Billionaire investor Warren Buffett waded into the nationwide debate over raising the minimum wage Friday with what he considers a suitable alternative for helping low-income, working people get ahead.
Raise the federal Earned Income Tax Credit, he suggested in an OpEd published in the Wall Street Journal.
“In essence, the EITC rewards work and provides an incentive for workers to improve their skills,” he wrote. “Equally important, it does not distort market forces, thereby maximizing employment.”
The Earned Income Tax Credit is designed to act as a meaningful supplement to a working person’s income and as an incentive for that person to work. Its effect on a working family’s income can be substantial: A family with two children in 2014 could qualify for a credit as large as $5,460. A single mother with two children could earn up to $43,756 and still qualify for some support. One of the federal credit’s most helpful features is that it’s refundable, so a working family that qualifies can still reap the benefit even if the credit is larger than the amount the family owes in taxes.
In 2013, 102,000 Maine families qualified for the federal credit, receiving $2,035 on average ($207 million total statewide). Nationwide, 28 million families benefited, collecting $66 billion, making the Earned Income credit one of the 10 largest federal “tax expenditures.” Overall, 50 percent of the benefits from those 10 expenditures — which include tax deductions for charitable contributions and mortgage interest and the favorable tax treatment of capital gains — accrue to the top fifth of federal taxpayers. But the Earned Income Tax Credit is one of those expenditures whose benefits accrue to the lower end of the income spectrum.
It’s a program with support from both Republicans and Democrats specifically because it acts as a work incentive. Basically, it’s one public assistance program that has smoothed out the so-called welfare cliff. “Payments to eligible workers diminish as their earnings increase,” Buffett writes. “But there is no disincentive effect: A gain in wages always produces a gain in overall income.”
Buffett goes on to suggest a handful of improvements to the credit program that are worth considering: More publicity about free filing help, monthly rather than annual payouts and heightened penalties for fraud.
So what do these suggestions for federal policymakers have to do with Maine’s state budget?
The two-year budget proposal before state lawmakers proposes to eliminate Maine’s version of the Earned Income credit. Maine is one of more than 20 states that supplement the federal credit with a state-level benefit. Maine’s is worth 5 percent of the federal credit, and it isn’t refundable, so it only helps to reduce low-income families’ tax obligations. Maine Revenue Services estimates about 20,000 families qualify for the state version.
The helpfulness of Maine’s program is limited, but it’s worth preserving, particularly if key parts of Gov. Paul LePage’s tax reform proposal — which provide for significant tax credits for low-income people to offset sales and property taxes — are endangered. (An alternative tax change framework put out by legislative Republican leaders, for example, doesn’t include what Senate President Michael Thibodeau called “complicated bureaucratic rebate programs” that involve “filling out a form and waiting for their check to arrive.”) We think if legislators ultimately keep Maine’s tax code more or less as it is, they should be sure to apply the same thinking to the Earned Income credit, reversing LePage’s proposal to nix it.
If lawmakers do make some tax code changes, they could come up with a mix that produces enough revenue to expand Maine’s Earned Income credit. The tax proposal from Democratic legislative leaders — which still proposed eliminating the credit — offered the right mix of changes that could allow the state to expand the credit.
As for the minimum wage? That’s a whole other debate, but it’s worth noting that Buffett didn’t rule out a measured increase.