Advocates for smaller government sometimes imply that low-income beneficiaries of government programs are taking an unfair share of taxpayers’ money. Arguing that endless “handouts” from the government create dependency, these advocates often claim that the best way to deal with poverty is to force people to climb out on their own.

But government has the power to help people, as well as to maintain the status quo, and there are many social policies that have been heralded as enlightened, despite the fact that they involve government spending. The GI Bill, for example, allowed hundreds of thousands of GIs to go to college for free and easily purchase homes, beginning in 1944. The administration at that time recognized the benefit the policy would have on recipients and ultimately on society. Though it cost the country billions of dollars over time, the GI Bill is viewed as an extremely wise investment that completely transformed America, and in many ways led to the rapid economic growth of the postwar period.

Similarly, the mortgage interest deduction that many homeowners claim on their federal tax returns comes to hundreds of billion of dollars per year, yet is seen as beneficial because it encourages homeownership, something widely recognized as important to a family’s well-being.

There are existing programs that benefit low-income people and require an appropriation, yet have proved successful and helped raise people out of poverty by encouraging beneficial behaviors like working and saving money. Two such programs are briefly profiled below: Individual Development Accounts, and the Earned Income Tax Credit.

Individual Development Accounts

The idea for Individual Development Accounts was created by author Michael Sherraden in his 1992 book, Assets and the Poor, and was further advanced by the Corporation for Enterprise Development in the mid-1990’s. One half of all Americans own less than $1,000 in net financial assets, and one third of American children grow up in households with zero or negative financial assets. [i] IDAs are part of an “asset building” strategy that concentrates on building family security by improving long-term economic well-being and emphasizing beneficial behaviors, rather than merely offering temporary assistance.

The IDA plan is fairly simple. Participants in the program are encouraged to save their money and work towards one of a few specific goals: homeownership, small business ownership or education. Funding from diverse sources, including federal and state governments and financial institutions, match the participants’ savings, often at a ratio of 2:1 or 3:1. The participant, most often a single mother, also takes classes on budgeting and financial management, and receives one-on-one counseling. The program works by teaching financial skills and helping participants successfully achieve goals.

Federal legislation to fund IDAs, called the Assets for Independence Act (AFIA), was passed in the mid-nineties and is up for reauthorization this year. IDA supporters hope eligibility guidelines will be somewhat amended: currently, income eligibility is set at 200% of the poverty level, and many low-income advocates, particularly those who work in housing, would rather see area median income levels used as the income standard. [ii]

48 states have IDA programs of some type. North Carolina was one of the earliest states to get involved: the program was begun in 1998 and currently is run by 24 local agencies that cover approximately 50 counties. The NC IDA and Asset-Building Collaborative, a group of some of the state’s primary economic development organizations and an executive director, coordinates the program, lends technical assistance, and assists with policy development. Funding comes from the federal AFIA, Small Cities CDBG funds, the NC Housing Finance Agency, a one-time appropriation of $600,000 from the NC General Assembly in 1997, and some financial institutions.

Currently, about 500 people are enrolled in the program across the state, with 200 more pending enrollment and over 200 graduates. As of October 2002, the first 170 people completing an IDA program had purchased 136 homes, started or expanded 30 small businesses, and made 4 educational investments. [iii]

Though highly touted by its fans, the IDA program in North Carolina is still growing.  Most of the funding is used to match participants’ savings, with little earmarked for administrative costs. For the program to be effective, each of the 25 agencies in the state needs a full time staff member to manage cases and supervise the project. Over time, there is hope that the General Assembly will allocate regular appropriations to the program.

For more information on the Collaborative and North Carolina IDA programs, contact Shayna Simpson-Hall at sshall@ncidacollaborative.org.

Earned Income Tax Credit

The Earned Income Tax Credit was enacted in 1975 and has earned strong bipartisan support for its ability to assist low-income working people. More than 19 million individuals and families, approximately one out of every seven filers, claims the federal EITC. After Medicaid, the EITC is the largest federal program targeted to poor people, and has lifted approximately 4.8 million people out of poverty. More than half of those are children. [iv]

The federal EITC is a refundable tax credit that working people can claim on their returns. “Refundable” means that an individual or family may get money back from the government if their credit exceeds the taxes they would otherwise owe. As a result, the EITC often serves as an income supplement for many individuals and families who earn close to the minimum wage. The refund can effectively increase their hourly wage by a few dollars.

For example, a family of four with two children and a full-time worker earning about $7 per hour has wages, after payroll taxes, of about $13,600 per year, several thousand dollars below the poverty line, which is $18,800 for a family of four. In 2003, this family would qualify for a federal EITC of $4,204, bringing its income close to the poverty line. [v]

As a family’s income rises, EITC benefits are gradually phased out. Up to a certain income level, the amount of the credit increases as earnings increase. The EITC reaches a maximum of $364 for childless taxpayers, $2,428 for taxpayers with one child, and $4,008 for taxpayers with two or more children in 2001. The credit begins to decrease and phases out altogether at earnings of $10,710 for childless taxpayers, $28,281 for taxpayers with one child and $32,121 for taxpayers with two or more children. Receipt of the EITC does not affect a family’s eligibility for other low-income assistance such as Section 8 vouchers or food stamps. [vi]

Seventeen states have enacted state earned income tax credits that piggyback on the federal one and increase benefits to low-income workers. On average, the state EITCs are set at approximately15% of the federal credit, meaning that if the head of a family will receive a $2,000 credit from the federal government, he or she will also get a $300 credit from the state. Most state EITCs are refundable. [vii]

Though perhaps difficult to enact during a time of budget shortfalls, the EITC could be particularly helpful during this era of economic change that North Carolina is experiencing. Many decent-paying manufacturing jobs are leaving the state, and often, the only alternatives are low-paying service and retail jobs. The EITC could help supplement those low wages. The EITC is also a way of offsetting the disproportionate impact that some taxes have on the poor. North Carolina’s tax base has come to rely more and more on lower-income people, through heavier sales and excise taxes.

Bills have been introduced at the NC General Assembly over the past few years for a state EITC. Most recently, SB 574 and HB 804 were introduced this year to create a refundable state EITC set at 10% of the federal credit. In 2000, more than 627,000 tax filers in North Carolina, or 17.6% of all returns, qualified for the federal EITC and would qualify for a state EITC.  If a North Carolina EITC were enacted at the terms set in the bills now at the Legislature, the total cost would be approximately $111 million. Although that may sound like a high price tag, it’s less than 1% of the general fund. [viii]

The EITC has been very successful, but the Bush administration has begun to talk about cracking down on fraud by demanding greater evidence of filing eligibility. Critics of this new policy argue that the amount of money lost through EITC fraud is approximately 7%, not unusual for a program of this size. In addition, they say, increased need for proof of eligibility could make filing more complicated, which could ultimately mean fewer filers or more people visiting tax preparation businesses to assist with returns. These businesses take their payment out of the credit, leaving the filer with less money.

Unfortunately, many people who are qualified to receive the credit do not take it, possibly because they don’t know about it. It is important, therefore, that advocates for low-income people educate the population they work with about the program. The Center for Budget and Policy Priorities in Washington, DC, has created a “2003 Earned Income Tax Credit Outreach Kit” that is available free or at a minimal charge. For more information, visit www.cbpp.org/eic2003/index.html.

[viii] Mejia, Elaine. NC Justice and Community Development Center, April 2003.