The Star-Ledger

OPINION

N.J.'s Earned Income Tax Credit Is A Cruel Joke

The Star-Ledger — Sunday, January 28, 2007

BY JON SHURE

If a family in New Jersey sees its income rise by $2,000, from $500,000 to $502,000, it owes the state an additional $179 in income tax. No biggie.

But if a New Jersey family's income rises from $19,000 to $21,000, it costs the household more like $1,400 in income tax.

That's the painful math of a state where many of the programs and policies supposed to help working people pull themselves up the economic ladder look as though they were designed for people in another time and place.

It's hard to be poor anywhere. But it's even harder in New Jersey, where the cost of living is a third higher than the national average and housing expenses are close to the top. And the problems of low-income working families are made even worse by the cruel joke played on them by New Jersey's Earned Income Tax Credit – the program responsible for the shameful example above.

To simplify, EITC is a break on income taxes owed by people whose incomes are very low. If your income is so low you don't owe any income tax, you get a check. The federal EITC began in 1975 and has enjoyed very strong bipartisan support. President Ronald Reagan said of the EITC, "Giving a leg up to those struggling to move up is what America is all about." President George W. Bush recently expanded the program. One of the things politicians like about the EITC is that it only goes to people who are working; it's not a handout.

One of the good things about the federal EITC is that as the in come of recipients rises, the benefits are reduced gradually instead of all at once. In 2006, a family of four could make $38,222 and still get some benefits.

In 1986 the first state EITC was created in Rhode Island. Now, 19 states have their own EITCs. And all but one use the same eligibility standards as the federal EITC. That one is New Jersey.

New Jersey tells working families that as soon as you make a penny over $20,000 you're cut out of the state EITC. Family size is irrelevant. And there is no gradual lessening of benefits. Instead there is what's called the "cliff," an abrupt cutoff. You get to $20,000 and two things happen: You lose the state EITC, and you have to start paying state income taxes. That's why a family whose income rises to $21,000 from $19,000 actually nets only $586 more.

And New Jersey's EITC eligibility level stays the same every year. Unlike the federal program – and that of the other states – there is no annual increase to reflect inflation. It was $20,000 when Gov. Christie Whitman created the program in 2000, and it is $20,000 today.

It should be no surprise, then, that even as the number of people in New Jersey who get the federal EITC goes up yearly, the number getting the state EITC goes down. Today, fewer than half the people in New Jersey who get the federal EITC also get the state EITC. It's not because they don't need it. For most, the reason they can get one but not the other is that their in come rose above $20,000 but was still low enough to get the federal EITC.

Can you imagine an income of $20,000 being too high for anything?

New Jersey should strengthen its state EITC by raising the in come eligibility level to that of the federal program and of the other states. Yes, the state is in tough financial shape and it's hard to come by money to meet a wide range of needs. But that's not the fault of low-income working families who play by the rules. They shouldn't have to keep paying the price.

The current EITC in New Jersey is stingy and short-sighted. A revamped EITC should be seen for what it would be – an economic development tool that in vests in the state's future. That's because the money that goes to working families as tax credits will be spent right back into the state and local economy.

You'd like to think a state that spends millions of dollars every year competing against its neighbors to try to get businesses to come here would do a little more to help make sure working people can afford to live here.

Jon Shure is president of New Jersey Policy Perspective, a nonprofit organization that conducts research on state issues. NJPP's recent report on the state's earned income tax credit may be viewed at www.njpp.org.

Top Top | NJCA Homepage | NJCA in the News