What is the Earned Income Credit?

This session, the Montana legislature is considering legislation to create a state earned income credit – the Working Families Credit – to provide assistance for low- and moderate-income working families, modeled after the successful federal Earned Income Tax Credit (EITC). Doing so could help boost incomes for thousands Montana working families. Today we are going to give a little more background on what the EITC is, and how it works.

History

The EITC was first created in the 1970s, but was expanded significantly in the 1980s by President Ronald Reagan, who called it the “best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” The measure had broad bipartisan support because it improves the lives of low-income families while encouraging work. In 2013, the federal EITC lifted more than 6.2 million people, including 3.2 million children, out of poverty.

How it works

The credit is based on the amount of money that an individual earns, helping to encourage work. The credit begins with the first dollar earned, increasing before reaching a maximum amount where it plateaus, and then tapers off. This model helps to encourage workers to increase their hours and wages, without punishing them for earning too much. The credit also increases with the number of children in a family, maxing out at three children. Low-income workers without children are eligible for a very small credit, but majority of the benefit goes to adults with children.

Figure 1 _EITC. 3-17 (1)

The federal EITC in Montana

In Montana, 80,000 families receive the federal EITC, with an average amount of $2,168. Rural counties especially benefit from the credit – 21 percent of federal households in rural counties receive the EITC, compared to 17 percent in the rest of the state. In 2014, the federal EITC brought in $173 million into Montana’s economy.

State EITCs across the nation

Because the EITC has been so successful at reducing poverty and encouraging work, 26 states and D.C. have enacted state versions set at a percent of the federal credit. The state credit helps to further support for low-income working families.

Montana’s families would likewise benefit from the Montana Working Families Credit. Two bills are making their way through the process – HB 391 and SB 156. Our legislature should act now to help improve the incomes of working families across the state.

Legislative Status Sheet: A Glimpse at Revenue and Spending

This week, the Legislative Fiscal Division (LFD) released the first general fund status sheet for the 2017 legislative session. The status sheet provides a glimpse at where we stand with revenue, projected spending, and the resulting ending fund balance, factoring in actions taken so far by the legislature. Right now, we sit roughly $140 million below the goal of a $300 million ending fund balance. Unless legislators get serious about the need for additional revenue, we could expect even further cuts (on top of the devastating cuts already taken).

Over the past month of session, subcommittees in charge of various parts of the budget have been taking action on the main budget bill – HB 2. These early actions on the budget included deep cuts to nearly all state agencies, including cuts to social service programs for seniors, the disabled, and our most vulnerable families, as well as cuts to higher education that will likely result in double-digit tuition increases for Montana students and families. When factoring both state cuts and corresponding federal dollars we lose, the legislature’s initial actions represent a total $449 million in cuts.

While subcommittees have taken action to add back some funding, most of these additions are “present law adjustments” and are simply a reflection of inflationary needs to continue the current level of services in the next biennium. To be clear: the cuts made in subcommittees will have a serious impact on our communities and families across the state.

The second page of the status sheet provides the general fund balance sheet. It shows that we begin the session with a beginning fund balance of $110 million. As we’ve talked about previously, lower revenue levels than projected have resulted in a much lower beginning fund balance than previously anticipated. The balance sheet then shows the amount of revenue projected to come in during the next biennium. The balance sheet also provides an estimate of expenditures that the legislature has approved thus far. This includes subcommittee action on HB 2, bills on which the legislature has taken positive action, and one-time-only spending approved so far. LFD will update the general fund status sheet on a weekly basis, take into account further changes to HB 2 and bills passing or failing. Right now, when you factor in the projected revenue minus the expenditures passed thus far, we finish the next biennium with an ending fund balance of $159 million.

We are not yet halfway through the session, but Montana families should be concerned about the deep cuts already taken to the state budget and how that will impact our seniors, students, and services vital to our communities. The good news is that there is still time. The Legislature has 49 more days to identify new revenue in the state and restore the deep and potentially devastating cuts they have made to the budget. It is possible in the state of Montana to have a balanced budget, fund the services that help citizens and communities across the state, and leave a healthy ending fund balance. We can do all of this by ensuing that the super wealthy and out-of-state corporations are paying their fair share.

