Advocates for Oregon’s low-income working families with children want to improve Oregon’s Earned Income Credit (EIC) to eliminate Oregon’s income tax on the working poor. They asked OCPP to suggest a revenue source to pay for the EIC’s improvement. This paper sets forth OCPP’s proposal.
Brief background on the EIC improvement
Oregon is one of a minority of states that continues to assess an income tax on working families living in poverty. The trend nationally is for states to eliminate income taxes on working poor families, in part to help these working families achieve self-sufficiency. The 2006 Oregon income tax for a family of four with income at the poverty line – $20,615 – was $319, the fifth highest amount in the country.
Oregon could eliminate income taxes on most poor families with one or two children by expanding the state Earned Income Credit from five percent to twelve percent of the federal Earned Income Credit, as the OCPP has detailed in Working, Poor, and Taxed: Improving Oregon’s Earned Income Credit.
Two bills introduced in the 2007 legislative session would increase Oregon’s EIC to twelve percent of the federal credit. HB 3023 would cause the increase to occur in tax year 2008, the same year the current credit is set to increase from five percent to six percent of the federal credit. HB 2398 would phase-in the increase over the six years from 2007 to 2012.
The cost of HB 3023 is in the range of $22-$31 million in 2007-09 and $45-$51 million in 2009-11. The cost of HB 2398 is in the range of $16-$19 million in 2007-09 and $29-$35 million in 2009-11.
Proposal to pay for improving the EIC
The cost of improving the EIC could be covered by phasing out the personal exemption credit for high-income Oregonians. The OCPP estimates that eliminating the personal exemption credit for taxpayers with adjusted gross incomes over $200,000 beginning in tax year 2007 would raise $47 million in 2007-09 and $60 million in 2009-11. If the change did not occur until tax year 2008, it would raise $22 million in 2007-09. Hence, phasing out the personal exemption credit for high-income Oregonians could cover the cost of increasing the Earned Income Credit (Figure 1 see in PDF version).
Widening inequality and the tax shift to low-income Oregonians
Phasing out the personal exemption credit for the highest-income Oregonians to pay for an increase in the state Earned Income Credit would not only make Oregon’s income tax system more progressive, it would also serve to counteract the impact of widened income inequality in Oregon. In tax year 2005, only the highest-income 2.4 percent of full-year Oregon taxpayers had adjusted gross incomes over $200,000. From 1980 to 2005, the highest-income 2.4 percent of Oregon households saw their adjusted gross incomes come close to tripling, even after adjusting for inflation.5 The inflation-adjusted average adjusted gross income of this group rose from $188,328 in 1980 to $517,016 in 2005, an increase of nearly $329,000 (Figure 2 see in PDF version).
By contrast, the adjusted gross incomes of the lowest-income fifth of Oregon taxpayers (excluding those with negative incomes) has grown by just six percent since 1980, after adjusting for inflation. These taxpayers had average adjusted gross incomes of $5,931 in 2005, up from $5,588 in 1980 – an increase of just $342 above inflation (Figure 2 see in PDF version).
Oregon has exacerbated the impact of widening inequality by cutting taxes as a share of income for the rich while raising taxes as a share of income for low-income families. From 1989 to 2002, taxes paid by the lowest-income fifth of all families in Oregon grew by 2.2 percent of income.7 By contrast, taxes paid by the highest-income one percent fell by 0.4 percent of income (Figure 3 see in PDF version). For the highest-income five percent, taxes fell by 0.2 percent of income.
The improvements in the state EIC can be accomplished by phasing out the personal exemption credit for those households at the top of the income scale whose incomes have skyrocketed and whose state and local taxes have declined as a share of income.