The General Assembly is about to green-light a measure that will cut credits and raise taxes on low income working families by $5 million by 2027, but it doesn’t have to be that way. The Earned Income Tax Credit (EITC) is a widely utilized, and extremely successful, tax benefit for low income individuals that was originally created in the 1970’s and then expanded during President Ronald Reagan’s tax reform efforts of the late 1980’s.  In Indiana, working families with children that have annual incomes below about $40,320 to $54,884 (depending on marital status and the number of dependent children) are eligible for both a federal and state EITC.  The state credit is simply the amount equal to 9% of their federal credit.  That percentage is set statutorily by the General Assembly, and while the state credit is a percentage of the federal credit, the credits themselves are not officially coupled (this is important and you’ll see why below). 

The reason the EITC is so successful is that it is fully refundable.  This means that the credit, which incentivizes work, can wipe out a family’s tax liability, and if any credit remains will be provided to the taxpayer in the form of a tax return.  This extra money in a family’s pocket is often used for emergency expenditures, school supplies, household needs, etc., which can be the difference between making it and falling off a fiscal cliff for low income Hoosiers.  Nearly one hundred percent of the dollars refunded to eligible families are pumped back into our local economy, and the program itself has been supported by leaders of both parties including President Obama and Speaker Paul Ryan who together supported an expansion of the program as part of our economic recovery from the Great Recession.

Unfortunately, Hoosiers who use the program are on the verge of seeing a huge tax increase with the recent passage of the federal tax bill, combined with the passage of House Bill 1316 during the special session of the General Assembly this week.  Tucked into the federal legislation was a new way of calculating cost of living adjustments for the federal EITC. This new method, called Chained CPI, will constrain these adjustments so that they grow at a far slower rate than normal inflation.  Among the various provisions of HB 1316, which was drafted in large part to protect some of Indiana’s biggest and most important companies from seeing large increases in their state tax liabilities as we reconcile our tax code with the federal legislation passed by Congress earlier this year, is a provision that will require Indiana to coincide with the use of Chained CPI.  The end result of both the federal and state legislation will be a large tax increase on low income Hoosiers who claim the EITC.  The Institute on Taxation and Economic Policy (ITEP) projects that in 2019 recipients will lose $12 million in federal EITC and $700,000 in state EITC returns.  The burden on Hoosiers continues to grow exponentially and by 2027 they are projected to lose at least $86 million federally and $5 million more from the state EITC.  Although the state and federal governments view any EITC expenditures not received by taxpayers as savings, make no mistake, it is a tax increase on low income working Hoosiers, and a big one at that.  $91 million big.    

But there are other options that Indiana isn’t considering. Because Indiana’s credit is not officially coupled with the federal credit, as mentioned previously, we do not have to utilize this new method of calculation for the State’s EITC.  Federally, low income working Hoosiers are already projected to lose tens of millions of dollars.  There is little we can do about that unless we can convince Congress to amend or repeal its most recent tax legislation.  But, we can do something locally with regards to the state EITC. Another $5 million out of the pockets of low income working Hoosiers, and local economies, is real money that cannot be ignored.  Unfortunately we at the Indiana Coalition for Human Services were not able to convince lawmakers to remove this provision from HB 1316, but it is our hope that we can work with them over the summer and fall to find a solution to this problem, just as Indiana’s largest employers were able to find solutions to their tax liability problems in this legislation.  We believe there are a number of options that are worthy of consideration, and we look forward to the opportunity to make our case.