Guest Blog: SNAP Supports a Strong Montana

It can be hard to imagine that thousands of our neighbors struggle with hunger, yet that is the reality for the nearly 140,000 Montanans living in food insecure households. Seniors, families with children, veterans, and even working Montanans aren’t always able to put food on the table, impacting the health, productivity, and academic success of our families and communities.

Our nation’s most important tool to combat hunger is the Supplemental Nutrition Assistance Program (SNAP). LBurhopSNAP fills in the cracks for low-wage workers, making sure they aren’t forced to choose between feeding their families and paying the rent. For kids, SNAP ensures they have nutritious foods outside of school hours, helping them focus and succeed in the classroom. For seniors, SNAP ensures they can fill their prescriptions and still buy enough groceries to remain healthy and independent. And for adults struggling through an unexpected job loss, illness, or other tragedy, SNAP provides an important stepping stone, helping them get through a hard time. Last but not least, SNAP supports our grocery stores, farmers markets, and state economy by bringing our federal tax dollars back to Montana.

That’s why we are concerned by continual attempts to weaken SNAP, at both the state and federal levels.

The first threat at the federal level will be through the upcoming budget resolution process, followed by the reauthorization of the Farm Bill. Congress has yet to develop specific policy proposals so it is crucial to reach out now to express the importance and effectiveness of SNAP. Let Montana’s Congressional leaders know that attempts to cut the program or undermine its foundational effectiveness through block granting or other structural changes are unacceptable.

SNAP is also at risk at the state level. A bill to revise SNAP eligibility, HB 361 sponsored by Rep. Tom Burnett, would make income guidelines even more stringent than they currently are, and would reinstitute a resource limit. Decreasing our state’s gross income test will primarily hurt working families with children, as well as families with high housing costs. Resource limits can be particularly harmful for low-income seniors but negatively impact all families. Numerous studies have demonstrated that having savings and other resources are critical for families trying to get back on their feet. Building assets helps low-income families invest in their future and avert a financial crisis that can push them deeper into poverty. At asset limit discourages savings and forces families to spend down all of their resources before receiving help.

Please speak out against harmful changes to SNAP. Let our lawmakers know that SNAP is one of our most effective and efficient public programs. It is quietly providing dignity and opportunity for thousands of Montanans when they need it most. Denying individuals the ability to access food assistance would have long terms costs on our nation’s health and productivity that are far greater than any immediate budget savings.

Lorianne Burhop, Chief Policy Officer, Montana Food Bank Network

What is the EITC and How Does it Work?

This Wednesday, the Montana legislature will have a hearing on a bill that could help brighten the prospects of working Montana families. The bill is HB 391, a proposal to create a state Earned Income Tax Credit (EITC). So let’s first figure out what exactly the EITC is, and how it helps working Montanans.

The federal Earned Income Tax Credit was first created in 1975, as a bipartisan means of reducing poverty and creating jobs. President Ronald Reagan once said,

“The Earned Income Tax Credit is the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”

The federal EITC gives families with incomes between about $39,500 and $53,000 (depending on marital status and number of kids) credit for the taxes they have paid. In 2015, the average EITC was $3,186 for a family with children, raising the family’s wages by about $265 a month. Only families that work qualify, and most families only use the credit for a year or two.

figure-1-_eitc

In HB 391, Montana’s proposed state EITC would be set to 10% of the federal credit.

A state EITC would:

  • Benefit 80,000 families across Montana. Montana’s low-income families actually pay a higher portion of their income in taxes. A state EITC could help even out this disparity.
  • Improve children’s lives. Children see plenty of benefits from the EITC – better health, better school performance, higher rates of college attendance, and even higher earnings for adults.
  • Promote work. With an EITC, the more you work, the higher your refund. This format encourages families to work more hours, meaning better opportunities and higher pay as their careers continue.
  • Strengthen communities. Families use their EITC to buy pay bills, buy groceries, and buy school supplies – pouring money back into their local businesses.

Twenty-six states plus the District of Columbia have already created state EITCs. This year, Montana legislators should make the same move to help support working families and their children.

