February 19, 1998
State Earned Income Tax Credits Build on the
Strengths of the Federal EITC
by Ed Lazere
Throughout the nation, poverty affects a greater share of children than of any other age group. Despite solid economic growth in recent years, one of five children (20.5 percent) lived in poverty in 1996, and the child poverty rate was nearly twice as high as the poverty rate for adults. This is cause for concern because there is strong evidence that poverty can limit a child's physical and cognitive development.
Contrary to popular perception, most poor children live in families where one or more adults work. In fact, earnings from work are the primary source of income for a majority of poor families with children. Thus, the high child poverty rate reflects in large part the fact that millions of working parents are not able to earn enough to lift their families out of poverty, including many parents who work full time all year.
State and local tax systems often push poor working parents deeper into poverty, compounding the difficulties they face in supporting their families. Because states rely to a large extent on revenue from regressive sales and excise taxes, state and local taxes typically consume a greater share of the incomes of lower-income families than among families at higher income levels.
One approach states can take to boost the incomes of working poor families while also relieving the high tax burden on these families is to enact state earned income tax credits. State EITCs build on the strengths of the federal EITC, a tax credit for low-and moderate income workers that is designed to offset regressive federal payroll taxes, to supplement wages, and to complement welfare-to-work efforts. The federal EITC which has been expanded substantially three times since 1986 has contributed to a significant increase in labor force participation among single parents and now lifts roughly four million people out of poverty each year. The EITC has received international acclaim as a successful anti-poverty tool, so much so that some countries are considering adopting similar credits.
The success of the federal EITC has led nine states to enact a state EITC, typically with broad bipartisan support. In 1997 alone, two states Massachusetts and Oregon enacted new EITCs and Minnesota greatly expanded its credit. The additional states with EITCs are Iowa, Maryland, New York, Rhode Island, Vermont, and Wisconsin.
State EITCs further the goals of the federal EITC in three key ways:
- State EITCs support welfare reform by further boosting the incomes of families that move from welfare to work.
- State EITCs reduce poverty among working families. Even with the substantial expansions of the federal EITC, millions of working families fall into poverty.
- State EITCs relieve state and local taxes on poor families. Most state tax systems rely heavily on regressive sales and excise taxes, and nearly half of the states impose an income tax on working poor families. State EITCs help prevent states from taxing families deeper into poverty.
Creating a state EITC is relatively simple. Each of the nine state EITC's piggybacks on the federal EITC; the states use federal eligibility rules and express the state credit as a specified percentage of the federal credit.
The federal EITC is a refundable credit that is administered through the income tax. A worker's credit amount is determined by his or her earnings and the number of children in the family. A family or individual receives the full amount of the credit, even if the credit amount is greater than the family's income tax liability. The amount by which the credit exceeds taxes owed is paid as a refund. If a family has no income tax liability, the family receives the entire EITC as a refund.
There are two principal decisions for states to make when designing a state EITC: whether the credit will be refundable or non-refundable, and the percentage of the federal credit at which the state credit will be set. In addition, two other design features are important: whether to adjust the EITC for family size beyond the adjustments included in the federal credit and whether to include workers without a qualifying child. These design features will determine how broadly the credit applies, how effectively the credit functions as a wage supplement, and the cost of the credit. These options are discussed in detail below.
The Problem: Poverty Despite Work
It is common to believe that most poor families with children include parents who could work but do not. Yet this is not an accurate picture of poor families in the United States. To the contrary, work is the norm among poor families with children.
- In 1995, some 5.6 million families with children in which the parents were not elderly and disabled had incomes below the federal poverty line. Of these families, 3.8 million or 68 percent had a working parent.(1)
- Some 15.1 million people including 8.8 million children lived in a working poor family in 1995. In 1998 dollars, that means living on an income of less than $13,086 for a family of three. For a family of four, the federal poverty line equals $16,766 in 1998.
- Among all poor families with children in which one or both parents were employed, the parents worked a combined average of 41 weeks throughout the year, or nine and one-half months.
- Even among families that received welfare income at some point in 1995 either AFDC, SSI, or General Assistance more than half also had a parent who worked at least part of that year. This includes families that used public assistance when a parent's job was lost, families that left welfare when a parent found work, and families in which a parent worked but remained eligible for welfare due to low earnings.
For a number of reasons, the problem of poverty despite work has grown substantially over the past two decades. The poverty rate among workers in 1996 was nearly 20 percent higher than in 1979.(2) (A comparison of these two years is appropriate because they were at a similar point in the economic cycle and had similar unemployment levels.) During that period, the number of poor families with a working family head rose from 2.2 million to 3.6 million.
