TRENTON-One of New Jersey's primary tools for helping low-income families move up the economic ladder falls far short of its full potential because it cuts off assistance at a lower level than in any other state.

The state's Earned Income Tax Credit ends all benefits to families when they reach $20,000 in income, even though that is too low for families to support themselves. A new report from New Jersey Policy Perspective details the "cliff" New Jersey EITC recipients fall off, and calls on the state to fix the program.

Look Out Below: Steep "Cliff" Means Many Working Poor Lose Tax Credit was written by NJPP Policy Analyst Sarah Stecker. It shows that fewer than half of New Jerseyans who receive the federal EITC also get the New Jersey state EITC. In most cases it is because their incomes are still low enough to get federal benefits but too high for New Jersey's program.

"Those who qualify for the state Earned Income Tax Credit need it more than ever. And those who do not qualify, even as they struggle to support their families, face the prospect of falling ever farther behind," said NJPP President Jon Shure. "Reform is long past due."

There are EITCs in 19 states and Washington, DC. But only New Jersey cuts off eligibility at $20,000. The others all use the federal EITC's eligibility levels, a sliding scale under which-depending on family size and income-some families in 2006 could make $38,222 and still get benefits.

The EITC is a credit against income tax, aimed at helping low-income, working Americans reach self-sufficiency. Only households where someone has a job qualify for the EITC. The federal Earned Income Tax Credit was created in 1975 and has been broadened several times, with strong bipartisan support. New Jersey's program began in 2000 and has since day one lagged behind other states in terms of eligibility limits.

What makes the EITC especially effective in fighting poverty is that the credit is refundable. Most families qualifying for it make too little to owe income tax. If the amount of EITC they are eligible for exceeds their income tax obligation, they receive a check-a refund-for the difference.

In addition to cutting off eligibility at a lower level than other states, New Jersey's EITC also falls short because it offers no benefits to families that don't have qualifying children. The federal EITC and 16 of 19 state EITCs offer benefits to such workers.

The magnitude of New Jersey's state EITC shortcomings is intensified by the reality of trying to live in New Jersey on low income. This state has a cost of living one-third above the national average. And housing costs rank fourth in the U.S., according to a 2006 report released by the National Low Income Housing Coalition.

The number of people in New Jersey and across the nation receiving federal EITC benefits over the past three years has risen. But fewer New Jerseyans are getting their state's EITC. And New Jersey's state EITC eligibility rules make it easy to surmise why: many households have seen income rise to a point still low enough to qualify for federal EITC benefits, but surpassing New Jersey's $20,000 state EITC cutoff.

The report makes three recommendations:

• Eliminate "the cliff" by raising state EITC income eligibility standards to match the federal program.

For New Jersey households, there is no magic in crossing the $20,000 income threshold. That's only $40 above the federal poverty line for a family of four, and the federal poverty line itself is widely recognized as being much lower than what it really takes to make it on one's own. The additional cost of eliminating the cliff would be $35 million in Fiscal Year 2007and $37 million in 2008 and 2009.

• Give EITC to low-income workers without qualifying children.

Rewarding work is important for everyone, but current policy fails to take into account that some people without children might be trying to save money to start a family. Making this change also would mean New Jersey's EITC eligibility rules completely match the federal EITC-further reducing chances of confusion.

• Increase benefit to at least 25 percent of the federal EITC.

The benefit today is 20 percent of what a New Jersey EITC recipient gets from the federal program. Given the cost of living here, New Jersey's EITC should be among the nation's most generous.

New Jersey's EITC in 2005 cost the state $113.5 million. Following the recommendations of NJPP's report would provide the state EITC to about 250,000 working New Jersey households. The total cost of the program would be $198.5 million next year if the credit were 25 percent of the federal EITC and $238.5 million at 30 percent. This would be a productive use of state resources, and an investment in the future of thousands of men, women and children.

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TAX REFORM

WORK & WAGES

BUDGET & FISCAL POLICY

TRANSIT ISSUES

ECONOMIC DEVELOPMENT

VOTING & GOVT REFORM

© 2008 New Jersey Policy Perspective