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Fixing Oregon's Low Income Tax Credits: Should They be Made Refundable?

Executive Summary

In 1997, the Oregon Legislative Assembly created two new targeted tax credits aimed at providing tax relief to low-income working families, especially those who leave welfare for work. The Working Family Credit provides a credit equal to 40% of total child care costs for families with incomes up to 150% of poverty ($20,475/year for a family of three in 1998). The credit phases out as a family's income increases to 200 percent of the federal poverty level. The state Earned Income Credit (EIC) is set at 5 percent of the federal Earned Income Credit.

Both tax credits are "nonrefundable"; that is, if the amount of a credit exceeds tax liability, the excess credit is lost. Many low-income families also have little tax liability. Because of this, the tax credits are of limited value to the working poor and to former welfare recipients.

An analysis of the credits finds that:

• No one receives the full 40 percent child care credit.

• As a family's income increases, the family receives a greater share of its child care costs as a credit. In other words, under current law the benefit is less for those with less ability to pay for child care.

• Families working part time, and persons leaving welfare for work mid-year, are not able to utilize fully the state Earned Income Credit.

In addition, "carry forward" provisions used for other tax credits are inappropriate for low-income credits because they defer needed relief, are not likely to provide relief, and require additional record keeping which increases the likelihood of errors.

Finally, the cost to make both credits refundable at their current benefit levels is approximately equal to or less than the proposals to expand the credits without making them refundable.