A new policy brief by the Badger Institute details why Wisconsin’s Earned Income Tax Credit (EITC) penalizes some low-income parents who marry.
The institute recommends that state lawmakers implement a “honeymoon” policy, similar to one proposed in the last biennial budget, which did not pass. The policy would hold families harmless for the first three years of their marriage when determining their state EITC benefit.
“Marriage penalties” refer to means-tested public benefits, which are reduced when previously unmarried, cohabiting couples decide to marry. Benefits may be reduced because income for the married couple is considered jointly instead of separately, or becomes higher than the income eligibility threshold for the public program.
The institute’s research suggests that penalties primarily affect decision-making among households at the higher end of eligibility for such public programs.
“Federal and state programs too often penalize marriage,” the authors of the report argue. “Where it is within the purview of state authority to change this, especially for low-income families, it is common sense that our leaders should.”
Wisconsin’s EITC is based on the federal EITC, and its benefits are calculated as a percentage of the federal credit for which filers are eligible and varies by family size.
The EITC penalizes married couples in Wisconsin if a parent working at low wages is cohabiting with the other parent, and that other parent earns a meaningful amount of money, pushing the family above the EITC threshold. As a result, the couple will be worse off on net because if they were to marry their combined income for tax purposes would reduce or eliminate the EITC benefit, the report states.
As a result, the couple experiences an incentive to stay unmarried, meaning public policy shapes behavior.
“If we accept that public programs should not punish working families for making marital commitments, policy-makers at the state level should consider fixing what is within their control to fix: the state EITC’s marriage penalty," The Badger Institute writes. Addressing this problem would not “incentivize” marriage – it merely would attempt to be neutral with respect to marriage and to do no harm.”
The report cites a substantial body of academic research that indicates that the EITC encourages parents from entering the workforce who might not have considered it otherwise.
Research also indicates that family structure affects child outcomes and that public policy affects taxpayers’ decisions about marriage, the Badger Institute states.
National data reveals that marriage rates have declined in the U.S. since the 1970s, and disproportionately among low-income and working-class families. As a result, the Badger Institute argues, “It is sensible to look at the public programs in which such families are involved.”
The report, which cites data from Brookings Institute, Harvard University, Syracuse University, and many others, explains that supporting marriage does not negate the “heroic efforts” made by single parents. It states, “And it does not mean that children raised by single parents or in other family structures cannot succeed – many do – or that children raised by married parents always succeed – many don’t. It simply suggests that on average, family structure matters and is an important factor to think carefully about if child outcomes are an objective.”
The solution the Badger Institute proposes would allow parents to take the greater of the credit they would have received had they not married, or the credit they normally would receive under the status quo for married filers.
Doing so would come at a modest cost – as proposed in the 2017-2019 budget, about $1.5 million per year, the institute notes. Implementing this policy would communicate to low-income parents: “When it comes to making the decision to marry, make the best decision for you and your family. The government will not punish you for it.”