Comparing a tax cut with a tax credit | Arkansas Blog

Thursday, January 19, 2017

Comparing a tax cut with a tax credit

Posted By on Thu, Jan 19, 2017 at 2:57 PM

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Arkansas Advocates for Children and Families has compared the cost and impact of two tax relief bills that came out of the House committee this morning — Gov. Asa Hutchinson's income tax cut for those making less than $21,000 a year in next taxable income and Rep. Warwick Sabin's bill to give an earned income tax credit to state taxpayers equal to 5 percent of the credit they get under existing federal tax law.

Here's a link to the comparison.

The Hutchinson plan gives most benefits to those at the higher end of the range of taxpayers covered. That is, the very poorest benefit the least.

A State Earned Income Tax Credit (EITC) is a more streamlined approach that benefits low-income families and the state economy. A 5 percent EITC would be cheaper than Hutchinson’s current low-income tax cut plan (only $40 million compared to $50 million), and it would put a lot more money into the hands of our most financially vulnerable working families. In the chart below you can see that a state EITC would be far more beneficial to the lowest 40 percent of earners in Arkansas. That group – who makes less than about $32,000 a year – are more likely than more wealthy Arkansans to spend any extra money in the local economy. EITCs are proven to help these families move into the middle class, and boost local businesses along the way.
About half the states have an EITC. The federal credit had bipartisan support because it's been shown as incentive to work. The more you work and earn, the greater the credit.

Hutchinson's plan, the organization notes, could reward some people who aren't poor.

Hutchinson’s plan does technically reduce the tax burden for people earning less than $21,000 a year, but that fact is misleading. If you ask any accountant, you’ll find that there is some fantastic breadth in the variations of what “making money” can mean. Hutchinson’s bracket changes are based on “taxable income,” not wages, salary, or even adjusted gross income. That means we would be cutting refund checks based on what your reported income is after subtracting itemized deductions, capital gains exclusions, business losses, etc. There are always going to be taxpayers with a lot of income and little “taxable income” for various reasons. You can “make” quite a lot of money, and still easily come in under $21,000 in taxable income.

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