By Andy Brack
The Brack Report

From the state Chamber of Commerce to the Palmetto Institute, more folks are talking about raising incomes in South Carolina to boost competitiveness and make the state stronger.

According to preliminary 2005 figures from the U.S. Department of Commerce, per capita income in the state is $28,352, 82% of the national average of $34,586. South Carolina ranks 43rd nationally in per capita income.

While business and nonprofit leaders are focusing on the problem, state lawmakers don’t seem to have it on their radar screen.

Yes, they’ve taken steps to try to lure more jobs here, but most of that effort seems to focus on bringing in big industries, instead of pumping up small businesses. Unfortunately, any gains they see from new jobs aren’t keeping up with lost jobs, particularly manufacturing jobs. In turn, that keeps the state’s unemployment rate among the highest in the nation.

Perhaps it is time for state government to do more. One idea to consider is a state earned income tax credit. Some 19 states across the country have successfully implemented such a credit to help lift working low-income residents out of poverty.

No Southern state has a fully refundable credit, although Virginia will implement a non-refundable version in the 2006 tax year.

An earned income tax credit is a work incentive that goes to working families. State EITCs typically are based on the federal credit, which has enjoyed bipartisan support and expansion over the last 30 years.

The federal EITC reduces or eliminates income taxes for poor and near-poor working families.

Additionally, it also can provide a refund for any remaining amount of credit. It helps offset other federal payroll taxes, such as Social Security, and can help bring working-family incomes above the poverty line.

Here’s how the federal credit worked in 2005. If a family with two or more children had an income of less than $35,263 (or $37,263 for married couples filing jointly), the working family could receive an earned income tax credit of up to $4,400. As incomes approach the top level of income in the EITC program, the credit phases out. The maximum benefit tends to be for families with incomes around $15,000 to $18,000.

Families that take part in the federal EITC program are able to get back some of the money withheld from paychecks. If their incomes are low enough, they may receive an additional refund up to the total of $4,400, based on total income.

Across the South, some 6.4 million working poor families took advantage of the federal earned income tax credit in 2003.

In South Carolina, almost 415,000 of the 1.8 million federal tax returns filed included EITC claims, worth $980 million. In other words, the federal government pumped almost a billion dollars back into South Carolina to augment wages of working poor families.

But while the proven federal government strategy recognizes that an EITC is a way to boost incomes of the working poor, South Carolina hasn’t responded in kind.

So that leaves working poor families in a weird place: Those with earnings so low that they get a credit refund from the federal government still have to pay state income taxes. Arguably these taxes are lower, but they put a strain on already poor working families that are trying to escape poverty.

States with EITCs generally have implemented refundable state credits based on a percentage of the federal credit, which makes it easy to administer. If, for example, a family qualified for a federal credit of $4,400, a state credit at a 10% level would relieve a state income tax burden by up to $440.

Yes, a refundable earned income tax credit for South Carolina would “cost” money. If South Carolina enacted a credit based on 10% of the federal EITC, they would have to come up with a $96 million pool to make refunds available to the working poor.

But many argue that investing in working families through the credit would reduce the burden of regressive sales and property taxes. It also would reward work in a progressive way without creating a welfare program. And it certainly seems a better way to help thousands of working people than providing millions in tax incentives for big businesses that bring relatively few jobs to the state.

Andy Brack is publisher of S.C. Statehouse Report. He can be reached at brack@statehousereport.com.

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