Tax credit better way to help poor
Author: Michael Saltsman
Publication Date: May 2017
Newspaper: Baton Rouge Advocate
Topics: Minimum Wage
Gov. John Bel Edwards has proposed raising Louisiana’s minimum wage by 17 percent to $8.50 —giving the state a higher wage floor than two of its three neighbors. State legislators need not put the state at a competitive disadvantage to raise wages. Thanks to a federal policy called the Earned Income Tax Credit, the real minimum wage for many Louisiana families is already over $10 an hour.
The federal EITC was signed into law by President Gerald Ford in 1975 and has since been embraced by politicians from both parties. It supplements the income of starter wage employees through the tax code, avoiding the negative employment strains of minimum wage increases. Because a job is required, it is designed to be more of a hand up than a handout. According to the IRS, over a half-million state residents received the EITC last year, with an average credit of roughly $2,900.
Consider the math for a single mother with two children. This single parent, working full-time at the state minimum wage, earns $15,080 in a year. The federal EITC adds roughly $5,550 to her annual wage, raising her effective hourly wage to just under $10 an hour. Louisiana, along with 25 other states and the District of Columbia, supplements the payout with a state version of the credit–which boosts the state’s effective minimum wage above $10 an hour.
Contrary to popular belief, single parents aren’t a typical beneficiary of minimum wage hikes; for instance, they represent just one in ten of those affected by the aforementioned federal increase. But single parents with minimal workforce experience are uniquely vulnerable to losing their jobs when the minimum wage rises. For instance, a University of Georgia study finds that each 10 percent increase in the minimum wage reduces the employment of single mothers by six percent.
By contrast, this same study finds that an equivalent increase in a state’s EITC is associated with an increase in employment for this group. This effect isn’t unique to single parents, either. According to a recent survey of U.S.-based labor economists, the vast majority of respondents say an expansion of the EITC is a far more efficient way to address the income needs of poor families than a minimum wage increase.
Praising a government credit may not have the same political appeal as a minimum wage hike, but it’s a better bet for Louisiana. Louisiana’s youth unemployment rate is averaging 20 percent; in some New Orleans neighborhoods, the rate spikes above 40 percent. And nearly two-thirds of the state’s poor hold no job at all. Put differently, what these residents need right now are jobs — not a government-mandated raise.