Sep 17, 2018

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20th Anniversary Milestones: The Long and Winding Road for Colorado’s EITC

by | Sep 17, 2018

Workers supporting their families now benefit from a state Earned Income Tax Credit (EITC) thanks in large part to Colorado Center on Law and Policy’s decades-long efforts to put extra dollars into the pockets of Coloradans in low-income jobs. The tax credit benefits workers with children as well as individuals with extremely low wages.

Widely considered one of the most effective tools for fighting poverty, the federal EITC was established in 1975 and expanded on a number of occasions since then. Because the EITC grows with each additional dollar of earnings until reaching the maximum value, studies show that the EITC encourages large numbers of single parents to return to work while giving workers in poorly paying jobs an incentive to increase their work hours. Specifically, a 2015 study showed that a $1,000 increase in the EITC leads to a 7.3 percentage point increase in employment — demonstrating that the tax credit is even better at fighting poverty than what earlier Census data suggested.

The Colorado EITC was first enacted in 1999 when legislators faced a budget surplus of $900 million amid a booming economy. Because the Taxpayer’s Bill of Rights (or TABOR), approved by Colorado voters in 1992, limited the amount of revenue the state could collect, legislators lowered the income tax rate from 5 percent to 4.75 percent and considered tax breaks for everything from investing in new farm equipment to adding new phone lines.

“Basically, it seemed like every lobbyist was working on a tax break for their own client. It was as if every corporation had an idea for a tax credit for themselves,” said Chaer Robert, who was involved with efforts to approve, increase and implement the state EITC over 16 years through her role as president of the Women’s Lobby of Colorado. Robert also served as chair of the EITC Coalition and more recently as Manager of the Family Economic Security program at CCLP.

A pioneering advocate of a state EITC, Maureen Farrell-Stevenson, then Executive Director of CCLP, believed that as long as employers were benefitting from new tax breaks, ordinary workers ought to benefit too. Gov. Bill Owens himself called for broad-based tax cuts to include an EITC in addition to cuts in the sales tax and income tax rates.

In 1999, Farrell-Stevenson and CCLP Policy Analyst Adela Flores partnered with the Women’s Lobby of Colorado. They worked with the late Rep. Gary McPherson to establish a state EITC. The successful bill was among four introduced that created the State EITC as a “top-priority” TABOR refund mechanism to be paid to qualifying Coloradans at 8.5 percent of the federal EITC during years when there was a surplus of taxpayer revenue. McPherson sponsored another proposal which raised the state EITC from 8.5 percent of the federal level to 10 percent the following year. At the same time, legislators voted to permanently reduce state income taxes from 4.75 percent to 4.63 percent. Qualifying Coloradans also received the tax credit in 2001 before the state’s economy took a turn for the worse.

Since the tax credit was predicated on a TABOR surplus, the EITC wasn’t paid from 2002 through 2005 because of insufficient tax revenue. The credit wasn’t paid in the 2006 or 2007 tax years because the voter-approved Referendum C suspended the TABOR limit for five years to support K-12 education, higher education, health care and transportation. In the years following the Great Recession of 2008, there were no TABOR surpluses and therefore no EITC, though workers needed financial relief more than ever.

But despite bipartisan support, efforts to make the EITC permanent — whether or not there was a TABOR surplus — failed year after year amid concerns about the state’s economy and lack of tax revenues.

In 2008, after several years without an EITC, Farrell-Stevenson and Kathy White of the Colorado Fiscal Policy Institute (then a project of CCLP) crafted a bill to fund the tax credit at 10 percent of the federal level using Unemployment Insurance (UI) surcharge dollars and unused federal dollars — or reserves — from the Temporary Assistance for Needy Families program (or TANF) which provides cash assistance for the lowest-income Coloradans. The measured was sponsored by Rep. John Kefalas and Sen. Betty Boyd. A very active EITC Coalition, which included Colorado Progressive Coalition (now COPA), 9to5 Colorado, All Families Deserve a Chance Coalition, Women’s Lobby of Colorado and dozens of other organizations brought hundreds of community members to the capitol in support.

White, who later continued her work on the EITC through the Colorado Fiscal Institute, said the proposal was supposed to be a “temporary fix” but the business community was “up in arms” about the legislation because they feared it could trigger an increase in required employer UI contribution. Meanwhile, county administrators disliked the notion of tapping into the TANF reserves, despite having reserves that exceeded their annual operating budgets. As a result of the opposition, the bill died swiftly in the House Finance Committee.

“Too many constituencies didn’t like it,” White recalled. “The outcome was really disappointing.”

The following year, Sen. David Schultheis sponsored a bill that would abolish the state EITC and all other TABOR refund mechanisms except for the state Sales Tax Refund. With the economy still in the doldrums at that time, Schultheis reasoned that the state might have different priorities when the recovery came. The EITC Coalition successfully lobbied to defeat the legislation and continued to rally behind the EITC for years to come.

In 2010, House Bill 1002 restored the state EITC as the primary TABOR refund mechanism. In 2013, with Colorado Fiscal Institute leading the EITC Coalition, Sen. John Kefalas, Sen. John Morse and Rep. Daniel Kagan sponsored a successful bill that made the state EITC permanent once it is triggered by a TABOR surplus. The legislation also created a state Child Tax Credit for children under 6, which was made contingent upon Congress passing a tax on internet sales.

With the economy gaining steam, a surplus finally triggered payment of the EITC in 2015, and Colorado residents who qualify have used the now permanent tax credit to defray state income taxes ever since. Though proponents would like to increase the state tax credit to a higher level or expand it so that more Coloradans would qualify, the current EITC still gives working Coloradans a nice boost in income.

“If people have kids, even adding $300-$400 a year can make a big difference,” Robert said.

White said she appreciates the multiplier effect of the EITC. She cited an anecdote where a single mother used the savings from the tax credit to buy diapers in bulk and pay her car insurance along with school fees and swim lessons for her child.

“The EITC is great because people take that money and exercise their own financial acumen and do what’s best for them,” White said. “And that’s what helps get them ahead.”

-By Bob Mook

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