An Improved Tax Credit, a New Direction for Oregon

February 2, 2009By Lee Mercer

About the only good thing that can be said of the current economic mess is that it creates an imperative to move in a new direction. For Oregonians at the bottom of the pay scale especially, that change can’t come soon enough.

The “you’re on your own” economic philosophy of recent decades has diminished work’s effectiveness as a ticket out of poverty. Nearly twice as many full-time, year-round working families with children in Oregon are poor, despite their work effort, as in 1980.

A true change of direction requires a range of new policies designed to expand and strengthen Oregon’s middle class, in part by creating more opportunities for low-wage workers to move up.

This new policy approach should include improving Oregon’s Earned Income Tax Credit, or EITC. One in seven Oregon households already benefits from the EITC.

Unfortunately, the amount of the credit is too small. The average recipient gets only $85 — help for sure, but certainly not enough to have a meaningful impact. Oregon’s EITC is among the smallest of state EITC credits. It’s only one-third the size of what it would need to be to rank in the middle of the pack among state EITCs.

Oregon’s EITC is also too small to spare working poor families from paying income taxes on their wages. Most states have moved away from levying income taxes on the working poor, but Oregon has not. Shamefully, the income taxes we ask of poor, working families are among the nation’s highest.

The undersized credit is also part of the reason why Oregon’s tax system is upside down. When state and local taxes are combined, Oregon’s low-wage workers pay a higher tax rate than the highest-paid workers. The 20 percent of non-elderly Oregon families at the bottom of the income scale pay 9.3 percent of their income in state and local taxes, while the top 1 percent pay only 6.7 percent.

Senate Bill 392 would improve Oregon’s EITC by increasing its size. If the bill is enacted, Oregon, like the majority of states with income taxes, would largely stop taxing the work effort of poor families with children.

Improving the EITC would signal a turning point, a decision by Oregon to begin to address its upside-down tax system. While it would not by itself make our state tax system fair, it would correct for some of its regressive nature.

In practical terms, SB 392 would supplement the earnings of the average EITC household by about $180 a year. For a family of four living at the poverty line (with an income of about $22,000), it would mean about $480 more, enough to purchase some credit hours at a community college or cover a major car repair.

Some might argue that now is not the time to improve the EITC, given the state’s revenue shortfall, but in fact there is no better time. That’s one reason why more than 70 organizations have come together as Oregonians for Working Families, a statewide coalition, to advocate for SB 392.

We need to head in a new direction, one in which the economy works for everyone. Improving Oregon’s EITC would help us get there.

Lee Mercer is the education and outreach coordinator of the Oregon Center for Public Policy, a member of Oregonians for Working Families.