EITC: an answer to minimum wage riddle?

Drug Store News, Feb 6, 1989 by Ken Rankin

EITC: An answer to minimum wage riddle?

The minimum wage battle of 1987-88 ended in a Senate filibuster that doomed all chances for an increase in the national hourly pay floor. The minimum wage battle of 1989-90 is already underway, and for the drug store industry the stakes are higher than ever.

*On one side of the issue: organized labor and other advocates of a rising minimum wage. They contend that the minimum wage should serve as an anti-poverty device by serving as a safety net for the working poor. If the minimum wage is allowed to be eroded by inflation, as it has been for the past eight years, many low-income families will find it impossible to work their way above the poverty level. *On the other side: most economists and business groups, including the drug store industry. They maintain that a rising minimum wage fuels inflation while reducing job opportunities for the unskilled. Moreover, since the vast majority of minimum wage earners are not from poor families, they argue that the wage floor serves as a notoriously inefficient anti-poverty device.

This year's legislative confrontation over the minimum wage will be structured somewhat differently than those of the past.

For their part, supporters of a wage hike have already fired the first shot. Indeed, on the first day of the new 101st Congress, House Education and Labor Committee Chairman Augustus Hawkins (D-CA) unveiled the 1989 minimum wage bill.

Like last year's proposal, the new legislation calls for a whopping 39 percent boost in the hourly rate, from $3.35 to $4.65. The additional $1.30 per hour would be phased in over three years (starting next Jan. 1), and independent druggists as well as other small businesses with annual sales under $500,000 would be exempt from the federal pay requirements.

Unlike last year's version, however, Hawkins' new bill does not call for "indexing" the hourly wage rate to require annual adjustments for inflation. Instead, the measure would create a new federal review board charged with recommending minimum wage increases to Congress every two years.

In announcing the new minimum wage proposal Hawkins noted that the present $3.35 minimum rate has not been adjusted since 1981, he stressed that "since that time the cost of living has risen more than 30 percent," and that "in today's dollars the current minimum wage is worth only $2.56."

Critics of raising the minimum wage don't dispute Hawkins' arithmetic, but they do take exception to his premise. Raising the minimum wage to $3.35 in 1981 was a mistake that wiped out millions of job opportunities for low-income workers, and raising it again now would only compound that error, they maintain.

This year, however, there is a third option. The alternative would eliminate the Federal minimum wage altogether and, instead, address the needs of the working poor by an enhanced Earned Income Tax Credit (EITC).

The EITC, a sort of "negative income tax"--first implemented in 1975--was originally designed to off-set rising Social Security taxes for the working poor. Rep. Thomas Petri (R-WI), however, has come up with the idea of using the Earned Income Tax Credit as an alternative to the minimum wage.

Under Petri's plan, low-wage workers would earn federal subsidies (i.e. tax credits) based on need and family size. The EITC subsidy would gradually phase out as the family's income rises, and would be eliminated altogether for those earning over $18,000 annually. An individual with four dependents and an income below the federal poverty line, for example, would be eligible for a tax credit of $2,500.

The advantages of Petri's approach would be that benefits are targeted to low income families and that the plan would not wipe out any jobs for unskilled laborers. According to the Congressional Budget Committee, Petri's plan would cost billions of dollars less to implement than Hawkins' plan to raise the minimum wage.