Earned Income Tax Credit (EITC) for Kentucky”
“State EITC Would Help Working Kentuckians Afford Necessities”
“Interactive Map: How a State Earned Income Tax Credit Would Benefit Each Kentucky County”
“Fact Sheet: The Benefits of a Stated Earned Income Tax Credit by Legislative District”
“Working Family Tax Credits Help Kentucky’s Military Families”
“Myths and Facts about an Earned Income Tax Credit in Kentucky”