To learn more about how a state EITC would benefit Montana, read our report here. Be sure to check back tomorrow, when we will talk more about how a state EITC would benefit our children.

Early Legislative Action Threatens Hundreds of Millions of Federal Funding

This week, MBPC released a new report providing an overview of early actions so far on the state budget, and the damaging cuts that have already been proposed. In the first couple weeks of the session, Legislators took early steps to make significant cuts to the state budget, representing more than $449 million in total funds. A good portion of these cuts will be in federal matching funds in critical programs for the state.

Montana’s budget and economy rely heavily on federal funding that assists us in our collective efforts to pave our roads, build and maintain our bridges, prepare our national guard, train our workforce, and help keep vulnerable Montanans safe and healthy in their homes and communities. The bulk of the federal dollars that get appropriated through the state budget fund infrastructure, programs, and services in the Department of Transportation (DOT) and the Department of Public Health and Human Services (DPHHS). These funds are usually under the condition that the state meets certain program requirements and matches the federal funding with a state share. Overall, the state budget is supported by over $4 billion of federal funding, roughly 42% of the entire state budget.

As we’ve written previously, this year state legislators and the governor are facing a short-term but significant drop in state general fund revenue. To deal with this decline, the governor’s proposed budget included a combination of difficult cuts to state services and targeted revenue increases that bring more fairness to our tax system and ensure adequate levels of revenue. Unfortunately, some legislative leaders have indicated a dangerous unwillingness to accept this balanced approach and have instead started the budget process by imposing additional deep, unnecessary, and harmful cuts.

Relying entirely on cuts, preliminary actions by the legislative joint subcommittees have slashed over $190 million in state spending ($114 million general fund; $77 million state special revenue) on everything from services for seniors and people with disabilities to our tribal, two-year, and four-year colleges and universities (likely resulting in doubled-digit tuition increases).

What do these state cuts have to do with federal funding flowing into the state and our communities?

Well, in key portions of the budget, like DPHHS and DOT, a lack of state funding means even more dramatic cuts in federal funding – much deeper than many people realize. So in making their unnecessarily severe cuts to state spending of over $190 million, legislators and Montana will lose out on an additional $254 million in matching federal funds. In total, this hit to the state budget is nearly half a billion dollars.

We know that this is more than just dollars to the state. If not restored, these unnecessary cuts will impact people and communities in every corner of Montana.

For example, DPHHS partners with community providers to run a Medicaid program called Community First Choice, for seniors and people with disabilities who need assistance with daily living in order to stay in their homes and avoid institutional settings like nursing homes. Through Community First Choice, Montanans can get help with activities such as eating, bathing, taking medicine, and getting to medical appointments. When Montana provides these services to the seniors and people with disabilities who need them, the state only has to pay 29% of the cost. The federal government pays for the other 71%. It’s a good deal for seniors who get to stay in their homes and a good deal for taxpayers as people avoid costlier institutional care.

The division responsible for running Community First Choice and other programs and services for seniors and people with disabilities is facing over $17 million in state funding cuts that would be accompanied by almost $34 million in lost federal funds for a total loss of $51 million dollars. These cuts are irresponsible to seniors, the state budget, our communities, and our economy.

This is just one of many examples of essential state services being cut so severely in an attempt to balance the budget. You can read a summary of total cuts adopted by the Legislative Committee in starting motions here.

We know that some cuts will be inevitable. However, as the legislature continues to evaluate the budget, they must look at ways to responsibly raise revenue and minimize unnecessary losses of federal funding.

 

Scorecard reveals Montana families’ financial well-being

Have you ever wondered how you can learn more about how Montana families are faring and what types of solutions are available to support them? Today, we’ll look at a comprehensive tool that sheds light on the financial security of Montana families and policies that could help them better make ends meet.

Every year, the Corporation for Enterprise Development (CFED) releases its Assets and Opportunity Scorecard, measuring the economic security of families in each state and highlighting how policies help or hurt their ability to make ends meet.

There are a number of scorecards and studies out there, but we find this scorecard to be one of the most helpful. It not only provides solid data, but also workable solutions that other states have implemented to help strengthen families’ economic security.

