The Earned Income Tax Credit in New Jersey: Beware of the Cliff

By Jon Shure

DEJA VU

New Jersey today is in a position very similar to that of early 1999, in terms of advancing policies to help the working poor. Now, as then, a proposal has been put forward that would reward work and ease the tax burden on people and families whose best efforts can take them only to or slightly beyond the poverty line.

Last year the policy involved increasing the amount of money a family could earn before having to pay state income tax. This year it is the Earned Income Tax Credit. Either one of them would be a step in the right direction. Used in tandem they can be a powerful engine to help drive working poor families farther.

But the similarities between this year and last-between the income tax threshold and the EITC-are not just that they both are solid programs that help people make ends meet. In its original form, the income tax threshold proposal fell short. Indeed, it would still have required some families earning below the federal poverty level to pay state income tax. However the version eventually passed by the Legislature and signed into law-a $20,000 threshold after the phase-in period-put New Jersey into the forefront of states when it comes to reducing the tax burden on families who have a difficult time affording life’s bare necessities. In the end, the consensus was that going further was advisable-and possible.

And so it is with the Earned Income Tax Credit. Unquestionably, an EITC in the form proposed by Governor Whitman in her January budget address would help many hardworking New Jersey families. It would be better than what we have now, which is a federal Earned Income Tax Credit program but none at the state level. According to the Washington-based Center on Budget and Policy Priorities, “several recent studies indicate that the EITC has positive effects in inducing more single parents to go to work, reducing welfare receipt, and moderating the growing income gaps between rich and poor.”

But an analysis of the proposed New Jersey EITC program, centering on the federal EITC and those enacted by other states, shows that under the current proposal New Jersey again would fall short of the standard being set elsewhere. The most serious shortcomings of the current EITC proposal lie in its eligibility criteria and the resulting level of benefits.

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