TRENTON - No anti-poverty tool in the nation is considered more successful than the Earned Income Tax Credit. It rewards work and helps people to help themselves.

ut no state-level EITC in the nation is less generous than New Jersey's, when it comes to who can claim the tax credit. Two years after initiating a state EITC, New Jersey still cuts off eligibility at an income level well below that of the federal EITC. Because of that and other factors cited in the report, upwards of 250,000 working New Jersey families and individuals that get the federal EITC aren't getting the state counterpart. New Jersey will fall further behind unless changes are made because federal income eligibility levels rise with inflation while New Jersey's remain the same.

Those are key findings in Half a Leg Up: New Jersey Still Trails in Crucial Help for Working Poor, by NJPP Policy Analyst Sarah Stecker. NJPP is a nonprofit, nonpartisan organization that conducts research on state issues.

Two years ago, New Jersey created an EITC program that works like the federal program in key ways. Benefits go only to working people and if the amount of tax credits they are eligible for exceeds their state income tax obligation they get a refund check. And like the federal program, New Jersey's was enacted with broad bipartisan support. Over its first two years, more than 377,000 families received state EITC benefits in New Jersey totaling nearly $114 million.

But the New Jersey EITC differs from the federal program in ways that hurt the chances of the working poor to rise above poverty. One involves eligibility by income. Under the federal program, families can earn up to $34,178 this year - depending on family size - and still qualify for some benefit. As they approach that level the credit gradually drops, but still exists as a way to ease the transition to self-sufficiency. New Jersey's EITC cuts off assistance at $20,000, making it the only state of the 17 with EITCs to cut off below the federal income level. The resulting "falling off the cliff" effect means that someone just above the cutoff line gets barely more money than someone just below it, making work less of the incentive that it should be.

In another significant departure from the federal program and most other state EITCs, New Jersey won't let workers with no qualifying children get credits - even at the reduced levels of the other programs.

The NJPP report says that in 2000, 440,175 New Jersey families got the federal EITC, but only 188,272 got the state EITC, a difference of 251,903. Preliminary figures for 2001 show that 426,730 got the federal credit and only 189,623 got the state EITC, a difference of 237,107. In addition to those whose income surpassed $20,000 or who had no qualifying children, others may well have missed out because of confusion over eligibility - a problem when the state and federal program rules don't match. Others might not have known the state EITC existed. In 2000 the state predicted 85 percent participation in the program's first year, but it turned out to be only 67 percent.

"New Jersey's abrupt cutoff was a problem in 2000 when people thought the economy was booming, and it's even a bigger problem today," said NJPP President Jon Shure. "In the current budget crisis, taxes that fall hardest on lower income people are rising. Now, more than ever, they need the EITC to offset that burden."

Half a Leg Up makes the following recommendations for changing New Jersey's EITC to one that offers the poor the help they need:

Raise state EITC income eligibility standards to match the federal program.

Families in New Jersey making above $20,000 still struggle to provide basic necessities for their children and themselves. According to a recent study, families need to earn $30,000 to $57,000, depending on the county, to achieve self-sufficiency in New Jersey. So, a tax credit for the working poor that cuts off eligibility at $20,000 falls far short of what is needed. If the state EITC had included those who fell off the cliff in 2000, the cost would have been $26 million in addition to the current cost reported by the state of $44 million. If New Jersey had matched federal guidelines for 2001, the additional cost would have been $33.7 million.

Make low-income workers without qualifying children eligible for EITC benefits, though at lower levels, as with the federal EITC and most state programs.

The bulk of credits should go to people raising a family, reflecting the costs of child rearing. But rewarding work is important for everyone, and the current policy fails to take into account that some people without children might be trying to save money to start a family. This change, which would cost about $3 million, also would mean New Jersey's EITC eligibility rules totally matched the federal EITC - further reducing chances of confusion.

Increase New Jersey's EITC benefit to 25 percent of the federal EITC.

This year the New Jersey EITC is 17.5 percent of a family's federal credit, scheduled to rise next year to 20 percent. At 25 percent, New Jersey would be one of the nation's most generous states - appropriate in light of the state's high cost of living. If New Jersey's EITC was 25 percent of the federal program in 2001, the additional cost to the state would have been $68.6 million.

More aggressively promote awareness of the state EITC.

The 67 percent participation rate in 2000 is unacceptably low. Better outreach, coupled with matching eligibility levels to the federal EITC to avoid confusion, would help. The state's effort should include working with Washington to establish more IRS Volunteer Income Tax Assistance sites around the state where low-income people get free tax preparation help and electronic filing is available.

Adopt a state standard of need quickly and include costs for health care and childcare; update it yearly to reflect what people must earn to be self-sufficient.

New Jersey was supposed to set a figure nine years ago reflecting the real cost of living in the state. Given the difference between the unrealistically low federal poverty line and the income actually needed in New Jersey to be self-sufficient, the importance of implementing a realistic standard of need is great.

TAX REFORM

WORK & WAGES

BUDGET & FISCAL POLICY

TRANSIT ISSUES

ECONOMIC DEVELOPMENT

VOTING & GOVT REFORM

© 2008 New Jersey Policy Perspective