Screen Shot 2016-01-26 at 9.15.02 AM

The scorecard is organized into five categories:

  • Financial Assets and Income
  • Businesses and Jobs
  • Housing and Homeownership
  • Health Care
  • Education

New this year is the policy change map, which let’s you see policy gains and losses in each state.

CFED uses two measures – outcomes and policies – to better understand financial security in each state. Overall, Montana ranks 15th in outcomes. These outcomes measure things like rates of poverty, unemployment, and homeownership. CFED also lists policy opportunities to support families. Over the next week, we will dig deeper into some of the data and policy solutions, but here is a quick overview on how Montana fares:

Financial Assets and Income

Nearly one in six households in Montana are living in poverty, and there remains a large gap between high-wage and low-to-moderate wage earners. Over one-fourth of Montana households do not have a savings account.

Enacting a state earned income tax credit (EITC) is one of the best ways to supplement working parents’ income, helping them to catch up on bills, put food on the table, and rise out of poverty. Eliminating asset tests for programs like Temporary Assistance for Needy Families (TANF) help people focus on saving for the future and achieving self-sufficiency. Finally, tax fairness reforms are key to ensuring that corporations and wealthy Montanans are paying their fair share for the things we all need, like schools, police, and roads.

Business and Jobs

For the second year in a row, Montana scores high with small-businesses. However, almost one-in-three jobs are low-wage. Montana workers report that they feel underemployed – many want to work full-time, but are only offered part-time positions – and unemployment rates are twice as high for workers of color.

Enacting paid family and medical leave would help working parents better balance work and home demands by taking time off to attend to their own health needs or that of a family member without risking their financial security. Increasing unemployment benefits so that workers receive an adequate weekly wage while unemployed would help parents afford the basic needs while they search for long-term work opportunities.

Health Care

With Medicaid expansion just recently up and running, it is not surprising that Montana still ranks low on health care outcomes. Montana has already enrolled over 22,000 individuals in affordable health care coverage. We know expansion will have a significant impact on the uninsured rate, and we look forward to seeing how we will compare in 2017.

We encourage you to visit the scorecard. Play around – it’s a lot of fun! And learn more about how Montana families are doing. Also, please follow us this week as we dig deeper into specific policy issues related to the scorecard.

Expanding temporary disability insurance is one way to provide paid family leave

Think of today’s blog as part two from yesterday. After learning about TDI, you may have the question – what does this mean for paid family leave? And you may also be wondering how exactly states like California, New Jersey, and Rhode Island have been able to implement these programs. With that in mind, lets examine how several states have expanded their TDI programs to provide paid family leave benefits.

Screen Shot 2015-06-24 at 3.57.52 PM

While the 1993 enactment of the federal Family and Medical Leave Act provided a great first step in helping individuals balance work and home demands, many Americans do not qualify for coverage or cannot afford unpaid time off from work. Legislators and advocates have explored options that would provide more than the FMLA and offer paid family leave benefits to workers who need time off to recover from a serious illness, around the birth, adoption, or foster placement of a child, or to care for sick family members. While there are various routes to creating and implementing a paid family leave program, three states – California, New Jersey, and Rhode Island – have expanded their longstanding TDI programs to provide paid family leave insurance.

By building on top of existing TDI structures, California, New Jersey, and Rhode Island have been able to implement paid family leave more efficiently and with fewer costs. In these three states, the same administering agencies that process TDI claims and administer disability insurance benefits are now processing paid family leave claims and administering those benefits. Using already experienced staff has reduced recruitment and training costs.

Additionally, the same financing structure (payroll taxes) used to cover the cost of administering TDI programs and pay out benefits has been altered to also provide funding for paid family leave programs. However, while a combination of employee and employer provided payroll deductions fund TDI programs in some states, only employee payroll deductions are used to cover paid family leave programs, and employers have no direct costs in terms of funding. The cost to workers and the resulting benefits they receive in California, New Jersey, and Rhode Island are included in the table below.

As you can see, we are talking about a relatively low cost to provide a significant benefit to workers and our broader economy. While 45 states do not have TDI programs, this model offers one viable way to finance and implement paid family leave programs. Finally, because California, New Jersey, and Rhode Island built off of their existing TDI programs, workers in all three states now have access to both paid medical and paid family leave benefits.

