Local tax credits are delivering for families nationwide, but not in NC
As election season wraps up this November in cities and towns across our state, the front-line role of local government in advancing the well-being of residents is top of mind for many North Carolinians. A recent report from the Institute on Taxation and Economic Policy (ITEP) is timely, then, in lifting up the potential of local governments to make transformational investments in working families through innovative policies like a local Earned Income Tax Credit. While the use of these local credits is currently blocked by state law in North Carolina, their effectiveness is a reminder of what might be possible if legislative leaders pursued policies to deliver well-being to communities across NC and empowered local governments to do the same.
Local EITCs build on state and federal policy to lift more people out of poverty
First implemented at the federal level in 1975, the Earned Income Tax Credit (EITC) has been boosting the incomes of low-paid workers and lifting millions out of poverty for decades. In 2022 alone, the federal EITC and federal Child Tax Credit together lifted 6.4 million people out of poverty in the US. Research shows that families mostly spend their tax credit on basic needs like food, clothing, and housing. Studies have repeatedly linked the EITC to improvements in key markers of health and well-being among recipients, including reduced depression, increased consumption of healthy foods, and increased birth weights for new babies. Thirty-one states (plus the District of Columbia and Puerto Rico) have additionally enacted a state-level EITC, building upon the federal credit as a proven anti-poverty tool.
ITEP’s new report lifts up three localities that are bringing the power of EITCs to their local communities: Montgomery County in Maryland, New York City, and San Francisco. The three local credits vary in their structure, with San Francisco providing an annual $250 credit to all families and New York City and Montgomery County offering their credits as a percentage of the federal EITC. Crucially, these credits are all fully refundable, meaning eligible households can receive the full value of the credit regardless of how much they owe in income tax. Refundability acts as a countermeasure to regressive tax policies like sales and property taxes, mitigating upside-down local tax structures that tax low-income residents at higher rates than wealthy ones. Together, ITEP finds that these three local credits lift the incomes of approximately 700,000 households by more than $350 million each year in addition to federal and state tax credits, providing income support that helps families meet their basic needs in the face of rising prices and insufficient wages.
State policy blocks NC families from tax credit supports and pursues a regressive revenue structure
Unfortunately, localities in North Carolina hoping to enact a similar policy in service of families and kids will find their way blocked by state law, which prohibits local governments from providing such credits to residents. North Carolina is, in fact, one of the most restrictive states in preempting local governments’ authority to improve their residents’ well-being in a variety of areas, blocking local officials from raising the minimum wage, securing paid leave for workers, and protecting residents from discrimination. Rather than moving forward to a more equitable and adequate tax structure, legislative leaders have instead chosen policies over the past decade that take our state in the opposite direction, toward a more regressive structure.
In 2014, North Carolina became the first-ever state to eliminate its state EITC, resulting in a tax hike for 900,000 low- and moderate-income households. In recent years, North Carolina has also failed to join 14 other states in enacting a Child Tax Credit (CTC), even though evidence from the temporarily expanded federal CTC showed the dramatic impact of targeting tax policy to kids’ needs, reducing North Carolina’s child poverty rate by 42 percent in 2021.
Instead of helping children and working families thrive, North Carolina has instead targeted tax policy to help the bottom-line of corporations and the wealthy few, using the 2023-2025 state budget to deepen income tax cuts that disproportionately benefit the richest North Carolinians. This upside-down distribution of benefits stands in stark contrast to the impact of local EITCs in New York City and Montgomery County, where households in the bottom 40 percent of earners received 90 percent and 95 percent of the boost from the EITC, respectively.
North Carolina should reject manufactured scarcity and pursue policy that meets communities’ needs
All North Carolinians – Black, white, and brown – want to meet their family’s basic needs and raise their children in strong, flourishing communities. By pursuing the interests of corporations and wealthy individuals over average families, legislative leaders are placing our state on a perilous path. Combined with the elimination of the corporate income tax, the new scheduled cuts to personal income taxes will cost the state more than $13 billion annually by 2031. We are already seeing the high price of these backward priorities in our communities: teacher shortages, school buses that never arrive, and too few licensed child-care spots for the number of babies and working parents who need them. Instead of tolerating the dysfunctional conditions of manufactured scarcity, North Carolinians of all backgrounds can work together to demand a fairer tax structure – including refundable tax credits at multiple levels of government – that put our state’s children and families first.
