An Earned Income Tax Credit, an issue that is taking center stage as part of the discussion of the Puerto Rico tax reform, “does justice to workers” and is “good public policy,” Cecille Blondet, director of nonprofit Espacios Abiertos, said.
Upon unveiling a study it recently commissioned from Economist María E. Enchautegui, Espacios Abiertos believes re-establishing the EITC is a positive proposition.
“We have an opportunity here to do justice to workers with an incentive that has proven to be a very effective tool against poverty in the United States and other countries around the world,” said Blondet.
“Our laws grant a wide range of credits and incentives to corporations, but few or none to low- or middle-income individuals,” she added.
“It’s time to refocus our fiscal policies to do justice to the individual, too, particularly those who due to adverse situations outside their control live under financial hardships,” Blondet said.
Meanwhile, Enchautegui said the EITC is “good public policy” because it is tied to remunerating behaviors that the government wants to incentivize.
“In an atmosphere of severe financial crisis, five-year budget plans, and budget control by a the Financial and Management Board form Puerto Rico, it’s important that the EITC that’s finally designed be sustainable in the years to come, especially its potential to achieve the objectives that inspire it,” she said.
Enchautegui’s study, titled “Earned Income Tax Credit: Second Round,” is based on an analysis of the previous experience with the EITC in Puerto Rico, other jurisdictions’ experience, and the characteristics of the credit being proposed now.
“We can’t be reinventing the wheel every time a tax incentive is created. We have to extract lessons from past incentives. This is a good time to review the lessons of the EITC of 2007-2013 and design a credit that encourages employment and reduces poverty,” said Enchautegui.
The Earned Income Tax Credit of the past did not have the hoped-for impact and its effectiveness as a public policy tool for social welfare was limited in large part because the amount of the incentive per participant was too low, the economist added.
Puerto Rico has experience with a local Earned Income Tax Credit. Law No. 117 of July 4, 2006 created an incentive for workers that was in effect from tax year 2007 through FY 2013. In 2014, under the García Padilla administration, legislation was passed eliminating this incentive, the justification being the financial crisis.
This EITC, which has proved to be an effective tool for doing justice to low-income workers in the United States and other countries, will now have a second turn at bat in Puerto Rico. Both the New Fiscal Plan presented by the Puerto Rican government and the plan certified by the Oversight Board on May 30, propose adoption of a work credit, to begin January 2019.
Recommendations based on previous experience
In her presentation, the economist outlined several recommendations, including considering the desirability of offering a small credit to many individuals or a larger credit to fewer people.
Enchautegui suggested that to have an impact on the labor force and on poverty, a larger credit to a focus group is the more desirable alternative.
Another of the study’s recommendations is that the EITC be concentrated on families with children of up to 17 years of age. In addition, the economist insists that a minimum income from employment should be required to be eligible for the EITC, so that the individual shows his or her attachment to the labor force. Neither the eliminated EITC nor the EITC now being proposed calls for a minimum income.
The study also insists on the need for the cost projections of the EITC to be accurate, in order to ensure the program’s sustainability. These projections must be dynamic, because if the EITC meets it objectives, the number of beneficiaries will increase over time.
For Enchautegui, the fiscal plan’s projections do not appear to be realistic, because for five years the number of taxpayers benefiting from the tax credit are projected to hold steady at about 288,000 individuals, and for that projection the numbers from 2007 to 2013 were used.
“But these numbers reflect that the percentage of tax returns that received the tax credit rose from 21 percent in 2006 to 48 percent in 2013, in line with the increase in the total number of tax filings by low-income individuals,” said the University of Puerto Rico professor.
Enchautegui stressed that a stable design will have a greater impact on the labor force. And once again, she referred to the EITC experience from 2007 to 2013, when the incentive’s parameters changed five times in seven years, making it difficult for individuals to plan their labor offerings in response to the credit.
Benefits should be granted to the total tax unit
The economist underscored that the program’s benefits should be granted on the basis of the tax unit in its entirety, not to particular eligible individuals within a unit.
In the 2007-2013 EITC, 11 percent of the total dollar amount of the credits were given to tax units whose income in the total income reported by the family were outside the EITC’s income limits, but the benefits were still given because one of the members of that family unit met the income criteria.
Daniel Santamaría, a public policy analyst with Espacios Abiertos, said “the implementation of the new earned income tax credit promises to be a step in the right direction for achieving the public policy objectives that led to its initial creation.”
“However, to ensure its sustainability and maximize its impact, it’s important to prioritize and concentrate the incentive so that it leads to employment in the social groups in which the academic literature has shown its greatest effectiveness — for example, female heads of households or single mothers with young children,” he said.