Screen Shot 2015-06-24 at 3.57.27 PM

 

 

 

 

 

 

 

It’s Tax Day – Hooray! Let’s Invest in Montana.

Today is what many people refer to as Tax Day, and not always with a smile on their faces. But you know what? We’d all be a lot less better off if our state didn’t call on us to pool our resources in ways that invest in the public good today and in the future.

That’s because those resources enable us to invest in the building blocks of a strong economy and the quality of life that makes Montana such a great place to live.

In two previous blogs, Who Pays? and We Pay, Why Don’t They?, we looked at who contributes to paying taxes in Montana. We found that low-and-moderate income families pay a greater share of their income in taxes than wealthy residents, and tax breaks like the capital gains tax credit benefit large businesses at the expense of all Montanans. Because of this, there’s a great need to improve tax fairness in the state. Today, let’s explore how the money is used.

The Montana Department of Revenue’s biennial report is a good roadmap for learning about how tax revenue is invested back into our communities.

  • More tax dollars are used to support education in Montana than anything else. The money helps build and support Montana public schools, community colleges, universities, and tribal colleges. These investments make it possible for Montanans to compete in today’s global economy and helps businesses access the skilled workers they need to thrive. Tax dollars sustain a high quality of education through our teachers and programming, which enabled Montana high schools to reach the 12th highest graduation rate in the country and Montana 8th graders to achieve some of the highest test scores in math, reading, and science nationwide.
  • One-fifth of state spending helps build and maintain roads and bridges and supports the police and firefighters that protect our communities. Investments in infrastructure ensure that our highways and bridges are well maintained and safe to travel so we can get to and from work and further explore all of the beautiful places in our state.
  • Almost 10% of spending protects Montana’s natural resources and environment, including the parks, trails, and forests we all enjoy. Both state and federal tax dollars maintain and conserve 54 state parks and two national parks so we can continue to camp, fish, and hike throughout Montana.

So, sure, some folks like to complain about paying taxes on April 15th. But, we’d all have a lot more to complain about if Tax Day never came. Taxes are the visual proof that all Montanans come together to invest in the things that matter most. Tax dollars support the everyday necessities we rely on like police officers, hospitals, and public schools. These funds also sustain items that enrich our lives like parks and libraries. On this Tax Day, take a moment to consider just how much taxes improve you and your family’s well-being.

spending pie chart

Source: Montana Department of Revenue

Who Pays Taxes in Montana?

T-minus 2 days until Tax Day…Hooray! Why are we so excited about tax day you ask? Because it is through our taxes that we collectively invest in things like roads, public safety, schools, and so much more. Our taxes make our state a better place to live and raise a family, and that is something to celebrate. Over the next several days we’ll explore taxes in Montana. Today, let’s examine who pays taxes in our state and how fair our tax structure is.

The non-profit, non-partisan Institute on Taxation & Economic Policy recently released a comprehensive report on the distribution of taxes in all 50 states. Montana’s overall tax system is regressive, which means that low-and-moderate-income individuals pay a greater share of their income in taxes than do wealthier Montanans.

tax blog 1 bar chart

Portion of Family Income Paid in Taxes. Source: Institute on Taxation & Economic Policy

As you can see, in Montana, low-income individuals put more of their earnings in taxes than do high-income individuals. Those with annual earnings less than $19,000 pay 6.1% of their income in taxes but those earning more than $435,000 a year only pay 4.7%. Why are families living on lower incomes (who arguably need the money more) paying a greater share of their income to pay for schools and roads than those making the most?

To understand how Montana’s tax system stacks up, let’s look at three tax types (income, property, and sales) and how these types of tax influence tax fairness. Generally speaking, property and sales taxes are regressive, which again, requires lower-income folks to pay a greater share than high-income folks. This is easy to understand for sales tax – when a sales tax is imposed on a good, that tax is the same regardless of the purchaser’s income. Property taxes also tend to be regressive, because housing costs tend to be larger in proportion to the income of low-income households than high-income households. For example, a family making $50,000 a year may own a home costing $150,000 or three times their income, while a family making $1 million per year may own a home costing $500,000, or half their income. We also know that renters pay a portion of the property taxes paid on rental properties because the taxes are “passed through” by the landlords when setting the rent amount.

