Poor State Families Need A Tax Credit - And Child Care

January 17, 2006
Commentary By Jim Horan

There's a lot of hand-wringing these days about the state of Connecticut's economy: We're near the bottom in job growth, our population is stagnant, middle-class jobs with benefits are disappearing, and 66,000 Connecticut families are working hard but earning so little they can't make ends meet.

We know the problem, but lack concrete solutions. In fact, there are two things that the state could do now that would encourage people to work and boost employment in low-income neighborhoods.

First, Connecticut could follow the lead of the federal government and create a state Earned Income Tax Credit. The federal tax credit, which was created under President Gerald Ford and grew under Presidents Ronald Reagan and Bill Clinton, encourages low-wage people to work by offering a credit on their federal income tax return. Families who have children and who earn up to about $37,000 annually are eligible for a credit. Families earning between $11,500 and $16,000 qualify for the biggest credit - $4,400. Reagan called the Earned Income Tax Credit "the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress."

Eighteen states, including most of our neighbors, have recognized the effectiveness of the tax credit. They offer tax filers who qualify for the federal credit a smaller break on their state taxes.

A 20 percent credit would cost the state about $50 million. Low-income people would spend that money in their community. That would boost the economy, especially in low-income urban neighborhoods. Some of the money would go to help people pay for college, a car to get to work or even a home.

But how to pay for it? Right now, the state has a $500 million-plus budget surplus. The governor and legislators are talking about cutting the corporate tax surcharge - a good idea to encourage businesses to stay and grow in Connecticut. But while we're helping corporations, let's help people at the other end of the income scale - hard-working, low-wage families with kids - with a state Earned Income Tax Credit.

This is a great time to institute a state tax credit. Because it is a tax expenditure, it won't count against the state spending cap, which limits increases in spending.

A second idea to encourage work is to restore funding for the state's child care subsidy program. Child care is the single biggest expense for parents with young children - even higher than housing, according to a new state report on how much it costs to be self-sufficient.

For many parents who will get low-wage jobs, it simply isn't worth it to enter the workforce. But it would be if the state subsidized their child care costs. And it would be a solid investment in our future if care is of high enough quality to get kids ready for school success.

Following welfare reform in 1996, policy-makers recognized this and put a lot of money into child care subsidies. In Connecticut, however, funding dropped from $120 million in 2002 to $69 million this year.

Restoring at least part of this funding would allow more parents to go back to work, and help employers who need a growing workforce. Again, there's the question of where the money would come from.

The most likely source is federal welfare funds. The state diverts a lot of this money into the Department of Children and Families and other state agencies. This is permitted, but it would make a lot more sense to spend the money on programs that help keep families on the job and away from the DCF.

We all want the state's economy to grow. It's important to make sure, as we think about how to do this, to ensure that low-wage workers are part of the equation.

Jim Horan is executive director of the Connecticut Association for Human Services, an advocacy group based in Hartford.