- Basics
Enacted by Congress in 1975, the Earned Income Tax Credit (EITC) is a federal income tax credit for lower income employed individuals and families. It operates as the largest US antipoverty tool, lifting millions of Americans out of poverty by supplementing earnings for the working poor. Since enactment in 1975, Congress has expanded the federal EITC with bi-partisan support. In tax year 2009, the EITC provided nearly $58 billion in reduced or eliminated tax liability and cash refunds to more than 25 million low-income families. In 2009, the Recovery Act, temporary expanded the scope of the EITC fo those families with three or more children and married couples; in 2010, this expansion was extended another two years (through December 2012).
In addition to the federal EITC, 24 states (and the District of Columbia) have adopted a state version of the EITC to supplement the federal credit and reduce the state and local tax burden on low- and moderate-income working families. Almost all state EITCs are “refundable,” meaning that if the size of the family’s credit exceeds the amount of state income tax it owes, the family receives the difference in the form of a refund check. States with EITC programs use the same eligibility rules as the federal EITC, meaning only people who work can qualify for the credit. To simplify the process, most states typically use a fixed percentage of the federal credit to calculate the state credit. State credits range from 3.5 percent of the federal credit to 50 percent of the federal credit. The Tax Policy Center has a clear tabular summary of state EITC credits.
- Current
The EITC is popular with policy makers in part because it rewards work. The credit operates as a wage supplement, up to the point that the maximum credit is reached. By making work more remunerative, it is expected that the EITC draws additional people into the workforce and facilitates the transition from welfare to work. State campaigns have generally focused on expanding the EITC by increasing the percentage of the federal credit used to calculate the state credit.
In a number of states, the EITC has faced budgetary challenges: In Colorado, the state EITC is funded by rebates generated by the state’s TABOR amendment and credits have been suspended when funds were insufficient. In Washington, which does not have a state income tax, the state EITC must be funded by appropriation, and has been suspended (most recently in 2009) for lack of funds. In Michigan, Governor Snyder proposed eliminating the state program, and the Senate (May 2011) compromised by reducing the state credit from 20 percent of the federal EITC to 6 percent.
Each year millions of eligible workers risk (estimates are about a quarter of those eligible) missing out on these important federal tax benefits because they do not know they qualify, do not know how to claim the credits or do not know where to find free tax filing assistance. Link to CBPP’s EITC outreach campaign
- Learn More
The State EITC Online Resource Center also has links to a wide array of information and reports on state EITCs. The Center on Budget and Policy Priorities (CBPP) “Policy Basics: State EITCs” (January 2011) offers a primer on state policies and a map of EITC states. Good sources for legislative updates include the CBPP, and the Tax Policy Center. The Brookings Metropolitan Policy Program maintains an EITC database, allowing users to display and download ZIP code-level tax return information for states, metro areas, counties, cities, and state legislative and congressional districts for tax years 1997 through 2007.