Both of these regressive taxes impact low-income families. In many states, sales tax represents a significant portion of total tax revenue, and this has a negative impact on low-income families. And while Montana doesn’t have a sales tax, many Montana families face certain smaller fees or taxes that act similarly to a sales tax. And finally, as Montana relies heavily on property tax revenue, low-income families certainly face this regressive tax to a greater extent.

When it comes to income taxes, Montana’s income tax is progressive and it helps offset who pays taxes. The highest earners pay 3.8% in personal income taxes while the lowest pay less than 1%. Policymakers have put in place the income tax, because those with higher incomes have a greater ability to pay and contribute a greater share of their income for essential government services. But, there is still work to be done. Montana is one of five states to impose income taxes on families living in poverty.

The pie chart below shows exactly how much of Montana’s total revenue is gathered from income, property, and sales taxes as well as other taxes like the severance tax collected from the oil and gas industry.

Tax blog 1 pie chart

Source: Montana Department of Revenue. Biennial Report (2012-2014).

While not perfect, Montana’s tax structure is better than most. In fact, we are ranked 47Th most unfair state (or 3rd most fair!) in terms of state and local taxes. Of course, like all states, we can improve. Legislators could do this by adopting policies, like a state earned income tax credit. Policies like these enable Montana’s low-income families to keep more of their earnings, which stimulates local economies, and requires those who can afford it to pay a greatest share of their income in taxes.

The EITC Matters to Montana’s Rural Communities

“The EITC program has become, in many respects, increasingly a ‘rural program’ as rural areas and small cities contain the highest claims of EITC”

 – Center for Rural Affairs, 2014

We continue our EITC series this week by exploring the effects of a proposed state Earned Income Tax Credit (EITC). Today, we look at the specific impact a state credit has on rural communities. (For a quick recap, it may be helpful to read past blogs to learn about the EITC program more broadly and how a state credit would work in Montana)

Since its inception in 1975, the federal Earned Income Tax Credit (EITC) developed into a model anti-poverty program. Over time, the federal program has become more targeted in rural households. Nationwide, over 1 in 5 rural households claim the federal EITC, and these families receive a greater share of EITC benefits than those living in urban areas (largely due to lower income levels in rural America). This is also the case in Montana. In 2013, 21% of rural Montanans claimed a federal credit, compared to 17% of the state’s total population. Since many rural residents already claim the federal EITC, expanding a statewide EITC will further benefit these Montana communities.

In Montana, 17% of the total state population lives below the poverty line. However, rural families experience poverty at a greater rate. Between 26% and 35% of those living in counties like Glacier, Blaine, Roosevelt, and Big Horn have incomes below the poverty line. Furthermore, earnings are lower in rural communities compared to more populated areas in Montana. On average, the median household income is $46,000, but those living in rural areas earn about $9,000 less per year. A state EITC is the single best solution to improving the wellbeing of rural communities by increasing income, reducing poverty conditions, and stimulating economies.

In 2013, the federal EITC lifted 6 million people out of poverty in America. Expanding a state EITC in Montana will continue to lift rural families out of poverty by encouraging individuals to work, increasing their earnings, and enabling families to establish financial security. The proposed state EITC (HB592) can contribute a maximum benefit of $312 to a low-income household. Families earning more can pay off debts and make necessary household purchases that (without the EITC) can be difficult to cover. Since individuals qualifying for a federal credit also qualify for a state EITC, combined credits effectively increase wages and push households above the poverty line.

A state EITC will also have a significant impact on rural economies. In 2010, the federal EITC brought $10.5 billion into rural communities throughout the country. Enacting a state EITC will bring another $8.5 million into Montana annually. And since rural families claim a greater share of federal EITC benefits, it stands to reason that a large portion of these dollars will go into strengthening rural communities, workers, and businesses.

Since use of the federal EITC program is greater in rural communities, it is clear that enacting a Montana state EITC will benefit rural households. A state credit is an effective avenue toward improving the wellbeing of rural families in the state.