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.

We Need a State Earned Income Tax Credit. Here’s Why.

We need a state Earned Income Tax Credit. Here’s Why.

A state Earned Income Tax Credit (EITC), like the federal credit, could go a long way to helping Montana families meet their basic needs. But it could also do a lot to improve the fairness of our tax code.

Low- and moderate-income families in Montana pay a higher percentage of their income in taxes than do the wealthiest families. The lowest income one-fifth of Montanans pay 6.1 percent of their income in taxes, whereas the top 20 percent pays far less. In fact, the top one percent pays just 4.7 percent of their income in taxes.

While Montana’s income tax is progressive, meaning the more you earn the larger percentage of your income you pay in taxes, other taxes like sales and property taxes are not. People with smaller incomes end up spending a much greater percentage of their income on these taxes than higher income taxpayers. For example, families in the bottom 20 percent of incomes pay 3.3 percent of their income on property tax. The top one percent, however, pays just 1.6 percent. As a result, people with the lowest incomes actually spend much more of their money on state and local taxes than people with the highest.

mbpcslA state EITC could help correct this imbalance in our state taxes.

Twenty six states, plus the District of Columbia, have enacted state EITCs in order to help improve the lives of
working families. After seeing the success of the program, many have expanded their programs. Iowa, for instance, raised their credit to 15 percent of the federal credit. New Jersey recently set their credit to 35 percent of the federal credit. Maine also decided to make their credit refundable, meaning if the total amount of credit exceeds the taxes paid, the taxpayer receives the difference.

A state EITC would be easy for Montana to administer because it is calculated based off of the federal EITC. Administrative costs would be equal to less than one percent of the benefits provided.

It could also boost our local economy. House Bill 391 would establish a state EITC at 10 percent of the federal credit. If passed, this credit would funnel $16.5 million back into the hands of working Montanans and into our economy.

When families spend their tax credit on basic needs like school supplies and groceries, local businesses reap the benefits. A state EITC that could help the economy, as well as reduce the inequalities in our tax code, is a good deal for Montana.

A State EITC Can Help Montana Kids

Kids don’t usually get too excited about things like tax credits. But they do appreciate things like being healthy, doing well in school, and having working parents. A state Earned Income Tax Credit (EITC) could help families provide their children with each of these things, and support our local communities as well.

Today we are going to talk about how children benefit from the EITC. If you’re not sure what that is, check out yesterday’s blog post first to get caught up.

Slide1While some very low-income families without children receive the EITC, most of the credits go to families with children. In Montana, 80,000 low- and moderate-income households benefit from the federal EITC. House Bill 391 would establish a state EITC, and help improve the lives of families and children all over the state.

The EITC essentially raises the income of working families by providing them with a tax credit. This bump in income has significant benefits for children. Nationwide, the federal ETIC has been the single most effective way to reduce poverty. In 2013, it lifted 6.2 million people, including 3.1 million children, out of poverty.

Although most families only receive the credit for a year or two, the benefits for children last much longer. Here are few examples of the long-lasting benefits the EITC can have on children:

  • Better health at birth. Studies have shown that receiving the EITC can mean fewer babies born premature, or with low birthweight. Mothers were also more likely to receive prenatal care, and had better health indicators themselves.
  • Better school performance. Children whose families receive larger EITCs are also more likely to do well on school tests, particularly in math.
  • Brighter futures. Kids whose families receive larger ETICs are more likely to graduate from high school. They are also more likely to attend college.
  • Higher earnings. A small boost in a family’s income when kids are little can mean big payoffs when they are older. For every $3,000 in extra income a year that a child in a low-income family received before age six, their working hours increase by 135 hours per year by the time they reach 25. Income increases by 17%.

Families spend their tax credits on basic needs, most of which directly benefit their children. About half of the credit tends to go to things like groceries or school supplies. Families spend the other half of things like paying off debt, or on home repairs, education, or savings. The EITC can help parents better provide for their children.

If Montana creates a state EITC, we can help build even healthier and stronger families across the state. House Bill 391 is an important opportunity to help our children succeed.

To learn more about how a state EITC would benefit Montana, read our report here.

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.

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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.

