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Why Not Peg EITC Benefits to the Local Cost of Living?

David Callahan

It's no secret that the cost of living varies widely across different parts of the United States, and that it can be much tougher to make ends meet on a low wage job in Manhattan, New York than in Manhattan, Kansas. So here's an obvious idea: Let's improve the Earned Income Tax Credit so that its benefits track with local needs. 

With President Obama proposing an increase to the EITC in his new budget, now's a good moment to look at ways this crucial lifeline for low-income households could work better. 

There is a huge amount of data on cost-of-living by geographic location, and what it takes for an individual or family to meet basic needs in different places. The Economic Policy Institute has crunched the numbers to show that it can literally cost twice as much to stay afloat in an affluent area like Long Island compared to, say, upstate New York. (EPI even has a handy online calculator to estimate family budget needs in 615 different areas of the U.S.) 

Yet right now, workers get the exact same EITC no matter where they live. That doesn't make much sense. 

An alternative way of doing thing is not hard to imagine, and could operate simply. Drawing on its own data, the federal government could create variable EITC levels by geographic area so when low-wage workers file their taxes, their EITC would be based on the zip code of the tax return. If you live in a high-cost area, you get more; live in a low-cost area, you get less. 

It would be important in making this change that current benefit levels don't fall for anyone, but rather households living in high-cost areas see an increase. Ideally, policymakers would draw on the research that's been done on what's required to meet basic needs to establish benefit levels that ensure that every working household brings in enough to get by, wherever they live. 

Different benefits levels by location would obviously create temptations for fraud, since putting down a different a zip code could mean a bigger tax refund. But that's a surmountable problem, if the IRS compared tax return addresses to the post office's data base on mailing addresses. And, of course, there are penalties for fraud. 

At this point, you may be thinking: hey, if the EITC levels are based on local cost of living, why not a variety of other federal benefits and wage protections? Why not peg the minimum wage by Census tract? Or SNAP benefits? That's a good question, but ultimately things could get pretty complicated. 

Let's keep things simple and take it one step at a time: Improve the EITC so it meets people's actual needs based on where they live.