North Carolina bill seeks to restore state’s earned income tax credit

(The Center Square) – North Carolina lawmakers have proposed a bill to restore the state’s earned income tax credit.

Senate Bill 181 would set North Carolina’s earned income tax credit at 5% in the 2021 tax year until the 2025 tax year. The measure was introduced by Sen. Mujtaba Mohammed, D-Mecklenburg, and co-sponsored by Sens. Valerie Foushee, D-Chatham, and Paul Lowe, D-Forsyth.

Fiscal researchers estimate the change could save taxpayers about $120 million but could be more because of the recent expansion of the federal earned income tax credit passed through the American Rescue Plan Act of 2021, which was signed into law Thursday by President Joe Biden.

“There are, however, changes in the COVID relief bill at the federal level (that) may include some expansions of the earned income tax credit program,” General Assembly fiscal analyst Rodney Bizzell said last week in a statement. “Since the North Carolina credit is tied to the federal credit, this may result in the estimated North Carolina total amount being slightly higher if that legislation is enacted by Congress.”

Earned income tax credits can be used cut the amount of taxes someone owes and could result in a tax refund increase. The amount of the credit varies based on how much a person makes and the number of dependents.

State earned income tax credits can be coupled with the federal credit for low-income taxpayers to reduce their state income tax liability, according to the Internal Revenue Service. About one million North Carolinians claimed the state’s earned income tax credit annually before it was eliminated in 2014, data shows. North Carolina implemented an earned income tax credit in 2007 at 3.5% of the federal credit and increased the rate to 5% in 2008. It was reduced to 4.5% in tax year 2013.

Joe Coletti, a senior fellow at conservative think tank John Locke Foundation, said the earned income tax credit is complex and could lead to errors.

“It would provide only a fraction of the value of the federal tax credit for families with all of the propensity for mistakes, even fraud, and a large cost to the state,” Coletti said.

SB 181 is now in the Committee On Rules and Operations of the Senate. It must be approved in both chambers of the General Assembly before being sent to Gov. Roy Cooper for final approval.

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