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New Tax Credit For Working Poor Faces Test In Next Budget Battle

By Keith M. Phaneuf

January 11, 2013

Neva Caldwell's family was one of nearly 182,000 households that claimed the state's new income tax credit last spring for working poor families.

For Caldwell, a single mother of three, the roughly $750 credit she received helped cover basic household bills -- rent, utilities, groceries -- and kept her car running.

"It makes a big difference," said Caldwell, who earns in the mid-$20,000s annually as an early childhood development outreach worker for a New Haven area nonprofit. "Without it, it would be hard."

Caldwell's family is one of thousands in Connecticut that would find life becoming harder were it not for the new EITC, which was launched in 2011. But with the state's continuing struggle with red ink, some advocates fear the credit could become a target for cuts this spring.

"Connecticut has taken a giant step forward with the state's EITC," said James Horan, executive director of the Connecticut Association for Human Services. "If we go backwards and take money out of the pockets of hardworking families, we are taking money away from the communities where they spend money, and we are jeopardizing our fragile economic recovery."

Those households received $601 on average, according to a new report from CAHS and from a second nonprofit social service advocacy group, Connecticut Voices for Children.

The program targeted relief most heavily on the urban centers. More than 24 percent of the recipient households and 27 percent of the refund dollars were focused on the state's three largest cities -- Bridgeport, Hartford and New Haven.

The program also met cost projections in its first year, contrary to the initial predictions of critics.

"The Earned Income Tax Credit is clearly working and making a big difference in the lives of working families," Wade Gibson, senior policy fellow at Connecticut Voices, said Thursday. "We should continue support for the state credit, which helps to ensure that people who work are able to make ends meet and stay out of poverty."

Created by the General Assembly in May 2011, the EITC is a refundable tax credit for low-income families, primarily for those with children. When the value of the credit exceeds a family's state income tax obligation, a credit is provided.

The program has been somewhat controversial here since its enactment for two reasons:

The Connecticut credit is one of the largest of any state EITC benefit in the nation, equal to 30 percent of what a qualifying family can receive through the federal EITC program.

Because it is a refundable credit, some households that owe no income taxes still receive the state credit. Advocates note that these families still are working, and typically pay many other state levies and fees, such as sales and gasoline taxes.

"The fact is the state of Connecticut is sending a check to people who are not paying taxes," said Rep. Sean Williams of Watertown, the ranking GOP representative on the tax-writing Finance, Revenue and Bonding Committee.

Analysts for the executive and legislative branches have projected a shortfall approaching $1.2 billion in the fiscal year that begins July 1.

"With a $1 billion budget deficit, (the EITC) is probably the No. 1 place I would cut," Williams said.

The $365 million deficit in current finances was closed primarily with spending cuts. "Everyone was hard pressed to identify other areas we could cut spending, and it is only going to get worse" trying to close a $1.2 billion shortfall, Williams added.

Republican minorities in the state House and Senate have been particularly active in pushing for new safeguards against tax fraud. And when the legislature and Gov. Dannel P. Malloy approved a plan in mid-December to close a $365 million deficit in current state finances, they built a new assumption into the budget that $1 million could be saved by clamping down on EITC fraud.

That raised concerns among program advocates, particularly after the state's top tax official, Department of Revenue Services Commissioner Kevin B. Sullivan, said, "I'm skeptical" that $1 million in fraud exists in the program. "We have not seen any evidence."

Sullivan also noted that there already is a more comprehensive screening program in the EITC than in most other aspects of the state income tax system.

Senate Majority Leader Martin M. Looney, D-New Haven, one of the EITC's strongest backers in the legislature, said he remains confident that the credit is one of the best incentives Connecticut can offer for low-income households to remain employed.

Families who receive the credit typically have to spend all of it, often on basic living expenses such as heating and electricity bills, groceries, or clothing.

"Just about all of the money they receive goes back into the economy," Looney said. "The program is demonstrably successful. It would be counterproductive to scale it back."

'This really helps out'

Tyeron and Rhonda Williams of New Haven, who have two children, have been working to move from transitional housing into more permanent accommodations.

Tyeron is a clerk at Stop & Shop and Rhonda, a shift supervisor at Burger King, also is taking classes to qualify for a position in addiction treatment services.

The couple, who earn about $25,000, are hoping to secure a credit this year so they can leave transitional housing. If they receive the typical credit of about $600, it likely would go for bedroom and kitchen furniture, Tyeron Williams said.

"We plan to move out of here as soon as we have enough money," he said. "It's been difficult with the jobs we hold, but this (program) really helps out people who need that extra funding."

Christian Community Action of New Haven, a nonprofit that operates housing programs and a food bank, found "an overwhelming majority" of its clients who received the credit used it to pay down utility bills.

"One of the biggest stumbling blocks I find to people getting into permanent housing is their credit record," said Merryl Eaton, director of advocacy and education for CCA, who added that overdue utility bills are a major contributor to poor credit ratings.

Eaton added that while Connecticut's urban centers contain the state's largest pockets of poverty, there were state EITC households in all 169 cities and towns.

One hundred eighty families in Darien -- one of Connecticut's wealthiest communities -- received the state credit last year. Those recipients had an average annual income of $13,060.

Communities with the fewest number of recipients in 2011 were: Bridgewater, 24, with an average income of $15,833; Colebrook, 20, $14,217; and Union, 9, $21,878.