EITC: An Unconventional Income Approach (Greg Kaza Commentary)

Arkansas per capita personal income has been 82 percent of the U.S. for a record three consecutive years (2009-2011), partly the result of a commodity boom. Arkansas, in five short years, has improved from its multidecade range of 75 to 78 percent (1973-2006) of the national average to within striking distance of leading Southeast states.

Accelerate Arkansas, a group of business and community leaders, seeks to "position Arkansas where it can increase its per capita income to the U.S. average by 2020," a worthy but challenging goal that emphasizes the importance of a knowledge-based economy. An illustration of the challenge: Georgia and North Carolina have pursued knowledge-based approaches for decades. Yet at 87 percent, both remain below the U.S. average.

Public policies that leave more money in Arkansans' wallets and purses have the potential to move Arkansas toward the national average. Some policies are unconventional. These include the multiyear phase-out of the grocery tax and a federal policy usually associated with helping poor and low-income Americans.

Economist Milton Friedman, the 1976 Nobel laureate, proposed a negative income tax for society's poorest members in "Capitalism & Freedom" (1962). Friedman argued that a "program which supplemented the incomes of the 20 percent of the consumer units with the lowest incomes so as to raise them to the lowest income of the rest would cost less than half of what we are spending" if it was linked to a reduction in the welfare bureaucracy.

The earned income tax credit, passed by a Democratic Congress and signed into law by Republican President Gerald Ford in 1975, is a variation on this idea. The Internal Revenue Service describes the EITC is "a refundable federal income tax credit for low to moderate income working individuals and families." When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

EITC positions vary across the political spectrum. Some liberals contend the EITC should be expanded, while conservatives maintain it should be reduced. Despite this debate, the EITC has advanced in a bipartisan manner, expanding under Republicans Ronald Reagan, George H.W. Bush and George W. Bush and under Democrats Bill Clinton and Barack Obama.

The IRS administers the EITC and estimates that one in five who qualify fail to file for the credit. The IRS notes low-income households do not file as a result of not understanding the program.

Here's why the EITC is an unconventional Arkansas income approach: It is a transfer, a type of payment whose refundable portion is included in state personal and per capita income, according to the U.S. Bureau of Economic Analysis. If the refundable portion equaled half the average Arkansas EITC refund of $2,374 (2010), the potential addition to Arkansas per capita personal income would have fallen within a range between $72 million and $118 million based on participation and population estimates. Either amount increases Arkansas' per capita personal income.

The income effect from greater EITC participation isn't enough to significantly increase, in a single year, Arkansas' percentage rank versus the U.S. An effect significant enough to boost Arkansas to the 83rd or 84th percentile would take until at least 2020. In sum, improved participation in the EITC, an unconventional income approach, could complement other strategies that seek to move Arkansas to the national average.

(Economist Greg Kaza is executive director of the Arkansas Policy Foundation, a Little Rock think tank founded in 1995.)