Oil and Gas Tax Holiday: It is time to end this free ride

The 2017 Montana Legislature has been marked with concern over massive budgetary cuts and the major shortfall in revenue. While not all cuts can be avoided, the legislature should take a balanced approach to ensure the state can continue to invest in our families and communities. This includes ensuring we have adequate revenue in the state by putting in place common sense measures to ensuring wealthy corporations are paying their fair share.

Earlier this session, the House Taxation Committee heard House Bill 215, an act revising the rate of tax for certain oil and natural gas production. Reducing or even eliminating this tax break, called the oil and gas tax holiday, is one step toward balancing the budget and making sure corporations are paying their fair share. Unfortunately, the House Taxation Committee tabled HB 215 earlier this week.

The oil and gas tax holiday is a policy that allows newly drilled wells to be taxed at a substantially lower tax rate during the beginning of production. Wells, however, produce significantly higher amounts of oil and gas at the start of usage, which means these oil companies receive this tax break during the most profitable period of extraction. While some argued these tax holidays attract developers and increase revenue, the data clearly shows such tax holidays only suppress potential state revenue and does little to increase developer interest.

Montana, despite its lower tax policies, is not outperforming neighbors with higher tax policies. Wyoming, New Mexico, and North Dakota all have higher taxation rates for oil companies. All three states have consistently out produced Montana in terms of barrelage. Oil and gas companies do not seek to drill based upon the tax policy of that area. They drill where there are natural resources available.

Montana has lost millions of dollars in revenue due to this tax policy. From 2008 to 2014, the tax holiday cost the state and counties $265 million in revenue. This money could have been used to pay for public services, such as schools and roads. In oil-producing counties, especially those near the Bakken region, they have been forced to deal with increased demand on their infrastructure, but no increased revenue to update such necessary services.

HB 215 proposes to increase in Montana’s production tax would to 4.5 percent, which is still lower than the national standard of 9.26 percent. But even this small step is crucial in insuring our legislature can make strategic investments in Montana communities.

The increased revenue could be used to assist in failing infrastructure, public services, and our schools and universities. Oil and industry should not get a free ride in this state. We all need to pay our fair share especially when so many Montanans are struggling with significant budget cuts.

An Early Look at the 2019 Biennial Budget: Montana Needs a Balanced Approach to the State’s Revenue Challenges.

Montanans care deeply about the well being of their families and communities. They want a hopeful and prosperous future for their children and neighbors, safe communities, and a strong state economy that supports quality jobs and thriving businesses. As Montanans, we have come together at many pivotal moments in our state’s history to collectively build toward these goals. Together, we have considered not only what we can afford to accomplish today, but also the investments we must make
to protect our future.

During Montana’s 2017 legislative session, elected officials should be focused on wisely increasing and using the state’s resources to help build opportunities and a path to prosperity for all Montanans through the budget creation process. A recent, but short-term, decline in state revenue, caused primarily by declines in corporate income and oil and natural gas taxes and slower than anticipated growth in individual income taxes, has created significant challenges for the state’s elected officials.

The proposed executive budget creates a responsible blueprint for addressing these challenges through a balanced approach that includes a combination of difficult cuts and targeted revenue enhancers that bring more tax fairness to our system and ensure adequate levels of revenue. Unfortunately, key 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.

To shed light on the depth of these cuts and the programs and people they will impact, MBPC wrote a report – An Early Look at the 2019 Biennial Budget: Montana Needs a Balanced Approach to the State’s Revenue Challenges.

Supporting information can be found in two supporting documents.

Appendix A – Summary of Total Cuts Adopted in Legislative Committee Starting Motions

Appendix B – Partial List of Executive’s Proposed Revenue Enhancers

 

Water’s Edge Election: It is Time to Eliminate this Corporate Tax Break

On Thursday, the Senate Taxation Committee will hear Senate Bill 105, repealing the water’s edge election for corporate income tax purposes. The water’s edge election represents a multi-million dollar giveaway to large multinational corporations operating in Montana, and SB 105 aims to level the playing field for Main Street businesses across the state while also ensuring we have adequate revenue here in Montana to invest in our communities.

What is the water’s edge election, and why should we eliminate this corporate tax break?

First we need a refresher on combined reporting, which is the way Montana taxes corporations. Many large companies consist of a parent company and its subsidiaries. Combined reporting requires a parent company to add its income and its subsidiaries’ incomes for the purposes of state corporate income taxes. Montana then taxes its share of the total income based on the level of activity in Montana as a percent of the company’s total activity. States without combined reporting are vulnerable to a wide array of tax avoidance strategies by corporations which usually involve artificially shifting profits to subsidiaries that are in states without corporate income taxes or that do not tax a specific type of subsidiary.

