About Earned Income Tax Credit
A state Earned Income Tax Credit (EITC) supplements the federal credit and works as a rebate for state taxes paid by low-income working people. Currently, 24 states, including the District of Columbia, have enacted a state EITC, which is often a percentage of the federal credit. EITC legislation has been passed in states controlled by both Republicans and Democrats and has been supported by both business groups and social service advocates.
In 2008, the Family Economic Success Task Force recommended that states should create new or expand existing state Earned Income Tax Credits, and exempt the credits from Temporary Assistance for Needy Families (TANF), Medicaid and food stamp programs. States should make this state tax credit refundable, increasing tax refunds for low-wage working families, protecting them against tax refund anticipation loans. States should consider other tax incentives or credits for families to aid in asset building and long-term financial stability, and provide low-income families with free tax preparation services, including programs at State Employee Credit Unions.
How are state EITCs funded?
The cost of state earned income tax credits (EITCs) may be relatively modest because they are more specifically targeted to low- and moderate-income working families than many other major tax cuts. State EITCs are financed in whole or in part from funds available in a state’s general fund — the same funding source typically used for other types of tax cuts. When an EITC is used to offset the effects of a regressive tax increase, such as a sales tax increase, a part of the proceeds of the revenue increase may be set aside for the EITC. A state EITC can complement a state’s welfare program by assisting low-income, working families with children. [1]
According to the Center on Budget and Policy Priorities, in 2006, the annual cost of refundable state EITCs in recent years has ranged from about $17.3 million in Vermont to $591 million in New York, less than 1 percent of state tax revenue in each state.
The cost of a state EITC depends principally on four factors:
- the number of families in a given state that claim the federal credit
- the percentage of the federal credit at which the state credit is set
- whether the credit is refundable or non-refundable
- how many state residents who receive the federal credit also learn about and claim the state credit [2]
[1] Center on Budget and Policy Priorities, http://www.cbpp.org/cms/?fa=view&id=164
Why is it important for an EITC to be refundable?
It is the refundable nature of the earned income tax credit (EITC) that makes it such a powerful, poverty-fighting tool. The EITC provides a very considerable boost to low-income workers' take home pay, making each hour worked far more valuable to a struggling family. A non-refundable credit allows taxpayers to benefit only to the extent that they owe taxes. Such a credit can reduce a family’s taxes to zero, but if a family does not owe any taxes then they cannot benefit from the credit. [2]
A refundable credit allows families to benefit from the full value of the credit they have earned even if they owe less in income tax than the amount of the credit. If the amount of the EITC exceeds the amount of income tax owed, the difference is paid back to the filer in the form of a rebate. At least part of the refundable credit offsets payroll and sales taxes, which, for low-income working families, are often larger than income taxes. [2]
[2] State EITC, http://www.stateeitc.com
Facts about Earned Income Tax Credit
- The Earned Income Tax Credit (EITC), created in 1976, has grown over the past 30 years into the nation’s largest program for the so-called “working poor.” In tax year 2006, more than 22 million lower-income families claimed over $43 billion via the EITC. (Brookings Institute)
- Research indicates that each year state Earned Income Tax Credits lift approximately 4 million people, including 2 million children, out of poverty. (Center on Budget and Policy Priorities)
- Research shows that state EITCs raise employment among single parents and that the resulting increase in earnings boosts economic activity within a state. (Center on Budget and Policy Priorities, Roosevelt Institution at Yale College)
- From 2006-2008, five states have enacted new EITC legislation—WA, NC, LA, NM, and MI—bringing the total number of states that have enacted EITC legislation to 24. Eight other states improved their credits: IL, IN, IA, KS, NE, NJ, OR, and DC. (Center for the Study of Social Policy)
- The nation’s 100 largest metro areas were home to an estimated 13.8 million EITC-eligible tax filers in 2005. That represents about 16% of their estimated 86 million tax filers that year. Overall, those workers and families were eligible to claim EITC amounts totaling $25.1 billion, or an average of more than $1,800 per filer. (Brookings Institute)
States with Earned Income Tax Credit
The above map, created by the Center on Budget and Policy Priorities, shows the 24 states (included the District of Columbia) that have enacted state EITC legislation as of June 2009.
The below table, created by the Center on Budget and Policy Priorities, is a list of state EITCs based on the federal EITC.
| State |
Percentage of Federal Credit (Tax Year 2008 Except as Noted) |
Refundable? |
Workers Without Qualifying Children Eligible? |
| Delaware |
20% |
No |
Yes |
| District of Columbia |
40% |
Yes |
Yes |
| Indiana |
6% (to 9% in 2009) |
Yes |
Yes |
| Illinois |
5% |
Yes |
Yes |
| Iowa |
7% |
Yes |
Yes |
| Kansas |
17% |
Yes |
Yes |
| Louisiana |
3.5% |
Yes |
Yes |
| Maine |
5% |
Partially (in 2010) |
Yes |
| Marylanda |
25% |
Yes |
Yes |
| Massachusetts |
15% |
Yes |
Yes |
| Michigan |
10% (to 20% in 2009) |
Yes |
Yes |
| Minnesotab |
Average 33% |
Yes |
Yes |
| Nebraska |
10% |
Yes |
Yes |
| New Jersey |
22.5% (to 25% in 2009) |
Yes |
Yes |
| New Mexico |
10% |
Yes |
Yes |
| New Yorkc |
30% |
Yes |
Yes |
| North Carolinad |
3.5% (to 5% in 2009) |
Yes |
Yes |
| Oklahoma |
5% |
Yes |
Yes |
| Oregone |
6% |
Yes |
Yes |
| Rhode Island |
25% |
Partiallyf |
Yes |
| Vermont |
32% |
Yes |
Yes |
| Virginia |
20% |
No |
Yes |
| Washington |
5% (to 10% in 2010)g |
Yes |
Yes |
| Wisconsin |
4% — one child |
Yes |
No |
| |
14% — two children |
|
|
| |
43% — three children |
|
|
Notes: From 1999 to 2001, Colorado offered a 10% refundable EITC financed from required rebates under the state’s “TABOR” amendment. Those rebates, and hence the EITC, were suspended beginning in 2002 due to lack of funds and again in 2005 as a result of a voter-approved five-year suspension of TABOR. Under current law, the rebates will resume in 2011, but a recent income tax cut that also depends on the rebates is likely to exhaust the funds, leaving the EITC unfunded; a - Maryland also offers a non-refundable EITC set at 50 percent of the federal credit. Taxpayers in effect may claim either the refundable credit or the non-refundable credit, but not both; b - Minnesota’s credit for families with children, unlike the other credits shown in this table, is not expressly structured as a percentage of the federal credit. Depending on income level, the credit for families with children may range from 25 percent to 45 percent of the federal credit; taxpayers without children may receive a 25 percent credit; c - Should the federal government reduce New York’s share of the TANF block grant, the New York credit would be reduced automatically to the 1999 level of 20 percent; d - North Carolina's EITC is scheduled to expire in 2013; e - Oregon's EITC is scheduled to expire at the end of 2013; f - Rhode Island made a very small portion of its EITC refundable effective in TY 2003. In 2006, the refundable portion was increased from 10 percent to 15 percent of the nonrefundable credit (i.e., 3.75 percent of the federal EITC); g - Washington’s EITC is worth five percent of the federal EITC or $25, whichever is greater. When the matching rate rises to ten percent in 2010, the minimum value will rise to $50.
Earned Income Tax Credit Resources
