Testimony by Chris Stiffler in support of Senate Bill 13-001
Madame Chairman, members of the Committee:
My name is Chris Stiffler, and I am the economist at the Colorado Fiscal Institute.
The Colorado Fiscal Institute is a nonprofit, nonpartisan aimed at informing policy debates and contribute to sound decisions that improve the well-being of individuals, communities and the state as a whole.
I am here today to testify in support of Senate Bill 001, more specifically to discuss the economics behind the Earned Income Tax Credit: how it is strategically designed to encourage work, how it acts as a temporary bridge of support while people get attached to the labor market, and how it injects stimulus spending into the Colorado economy.
I’d like to begin by first discussing the shape of the credit.
The Earned Income Tax Credits is strategically designed to incentivize work. The more you earn the larger the credit. The EITC acts as a wage subsidy, providing an incentive for those not working to enter the labor force. It also supplements the income of those who, despite their work effort, have low labor earnings.
It also helps workers keep more of the money they earn. When families have more money to help with work-related expenses like childcare and transportation, they are in position to work more. That is why studies show that the EITC both increases hours worked and increases labor force participation, particularly among single mothers with children too young yet for school. In fact, 60 percent of the 8.7 percentage point increase in annual employment of single mothers between 1984 and 1996 is attributable to the expansion of the EITC program1 .
The EITC creates incentives to join and become attached to the labor force.
The Earned Income Tax Credit is a stepping stone because many recipients claim the credit only temporarily when a job disruption or other significant event reduces their income. Of people studied who received the EITC over an 18-year period, 61 percent received the credit for only one or two years at a time2 . Furthermore, over time, EITC recipients pay far more in federal income taxes than they receive in EITC benefits3 . The credits in SB001 act as a temporary bridge to self-sufficiency.
SB001 also puts money into the pockets of the working Colorado families who need it and who spend it.
In addition to the increased labor force participation, the EITC is also an effective way to generate economic activity by putting money into the hands of families who spend it. To get the most “bang for your buck” as far as providing stimulus spending into the Colorado, the money has to get spent over and over. A dollar spent becomes a dollar of someone else’s income. Then they go out and spend that income. Providing tax credits to the population of Senate Bill 001 gets the money circulating into the economy. It doesn’t get saved or spent abroad, but gets re-injected in OUR economy because this population spends it on necessities bought locally.
In a panel study of EITC recipients in North Carolina, researchers found that the EITC was used primary for household expenses, paying debt, paying medical expenses and investing in education4. Roughly 88% of all EITC filers spent at least part of their refund immediately on bills and other common expenses. And this is injected right into the Colorado economy.
SB-001 boosts the wages of working-Coloradans who have worked without pay-increases during the past economic storm.
Many employers want to increase wages for their workers but the economic conditions of the past 2 of more years have made those wage increases impossible for many. SB-001 helps employers by boosting wages for many low and middle income workers. The Earned Income Tax Credit acts as a wage subsidy and accomplishes the goal of rewarding work through the tax code. I encourage you to support a jobs bill, a stimulus bill, and a poverty reduction bill: all in the form of Senate Bill-001.
Thank you Madame Chairman.
CONTACT INFORMATION:
Chris Stiffler
Economist
Colorado Fiscal Institute,
1905 Sherman Street, Suite 225
720-379-3019 ext. 223
stiffler@coloradofiscal.org
- Nada Eissa and Hilary Hoynes, “Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply,” October 10, 2005, http://www.econ.ucdavis.edu/working_papers/05-29.pdf [↩]
- Tim Dowd and John B. Horowitz, “Income Mobility and the Earned Income Tax Credit: Short-Term Safety Net or Long-Term Income Support,” Public Finance Review (September 2011), 619-652 [↩]
- http://www.cbpp.org/files/6-26-12tax.pdf [↩]
