1. 1 December 8, 1999 Jamesburg, New Jersey Jeannette Russo Child-Based Budgeting Project Director/Fiscal Policy Analyst Association for Children of New Jersey 35 Halsey Street, Newark NJ 07102 P: 973-643-3876 F: 973-643-9153 www.acnj.org An Earned Income Tax Credit for New Jersey’s Working Families

2. 2 Why Do We Need An EITC? 1.It Supports Work – Refer to Working – But Still Poor in NJ a.Changing State Economy b.Expenses of Living in NJ c.Welfare Reform 2.It Reduces Poverty – Particularly for Children 3.It Reduces Tax and Income Inequality An EITC for New Jersey’s Working Families

3. 3 How Does the EITC Work? It is a tax program for working low-income individuals and low-moderate income working parents. It is administered by the IRS federally and by most state Treasuries. Benefits are distributed in the form of a refund check -- either because the filer no longer owes any income tax, or the filer’s credit exceeds their tax liability.

4. 4 Issues To Consider For a State EITC in New Jersey 1.Who should be eligible? Individuals Families with one child, two children, three children, etc. 2.At what income levels? Federal EITC levels Poverty Level or Range of Poverty Level (i.e. 150%, 200%) 3.Should the credit be refundable? 8 out of 11 state programs are refundable 4.How much of a credit should be offered? A percentage of the Federal Credit (most state programs are currently a fixed percentage of the federal credit). A fixed Credit amount

5. 5 ACNJ Recommendations for a State EITC * Follow Federal EITC Guidelines * 1.Least expensive to set up and implement – the rules and guidelines are already determined. 2.Simpler to administer – slight modifications of existing tax forms, benefits administered through the Treasury. 3.Easier to measure the impact – particularly if it is viewed as a complementary program to the federal EITC in helping working poor families and in fighting child poverty.

6. 6 1.Both Individuals and Parents would be eligible 2.At the same Income Level Thresholds as the Federal EITC ACNJ Recommendations for a State EITC

7. 7 Continued… 3.The EITC must be Refundable The only way the EITC is of full-value to a family is if the amount by which the credit exceeds the filer’s tax liability can be refunded. 4.The Credit should be a fixed percentage of the federal EITC Most refundable state EITC programs are a percentage of the federal EITC ranging from 10% to 25%. Presented here are the impacts of a state EITC at 15% and 25% of the federal EITC. Note: Senator Ronald Rice has sponsored a bill proposing a state EITC that would also be modeled after the federal EITC with respect to who would be eligible and at what income levels. The bill proposes that the NJ EITC be a refundable credit set at 20% of the federal EITC. Refer to Senate Bill-1625 in your conference packet. ACNJ Recommendations for a State EITC

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12. 12 Low-Moderate Income Working Parents Parents with one child may be eligible with income up to $26,928. Parents with more than one child may be eligible with income up to $30,580. Very Low Income Working Individuals Individuals may be eligible with income up to $10,200. Over 450,000 NJ residents filed for the federal EITC in 1997 (12% of all filers) Concentrated in Essex (63,300) and Hudson (53,365) Counties Who Would Benefit from A State EITC in New Jersey?

13. 13 The Cost of A State EITC The cost depends on who is eligible and the size of the credit. If NJ sets a state EITC as a percent of the federal EITC, the cost to the state would be a portion of the cost to the federal government. For example, in 1997 the federal government spent $654 million on EITC claims in New Jersey, which would be multiplied by the percentage used for a state credit: Federal $ x State Credit = State $ $654 million x.15 = $98 million $654 million x.25 = $164 million

14. 14 The Cost of A State EITC There are three options for financing a state EITC: 1.State General Funds All states with an EITC program initially funded it out of general funds 2.Federal TANF Funds 3.State Maintenance of Effort Funds Recent federal guidelines on the use of TANF funds allows the refundable portion of a state EITC to be charged to either TANF or a state’s MOE.

15. 15 The Cost of A State EITC To give a frame of reference to paying for a state EITC out of general funds -- If New Jersey were to set a state EITC at 25% of the federal EITC and it cost approximately $165 million, that figure is 1.4% of the state’s own source general fund resources ($12.2 billion for FY 2000).

16. 16 Source: US Census Bureau Small Area Income and Poverty Estimates.

17. 17 < $36,000$55,000 - $77,000$97,000 - $186,000 Source: Citizens for Tax Justice and Institute on Taxation & Economic Policy, 1996.

18. 18 Source: New Jersey Policy Perspective, Progress Volume One Number One, 1999. Cents From Each Dollar of Income That Goes to Each Quintile