States Can Adopt or Expand Earned Income Tax Credits to Build a Stronger Future Economy

UPDATED : January 19, 2016

by Erica Williams - Center on Budget and Policy Priorities

Twenty-six states plus the District of Columbia have enacted their own version of the federal Earned Income Tax Credit (EITC) to help working families earning low wages meet basic needs.  State EITCs build on the success of the federal credit by keeping people on the job and reducing hardship for working families and children.  This important state support also extends the federal EITC’s well-documented long-term positive effects on children, boosting the nation’s future economic prospects.  

State EITCs provide extensive benefits to children, families, and communities, and are straightforward to administer and to claim.  Lawmakers in states without their own EITC should consider enacting one.  States that have cut back or eliminated their credits should reverse course, and states that have limited their credits so that they only offset income taxes should expand them to help offset the full range of state and local taxes that low-income households pay.  This would vastly enhance the credits’ impact.  By investing in an EITC, states can make a big difference in the lives of low- and moderate-income working families.

Why Consider an EITC?

Many working families with children struggle to make ends meet on low wages.  A full-time job at the federal minimum wage yields about $15,000 ― often insufficient income for a family to afford basic necessities.  The EITC, a federal tax credit for low- and moderate-income workers and their families, rewards work and improves the outlook for low-income children.  State lawmakers can build on the proven effectiveness of the federal EITC to address low wages with a state-level credit.  Like the federal EITC, state EITCs:

• Help working families make ends meet.  Many low-wage jobs fail to provide sufficient income on which to live.  “Refundable” EITCs, which give working households the full value of the credit they earn even if it exceeds their income tax liability, provide low-income workers with a needed income boost that can help them meet basic needs.
• Keep families working.  Refundable EITCs help low-wage working families pay for the very things that allow them to continue working, like child care and transportation.  They are also structured to encourage the lowest-earning families to work more hours.  That extra time and experience in the working world can translate into better opportunities and higher pay over time.  Three out of five filers who receive the federal credit use it just temporarily — for just one or two years at a time.^[1]
• Reduce poverty, especially among children.  Over 10 million children in working families lived below the official poverty line (about $24,000 for a family of four) in 2014;^[2] millions of families modestly above that income level have difficulty affording food, housing, and other necessities.  The federal EITC is one of the nation’s most effective tools for reducing the struggles of working families and children. It kept 6.2 million people — over half of them children — out of poverty in 2013, and helped many with slightly higher incomes make ends meet.  State EITCs build on that record.   
• Have a lasting effect.  A growing body of research finds that young children in low-income families that get an income boost like the EITC provides tend to do better and go farther in school because the additional resources help parents better meet their needs.  And because these children attain more skills and education, they tend to work more and earn more as adults.  This helps communities and the economy because it means more people and families are on solid ground and fewer need help over the long haul.

Figure 1

In addition, low- and moderate-income families in almost all states pay higher state and local taxes as a share of their income than do upper-income families (see Figure 1).  This imbalance reflects states’ heavy reliance on sales, excise, and property taxes, all of which fall more heavily on low-income families.  Some states have increased their reliance on these taxes in recent years by shifting their tax systems away from income taxes, pushing an even larger share of the costs of state services to households earning the least.

More States Building on Federal Credit

In recent years, four states — California (2015), Colorado (2013), Connecticut (2011), and Ohio (2013) —  have enacted EITCs to bolster the wages of struggling families,^[3] and many other states have improved existing credits.  

In 2015, for example:

• Maine expanded its credit by making it refundable;
• Massachusetts raised its credit to 23 percent of the federal EITC from 15 percent;
• New Jersey raised its credit to 30 percent of the federal EITC from 20 percent; and
• Rhode Island raised its credit to 12.5 percent of the federal EITC from 10 percent.

The year prior, Washington, D.C. became the first jurisdiction to expand the credit for workers without dependent children in the home, extending the credit’s reach to childless workers with somewhat higher incomes and setting its value at 100 percent of the federal credit.  Also in 2014:

• Iowa raised its credit to 15 percent of the federal EITC from 14 percent;
• Maryland raised its credit to 28 percent of the federal EITC from 25 percent (the increase is scheduled to phase in over four years);
• Minnesota boosted the total value of its credit by 25 percent;
• Ohio doubled its credit to 10 percent of the federal EITC (though it remains nonrefundable); and
• Rhode Island expanded its credit for most recipients by making it fully refundable, though the state also cut the credit to 10 percent of the federal EITC from 25 percent.