Combined reporting ensures that corporations pay their fair share of taxes in Montana based on their corporate activity in Montana. In addition, it levels the playing field for smaller Montana-based companies that do not have subsidiaries across the country to which they can shift profits.

Montana requires worldwide combined reporting, which means that corporations with common ownership must report all income worldwide basis. Montana provides an exception to this rule, called the water’s edge election, which allows multinational corporations to only report their income within the borders of the United States, rather than their worldwide income. In exchange, these companies agree to pay a 7% tax rate, rather than the normal rate of 6.75%. The number of corporations that filed a water’s edge election in Montana increased 226% from 2007 to 2012.

There are some limits to the water’s edge exclusion. If a subsidiary is located in a country that is a known tax haven, the corporation may not exclude that subsidiary’s income even under the water’s edge election. In order for this exception to be useful and avoid inappropriate income shifting, the list of tax havens must be updated regularly in Montana law. Unfortunately, the Montana legislature has failed to update the list of tax havens in past sessions.

A cleaner way to address the inequities and level the playing field for Montana small businesses would be to eliminate the water’s edge election entirely. The Governor has called for the elimination of the water’s edge election in his budget, and the Senate Taxation Committee will hear Senate Bill 105 to do just that. The bill will eliminate the ability of multinational corporations to shift profits overseas without paying state corporate taxes reflecting actual operations in the state. We need out-of-state corporations to pay their fair share for the schools, roads, and bridges they rely upon for the success of their business.

MBPC recently wrote a report on how Montana taxes corporations. You can read that full report Policy Basics: Montana Corporate Income Taxes.

Early Budget Plan Bodes Poorly for Montana

The significant but short-term reduction in revenue levels over the past two years is going to be a challenge for the 2017 Legislative session in Montana. It will require tough choices balancing budget cuts and new revenue.

Unfortunately, the legislature’s plan to start the new budget with almost $50 million in additional cuts beyond those in the Governor’s balanced budget proposal will make matters worse by hurting the economy and families.

If the legislature continues with their plan, they will begin the session by automatically implementing hundreds of cuts hidden in procedural decisions without a transparent discussion of their impacts. We don’t know where these cuts are coming from or whom they will impact. Montana has seen time and time again that cuts this dramatic hurt vulnerable children, students, local communities, and seniors.

What is happening?

The Joint Committees charged with debating the budget (the Senate Finance and Claims Committee and House Appropriations Committee) are discussing moving the starting point for budget decisions to make additional reductions to all state agencies below the Governor’s budget.

This is unnecessary.

The Governor’s budget, which already includes over $73 million in cuts to the state budget is a transparent starting point. It has pages and pages of detail that have been available to the public for weeks, and it was widely publicized. Second, the Governor’s budget is structurally balanced and restores the ending fund balance (effectively Montana’s rainy day fund) to $300 million by the end of the biennium. It is a good starting place for the Legislature to make modifications.

Last, cuts are not the only way to balance the budget. The Governor created his budget that does not rely on only budget cuts, but also addresses the current lack in revenues, by closing tax loopholes used by special interests and ensuring everyone is paying their fair share. The Governor found several new sources for revenue that make sure we are all pulling our weight and can bring in additional revenue available to fund state priorities.

It is not fair to ask college students to pay more for school while the super wealthy get massive tax breaks. It is not fair to cut funding to local schools already struggling to find quality teachers for the classroom when out-of-state corporations take advantage of tax loopholes.

While some cuts are inevitable, this Legislative plan ignores an opportunity to build toward a better economic future. We need a balanced approach to our economic challenges –one that includes new revenue to meet today’s needs and starts planning for our future.

Governor Proposes Tax Fairness in his Budget

Every two years, the Governor of Montana releases their budget proposing investments to support our communities, including education, workforce development, and infrastructure. The budget becomes the marker for what the legislature will consider in the upcoming session. Yesterday, Governor Bullock released his proposed budget for the 2019 biennium (fiscal years 2018 and 2019). Over the course of the next week, we will highlight some of the key components of the budget and walk through some of the logistics on what happens now.

