Minnesota likely to see progress on tax goal while Congress punts

WASHINGTON — Democrats in both Washington and St. Paul are looking to boost two similar low-income tax credits, and their opposite outcomes illustrate the effectiveness gap between Congress and state Legislatures like Minnesota’s.

On the federal level, President Obama is looking to double the value of the Earned Income Tax Credit for some beneficiaries. The credit goes to families making very low annual incomes, with the intention of reducing their income tax burden, sometimes leading to outright refunds. It’s a widely regarded as an anti-poverty tool, and Democrats say pairing it with a minimum wage increase would help fulfill their commitment to help enhance the earning power of the low- and middle-class.

The size of a family’s tax credit depends on their income and number of dependents. As they make higher incomes, the credit fades out, until it disappears entirely at the $14,790 mark for individuals. (TurboTax has a calculator for determining EITC eligibility.)

During the recession, lawmakers bumped up benefits for married couples and those with children, but the Obama administration argues more can be done for single, childless workers. In the budget he proposed this week, Obama pitched a plan to widen the age limit for beneficiaries, double the maximum credit and increase the level at which it’s phased out for those workers. Under the plan, 13.5 million people would be eligible for new or larger tax credits, including 224,000 in Minnesota, according to the White House, lifting 500,000 out of poverty.

Increase unlikely this session

An EITC expansion is certain to run into the same roadblock as every major legislative proposal this year: a Congress paralyzed by partisanship and unwilling to compromise in an election year.

Obama’s plan would cost $600 billion and he’d pay for it by closing tax loopholes, something Republicans have consistently opposed. But that’s not to say they’re against the credit itself. House Budget Committee Chairman Paul Ryan has supported it, and Minnesota Rep. Erik Paulsen, a member of the tax-writing Ways and Means Committee, said its anti-poverty mission is worthwhile.

But he said any EITC overhaul should address the billions of dollars in overpayments that go out every year. He said a GOP tax plan includes provisions along those lines.

“Rather than just expanding it we should be narrowing the focus and looking at potential reforms,” Paulsen said.

Democratic Rep. Keith Ellison said Obama’s plan is similar to what his Progressive Caucus will propose in its budget next week. Though congressional progressives have often tried pushing Obama and their Democratic colleagues to move further to the left, Ellison said, “This is exactly what the president should be doing.”

“The Democratic Party is a diverse party, but there’s one thing all of us should agree on, which is: hard work should pay,” he said. “And the government has a responsibility to make sure the rules are fair. That’s what this is all about.”

But Ellison said he knows there’s little the party can do to push big, liberal reforms while Republicans hold the House.

“If all we’re fighting for is what’s likely to happen, then we’re not doing anything,” he said. “The odds are the state options are more viable.”

State House passes tax bill

Enter the Legislature.

Minnesota instituted its own version of the EITC since the mid-1990s, called the “Working Family Tax Credit.” Half the states have EITC spin-offs, and Minnesota’s is among the most generous, worth about a third of a taxpayer’s EITC refund, according to the Pew Center on the States.

But while federal lawmakers have tweaked and adjusted the EITC over the years, Minnesota hasn’t always kept pace, particularly when it comes to how married couples are treated.

Normally, a Minnesotan who is eligible for EITC is also eligible for the Working Family Credit. But in 2009, when Congress increased the income thresholds at which the EITC is phased out for married couples, Minnesota lawmakers applied that new formula for only one year. That means right now, there are some married couples in Minnesota whose incomes qualify them for a bigger federal credit, but not a bigger state version.

“The federal government has made some improvements that we have not caught up with yet,” Minnesota Budget Project Director Nan Madden said.

Lawmakers are getting around to filling in the hole this session: It was included in a tax bill passed overwhelmingly by the House on Thursday, and leading senators have co-sponsored their own version, Madden said. Gov. Mark Dayton included the $18 million fix in his proposed supplemental budget on Thursday. If the provision becomes law, more than 53,000 families will receive an average rebate increase of $334.

Like what’s happening nationally, advocates of the credit tie it to an over-arching anti-poverty agenda. In a statement, Dayton said “it is particularly important to provide this tax relief for Minnesotans, considering our state’s atrociously-low minimum wage.” Madden’s Minnesota Budget Project listed fixing the credit alongside four other legislative priorities like a minimum wage hike and increasing health insurance offerings.

Of course, much more is likely to happen in DFL-dominated St. Paul than in deadlocked Washington. A low-income tax credit looks primed to be one of the first chips to fall.

“It’s such a good deal,” Madden said. “It’s also a great way to make sure that families that are working hard can make ends meet.”

Devin Henry can be reached at dhenry@minnpost.com. Follow him on Twitter: @dhenry