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Reduce tax burden on working poor, study suggests

As California struggles with one of the highest jobless rates in the country, the state would benefit from creating an earned income tax credit to boost wages and encourage the unemployed to find higher-paying jobs, according to a report released tonight by the Public Policy Institute of California.

While offering business owners incentives to hire the unemployed provides a more effective short-term impact, an earned income credit – reducing the tax burden on low-income workers, and thus boosting their wages – could be a useful tool to encourage employment once the economy has stabilized, the report says:

There is overwhelming evidence that the EITC has increased employment among single mothers, who make up a large percentage of low-income families. An EITC does not have the stigma effects of hiring credits targeted at the disadvantaged because employers don't know whether an employee is eligible. A state EITC would be easily administered through the tax code, particularly if it piggybacks on the federal EITC calculation from the federal tax return, as most state EITCs do.

The study notes that a single mother faced with a wage of $8 an hour and no subsidy "may be better off if she does not work given the costs of child care, clothes for work, and commuting. But with a 40 percent supplement, her effective wage is $11.20 and work is likely to become more attractive."

A hiring credit that automatically kicks in during periods of economic struggle would provide a powerful response both in this downturn and future recessions, the study suggests.

“California needs a flexible approach to help cushion the state from the kind of blow it suffered in this recession,” said the study’s author, David Neumark.

These programs would be expensive, the report admits, but it argues that cost savings from reduced spending on unemployment insurance and welfare payments, and increased tax payments and economic stimulus would lower the program’s true cost.

Even when the economy is doing well, California has a persistent rate of long-term unemployed, the report says, and an earned income credit would be an effective way of addressing this once the immediate economic hardship has subsided.

In the short-term, any hiring credits should be designed to avoid stigmatization of workers, which the study criticizes the federal tax credit program for. It argues that the credit should be structured in a way that employees will not feel that use of it sends the message to a potential employer that they are less qualified or have had difficulty finding a job.

The study suggests the state can accomplish this by making the credit available to all recently unemployed, rather than targeting the particularly disadvantaged.

Similar tax credit programs have had problems catching on. The state created a $360 million fund two years ago for small business tax credits meant to spur job creation, but only 10 percent of that money has been claimed. Sharon Bernstein wrote in the Los Angeles Times:

Tax officials were flummoxed by the low response, but small-business owners said the economy had been so poor that few were able to hire, even with the $3,000 that the credit would have provided. Others said they were unaware of the credit.

Given the current climate of economic uncertainty, said Michael Shaw, California legislative director for the National Federation of Independent Businesses, a one-time tax break was not going to be enough to prompt businesses to take on the responsibilities of new employees.

The tax break 'made the difference for some folks who were ready to hire to make that final decision,' Shaw said, 'but it's not going to help someone who's struggling to keep their doors open to hire someone to get that credit.' … By law, the tax credit is supposed to remain available until it is drawn down completely, no matter how long that takes.

On the federal level, President Obama signed into law similar tax credits in the tax compromise reached with congressional Republicans in December. The law extended the federal work opportunity credit for four months, along with extensions of the Bush-era tax cuts and unemployment insurance, among other measures.



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