Rewarding Work with a State Earned Income Tax Credit

Even though the U.S. economy has been expanding at a record pace, nearly one in five American children still live in poverty. Even though federal welfare reform has been hailed as a success, former welfare recipients often earn near-poverty level wages at their new jobs. And even though there has been a loud cry for tax cuts in recent years, only 14 states and the District of Columbia have adopted the single most successful tax cut program for the working poor – the Earned Income Tax Credit. Refundable credits Colorado District of Columbia Kansas Maryland Massachusetts Minnesota New Jersey New York Vermont Wisconsin Non-refundable credits Illinois Iowa Maine Oregon Rhode Island The federal Earned Income Tax Credit (EITC) was created in 1975 to provide tax relief to low-income workers. The program was expanded in 1986, 1990 and 1993, and has now become a central part of federal efforts to fight poverty and move Americans from welfare to work. Most of the federal EITC’s benefits are targeted towards families with children. In tax year 2000, families with two or more children can receive up to $3,888 and families with one child can receive up to $2,353. Workers who have no children living with them are only eligible to receive up to $353 from the federal EITC. The federal program is a “refundable” credit, which means if the credit exceeds a family’s total income tax liability, the difference is paid to the family as a refund. If the family owes no income tax at all, they receive a check for the entire EITC. Five states have less effective “non-refundable” EITC statutes. In those states the credit can erase tax liability but the poorest wage-earners, with incomes too low to owe any taxes, receive no benefit at all. Although the federal EITC has existed for 25 years, it has only recently gained momentum at the state level. Just since 1997, eleven states and the District of Columbia have adopted or substantially increased EITCs. In the 2000 legislative sessions, for example, EITC laws were adopted in Illinois, Maine, New Jersey and DC, and the EITC was substantially expanded in Maryland, Colorado, Vermont, New York, and Minnesota. The State EITC has become a popular program because it is both good policy and good politics: Proven to reduce poverty. The federal EITC helps more working families and more children out of poverty than any other government program. According to Census Bureau data, the EITC lifts 4.8 million people out of poverty, including 2.6 million children. An expanded EITC helps offset the high costs of health care, child care, school supplies, clothing and other necessities of life. Aids welfare–to-work initiatives. At its maximum, the federal EITC pays working poor families 40 cents for every dollar earned. This, and additional state EITC subsidies, increase the incentive for individuals to move from welfare to work. Finely targeted and effective in reaching the poor. The program puts extra dollars directly into the pockets of people who need help the most – those who are working for poverty-level wages. According to one estimate, 85% of those eligible for the credit apply for it. Tax administration is simple, efficient and non-bureaucratic. Because it is a fairly straight-forward tax credit, the EITC is simple to administer. Nearly all of the funds spent on EITC programs go to workers who need the money rather than government administration costs. Bipartisan support. The federal EITC was enacted during the presidency of Gerald Ford and expanded under the Reagan, Bush and Clinton administrations. Similarly, state EITC programs have been created by governments led by both Democrats and Republicans and supported by both business groups and social service advocates. It is simply unacceptable to push people off the welfare rolls and close our eyes to their continued poverty. In this time of national prosperity, no American who works full-time and supports a family should be poor. That’s the philosophy behind the state EITC. An extensive discussion of the EITC is available on-line from the Center on Budget and Policy Priorities at www.cbpp.org . For a state model EITC, refer to the California Budget Project at www.cbp.org. Also see CPA’s recently released Policy Brief on the EITC.