In 2013, Oregon expanded its credit to 8 percent of the federal EITC from 6 percent, and Iowa doubled its credit to 14 percent of the federal EITC.

These increases follow several years in which other states cut back or eliminated this support for families earning low wages.  In 2013, North Carolina allowed its EITC to end after tax year 2013 and cut it by 10 percent in its final year.  In 2011, Michigan cut its credit by 70 percent and Wisconsin cut its credit by 21 percent for families with two or more children.  Connecticut, which enacted a credit in 2011 set at 30 percent of the federal EITC, cut it immediately to 25 percent due to budget problems; the credit now stands at 27.5 percent.  New Jersey cut its credit to 20 percent of the federal EITC from 25 percent in 2010 but reversed that cut and further increased the credit in 2015.   

More than one in three recipients of the federal EITC now lives in a state that has adopted its own EITC, and state EITCs boost the earnings of working families by close to $4 billion annually. 

EITC’s Design Rewards Work

The EITC only goes to working families and is designed to reward their effort.  For families with very low earnings, the EITC increases as earnings rise, which encourages families to work more hours when possible.  Working families with children earning up to about $39,000 to $53,000 (depending on marital status and the number of children in the family) generally can qualify for a state EITC, but the largest benefits go to families with incomes between about $10,000 and $24,000.  Workers without children can also qualify in most states, but only if their income is below about $15,000 ($20,000 for a married couple), and the benefit is small. 

Figure 2

The EITC’s design also reflects the reality that larger families face higher living expenses than smaller families: the maximum benefit varies for families with one, two, and three or more children.  For example, the maximum federal benefit for families with two children in tax year 2015 is $5,548, compared to $3,359 for families with one child.  (As with most other federal tax provisions, the IRS adjusts EITC benefit amounts and eligibility levels each year for inflation.) ^[4]

Figure 2 shows how the EITC works for a single-mother family with one child earning the minimum wage in 2015 (about $15,000 a year for full-time, year-round work).  For every dollar she earns, she gets 34 cents in EITC benefits.  The value of the credit continues rising at that rate until her earnings reach $9,880.  At that point, she receives the maximum benefit of $3,359.  Once her earnings exceed $18,110, the credit shrinks by about 16 cents for each additional dollar of earnings until reaching zero at about $39,000 in earnings.

Most States Model Their EITCs on Federal Credit

Nearly all state EITCs are modeled directly on the federal EITC:  they use federal EITC eligibility rules and are a specified percentage of the federal credit.  (The percentages are shown in Table 1.) 

A few state credits, however, differ somewhat from the federal credit:

• Minnesota uses federal eligibility rules and its credit parallels major elements of the federal structure, but it has its own schedule for the income levels at which the credit phases in and out. 
• Indiana uses old federal guidelines that exclude recent expansions and improvements to the federal credit.  
• Washington, D.C.’s expanded EITC for workers without dependent children will phase in following federal guidelines, but the maximum credit will extend to 150 percent of the poverty line (for an individual), and the credit will fully phase out at twice the poverty line.
• California’s newly enacted EITC is available to just a small portion of workers who claim the federal credit — those with incomes less than $14,000 for the largest family size — and self-employment income cannot be used to qualify for the credit.^[5]     

Twenty-three states and Washington, D.C. follow the federal practice of offering a fully refundable EITC.  (See Figure 3.)  Without this feature, state EITCs would fail to offset the other substantial state and local taxes families pay.  It is the reason that the EITC is so effective at boosting income and reducing hardship, because it lets families keep more of what they earn and helps them keep working despite low wages. 

Figure 3

The remaining three state EITCs — in Delaware, Ohio, and Virginia — are available only to the extent that they offset a family’s state income tax.  Thus, while these non-refundable EITCs can reduce income taxes for families that owe them, they do not make up for other taxes that working families pay; nor do they do much, if anything, to help keep families working and out of poverty.  Ohio’s EITC is limited even further, to no more than half of state income taxes owed on taxable income above $20,000.