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Tax credits: A better way?

While advocates rally for increased minimum wage, others see options

Bryan P. Sears//Daily Record Business Writer//February 3, 2014

Tax credits: A better way?

While advocates rally for increased minimum wage, others see options

By Bryan P. Sears

//Daily Record Business Writer

//February 3, 2014

An overhaul of state and federal earned income tax credits may be more effective at helping low-wage workers than an increase in the state’s minimum wage, according to a paper produced by the Maryland Public Policy Institute.

Minimum wage rally
Gov. Martin O’Malley speaks at a minimum-wage rally at St. Vincent de Paul Catholic Church on Baltimore’s East Side. (The Daily Record / Maximilian Franz)

The recommendation is the preferred option of three possibilities contained in a paper obtained by The Daily Record.

“It’s an option that looks a little more realistic if your concern is about helping people who have sub-poverty jobs,” said its author, Thomas Firey, a senior fellow for the nonprofit, which promotes policies based on a free enterprise, limited-government philosophy.

But Firey’s recommendation met with mixed reaction from a leading proponent of increasing the minimum wage in Maryland.

“It’s a valid conversation to have,” said Matthew Hanson, campaigns director for Maryland Working Families, which supports the proposed increase. “The minimum wage is not the only thing we can do for the poor. It’s a false choice to say it’s this or that, it’s one or the other.”

Firey, who is also managing editor of the Cato Institute’s magazine Regulation, said the best way to help workers attempting to live on minimum wage income is for the state to adjust the tax credits.

“Get rid of the minimum wage all together and adjust the tax credit,” Firey said. “It’s more focused on households and has no employment effect. It’s the more progressive solution because it forces the burden of paying for services up the tax chain.”

Firey’s seven-page paper comes during a time of debate in the Maryland General Assembly and in Washington over raising the minimum wage from $7.25 an hour to $10.10. Bills in the House of Delegates and the Senate are scheduled for hearings on Feb. 11 and Feb. 13 respectively.

Gov. Martin J. O’Malley has backed the increase, which includes a provision linking future increases to inflation. Legislators are expected to pass higher minimum wage this year, but some top Democrats have expressed discomfort with any wage of $10 or more — and with automatic increases.

At the same time, business leaders have expressed concern that increasing the minimum will result in layoffs or fewer hires, and might even lead to businesses closing.

“It seems like a tiny, tiny, tiny bit of help traded for an increase in unemployment,” Firey said. “That seems like an odd tradeoff.”

O’Malley, speaking Monday at a rally on Baltimore’s East Side in support of increasing the minimum wage, discounted those views.

“That’s not the experience whenever we raise the minimum wage,” O’Malley said. “Quite the contrary.”

O’Malley said increasing the minimum wage will improve the overall economy in the state.

Hanson, of Maryland Working Families, agreed.

“Look at all the studies going back 30 years and there’s no negative impact on job growth,” said Hanson, citing a recent study by Center for Economic and Policy Research, an organization that favors an increase in the minimum wage. “I think it’s important that we challenge the idea that there is a negative impact on the economy.”

But the argument is not as settled as that. Even the Center for Economic and Policy Research cites continued research into the issue that attempts to make sense of sometimes contradictory evidence.

Kevin McIntyre, an associate professor of economics at McDaniel College, said it is clear that an increase in the minimum wage will cause job losses. Those loses, however, would mostly felt by a small number of people — those who earn minimum wage.

“There just aren’t that many who work for minimum wage as their primary source of income,” said McIntyre, citing estimates that place the total number of people earning minimum wage at about 3 percent of the total workforce. “You’re looking at a segment of the labor force that is just a fraction of the grand scheme of things.”

In the end, McIntyre said, a successful effort to raise the minimum wage “is probably not a good idea.”

“You have to balance it: are the people who are likely to be helped by this, are they ultimately going to be helped more than the people who will be hurt? Because make no mistake about it, that tradeoff exists,” McIntyre said.

But the McDaniel professor said the proposal to adjust the earned income tax credit isn’t likely to produce substantially better results.

“Working families who are already earning the earned income tax credit already face a negative tax situation where the amount of programs and services and transfers they receive exceed the taxes they are paying,” McIntyre said.

“The solution isn’t an easy stroke of the pen,” McIntyre said. “Ultimately what we want to do is have the working poor transcend all of this. It’s a broader core issue in economic development that involves larger issues such as education and training. These are long-term issues that transcend election cycles.”


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