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For 31 years, the federal Earned Income Tax Credit (EITC) has been a fixture in the nation's arsenal of anti-poverty programs. In addition to bringing more children above the poverty line than any other federal program, the EITC has become a formidable and efficient generator of economic stimulus for U.S. cities.
A newly released study funded by the Nashville Wealth Building Alliance documents the EITC's growing fiscal influence in metropolitan areas, focusing research on Nashville, Tenn. In addition to examining the economic impact of the EITC, the study also performed a geographic analysis to assess the EITC's role in individual neighborhoods, providing useful market data on low-income households for use by anti-poverty program administrators.
Defining the local impact of federal programs
The EITC has become one of the top three federal assistance programs, adding millions of freely-expendable dollars to any given region's low-income labor force. The tax credit has boosted labor productivity among its recipients and increasingly replaced their dependence on less efficient state and local welfare administrations. This is good news for everyone, rich or poor. However, most federal studies of the policy's impact fail to quantify these local or regional benefits.
A regional "input-output" model, like the one used in this study, details some significant benefits to the local economy when federal money is recycled into local consumer spending. For example, we found that nearly 20 percent of every EITC check ends up with health care providers; the credit's addition of $34 million in annual revenue from low-income clients to local providers is critical knowledge at a time when the industry struggles to recover the cost of treating higher-risk patients.
Economic impacts of the federal EITC in Nashville
"The State of the Earned-Income Tax Credit in Nashville" is one of only a handful of studies nationwide that takes a detailed look at the impact of these large, efficient monetary transfers on a metropolitan economy. Using taxpayer data from years 1997-2004, the study found a robust economic output response that added to business revenue as well as significant increases in job creation as a result of EITC-supported household expenditures.
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The EITC also contributed to expenditures on health care, electric bills, big-ticket retail purchases and family outings to local restaurants, thus generating "multiplier" effects that reverberate through the local economy and become income for other local businesses, employees and governments.
Including these multiplier effects, the EITC provided $81.8 million in economic output to Davidson County-Nashville during 2005. Over the 8-year period analyzed by the study, these output impacts totaled $642 million. When the study area was expanded to the Nashville Metropolitan Statistical Area (MSA), the EITC brought in over $1.25 billion in economic stimulus.
The multiplier for EITC-recipient expenditures was 1.07: each EITC dollar spent in the Nashville economy produced that dollar plus an additional seven cents in economic output. Even though some EITC dollars are spent on goods and services produced outside the region, local employers and employees benefit nonetheless.
Over a third of the local EITC money received is converted to salary and wage earnings for Nashville-area residents, many of whom are low-income and likely eligible for the EITC themselves. Of the 708 jobs (full-time equivalent) in Davidson County that were created by EITC expenditures in 2005, 150 were in retail, earning an average of $31,348; 81 were in accommodations/food services, earning an average of $20,769; and 80 were in other service-oriented business, earning an average of $19,881. EITC benefits also support high-income employment as well; the health/social services industry benefited from $15.9 million in additional industry output and a total of 132 jobs within an average salary of $69,301.
In fact, the health care industry was the largest beneficiary from Davidson County with $16 million in addi-tional revenue; in the 8-county metropolitan area, these EITC-dependent revenues rose to $34 million. Retailers in Davidson County and the Nashville MSA brought in an additional $10.5 and $22.5 million, respectively. The local financial, wholesale and real estate/rental industries registered $5 to $7 million for Davidson County and $11 to $14 million for the MSA.
The broader picture suggests EITC has helped smooth consumer spending in Nashville through the economic downturn of 2000-2002. The size and amount of disbursements from year to year proved sensitive to general macroeconomic conditions, tending to expand and contract in opposition to annual changes in economic growth.
As illustrated in the graph, Nashville's EITC disbursements declined in the three years following 1997, tracking across-the-board economic gains until 2000 when the Dow Jones Industrial average started its three-year fall. Strong growth in the Nashville EITC from 2000-2002 continued to track heavy losses in the market and flattening U.S. personal incomes. However, personal incomes in Nashville defied expectation and continued to rise (albeit at a slightly slower pace) as if little had happened. Despite mismatches between the EITC and personal income over the eight-year snapshot, in general the credit's counter-cyclical growth has cushioned the softening economy's blow to the region, its low-skilled labor force and businesses that depend on a healthy middle class.
Conclusion
Though the positive economic impacts to cities like Nashville are robust, the EITC remains underutilized. The number of eligible persons who fail to claim the EITC is estimated at 25 percent of those currently receiving the credit. Failure to collect the EITC has cost Nashville an estimated $19.9 million in total economic output. Thus work remains to ensure that no low-income household leaves this credit "on the table."
This article was written by John N. Haskell, author of "The State of the Earned-Income Tax Credit in Nashville."
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