Today, we start with high-level overview of the budget and some of the tax fairness measures that will be up for discussion in the session.

But first, we need to set the stage for what the Governor was facing as he put together this biennium budget. Over the past year, the state has experienced lower revenue levels than previously projected. While the state initially estimated that we would begin the 2017 session with a strong ending fund balance of over $300 million, that amount now stands at around $120 million for the start of the session.

What has happened to cause such a shift? One of the primary reasons is lower oil and gas tax collections as a result of lower production and price. Montana has also seen a slight dip in individual income tax and corporate income tax collections. Both Legislative Fiscal Division and the Governor’s budget office have forecasted that this drop of revenue is short-term – both agencies anticipate revenue growth rate to begin to pick up again in FY2018 and FY2019. (It is worth noting that while revenue in Montana has been strong over the past 5 years, we have lost nearly a billion dollars in the past decade due to tax cuts aimed at wealthy households.)

To address the revenue drop – at least, in part – the Governor’s budget proposes a series targeted tax fairness measures that will also improve our current levels of revenue. Now, to be clear, the Governor’s budget also proposes across-the-board cuts to nearly every state agency. But by addressing the inadequate levels of revenue in the state, he’s been able to lessen the cuts and provide strategic investments in infrastructure, schools, quality child care and early childhood development, economic development in Indian Country, and an increase (albeit modest) in wages for state employees. We will dig into some of these sections on the expenditure side in future blogs. Today, we want to give everyone some background on the tax fairness measures the Governor is proposing.

Earlier this year, we released a report that provided an overview of levels of lost revenue in Montana as a result of tax cuts in 2003 that primarily went to the wealthiest households. Before 2003, Montana had ten income tax brackets with a top marginal rate of 11%. The 2003 legislation eliminated (or collapsed) nearly half of those tax brackets and lowered the top rate to 6.9%. Today, an individual working full-time at minimum wage (about $16,700 a year) now has the same top tax rate as someone making $1 million. The 2003 law also created a tax break for income coming from investments (as opposed to wages). Today, an individual who earns a living through wages is actually taxed at a higher rate than someone making the same amount of money but through investments, like selling stock. Montana is one of only nine states that provide this tax advantage to investors, and it cost the state nearly $30 million in 2013.

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Overall, these tax cuts have cost the state hundreds of millions of dollars in lost revenue, with 55% of the benefit going to the wealthiest 1% of households. This effort also made Montana’s overall tax system more regressive. Lower-wage families pay a higher portion of their earnings in state and local taxes (6.1 – 6.3% of income) than highest-income households (4.7% of income).

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The Governor’s budget restores a higher top tax bracket, but it will only apply to those with annual incomes over $500,000 (less than 1% of households). This top tax bracket would be set at 7.9%. The Governor has also proposed scaling back the tax advantages to wealthy investors – by capping the beneficial tax treatment on the first $1 million in annual capital gains income. The budget also proposes to bring about parity on the state deduction for federal taxes paid. Montana is one of only six states that allow taxpayers to take a state deduction for federal taxes paid. This expenditure benefits those who itemize their deductions (primarily higher-income households), and costs the state over $65 million in 2013. The deduction is capped ($5,000 for individual; $10,000 for couple), but that cap doesn’t apply to estates and trusts. This disparity in tax fairness costs the state roughly a million dollars a year. The budget would apply the deduction cap equally.

The Governor has also proposed providing some additional support for Montana’s working families. In Montana, our income tax system makes it even harder for many low-income, working families to provide for their basic needs. Montana begins taxing a two-parent family with two children at a lower annual income than nearly all other states in the country. We begin taxing such a family when their income reaches $13,480 per year (about 55 percent of the federal poverty level). And as mentioned above, when factoring in all state and local taxes, this family is likely paying a higher portion of their wages in taxes than the top 1% of households. To address this inequity and give working families a leg up, Congress created the federal earned income tax credit. Nearly half of states have followed suit by creating a similar state credit. The earned income credit is tied to work – a taxpayer must be working in order receive the credit, and the amount phases down as a family earned more. In 2015, this proposal passed with bipartisan votes in House Taxation Committee and second reading on the House. Nearly 80,000 working families in Montana would benefit from a state earned income credit.

The budget also includes proposal to make corporation income tax fairer and increases to some consumption taxes. Stay tuned for more information on those in blog posts later this month!