Helping Make Work Pay: The Federal Earned Income Tax Credit
The federal EITC is a tax credit for low- and moderate-income workers, primarily those with children, that is designed to offset the burden of social security payroll taxes, supplement earnings, and complement efforts to help families make the transition from welfare to work. The EITC was enacted in 1975 primarily as a means of tax relief; for a decade, the credit received little attention and was not altered significantly. Starting in the mid-1980s, however, the EITC was expanded three times in 1986, 1990, and 1993. Through these expansions, the EITC has become a central element of federal efforts to boost income from work and lessen poverty among families with children often called the "make work pay" strategy.
Because the EITC is administered through the tax code, most recipients claim the credit when they file an income tax form, though families can receive a portion of their EITC benefit throughout the year with each paycheck. The federal EITC is a refundable credit, which means that if the credit amount is larger than a family's income tax bill, the family receives a refund check.
The EITC is targeted primarily on families with children, and both single-parent and two-parent families are eligible. (Since 1994, low-income workers without a child have been eligible for a modest EITC benefit.) Two-parent families can receive the EITC if both parents work or if one parent works while the other parent stays home to care for the children, as long as the family's income is below the EITC limit. This is different from some other tax benefits for working families, such as the dependent care credit, where only families in which both parents work are eligible for the credit.
The maximum EITC benefit in 1998 is $3,756 for families with two or more children and $2,271 for families with one child. The greater EITC benefit for larger families reflects a recognition that larger families face higher living expenses than smaller families. The credit for workers without a qualifying child is much lower than the credit for families with children a maximum of $341 in 1998. (The EITC benefit structure is discussed in more detail in the next section.)
An example helps illustrate how the EITC works. A parent with two children and earnings of $15,000 in 1997 would owe $173 in federal income taxes which would have been withheld from her/his paycheck during the year. The family also would qualify for an EITC of $3,009. The EITC would allow the family to get back the $173 it paid in income taxes and to receive an additional refund of $2,836. Because the parent would have paid $2,295 in social security payroll taxes based on her/his earnings in 1997, most of the EITC refund would serve to offset those taxes. The portion of the EITC serving as a wage supplement for this family would be $541.(3)
This example also helps illustrate the importance of the refundability of the EITC. If it were not refundable, the EITC could not offset payroll taxes which represent a much larger burden on low-income working families than the income tax nor serve as a wage supplement to families with little or no income tax liability.
Some 19 million families and individuals claimed the federal EITC in 1996. Table I shows the number of EITC recipients in each state.
EITC Structure Complements Welfare Reform, Reduces Poverty
There are several features of the federal EITC that contribute to its effectiveness in boosting incomes and reducing poverty among low-income working families.
First, for families with very low earnings, the value of the EITC increases as earnings rise. For example, families with two or more children will receive an EITC equal to 40 cents for each additional dollar earned until earnings reach nearly $9,390 in 1998, for a maximum benefit of $3,756. This means that parents with very low incomes who are able to gain additional earnings get an additional boost in income from a larger EITC benefit. (See Figure 2.) In this way, the EITC complements efforts to help families make the transition from welfare to work.
Number of Families and Individuals That
Received the EITC for Tax Year 1996
State EITC Recipients Alabama 444,593 Alaska 27,228 Arizona 335,335 Arkansas 246,620 California 2,238,756 Colorado 233,193 Connecticut 137,040 Delaware 48,075 District of Columbia 53,826 Florida 1,229,281 Georgia 671,964 Hawaii 58,604 Idaho 77,687 Illinois 736,405 Indiana 367,832 Iowa 151,900 Kansas 145,151 Kentucky 297,842 Louisiana 482,574 Maine 79,584 Maryland 330,462 Massachusetts 271,773 Michigan 554,029 Minnesota 214,524 Mississippi 347,502 Missouri 384,279 Montana 63,851 Nebraska 95,925 Nevada 111,077 New Hampshire 55,724 New Jersey 434,685 New Mexico 170,954 New York 1,214,435 North Carolina 651,238 North Dakota 37,126 Ohio 678,872 Oklahoma 278,359 Oregon 189,947 Pennsylvania 674,743 Rhode Island 56,485 South Dakota 48,077 Tennessee 477,175 Texas 1,825,533 Utah 104,375 Vermont 35,691 Virginia 430,120 Washington 295,440 West Virginia 134,531 Wisconsin 255,287 Wyoming 32,432 U.S. Total 18,915,70 Source: IRS, preliminary figures on EITC claims through September 1997.
Second, families remain eligible for EITC benefits long after eligibility for welfare ends. As shown in Figure 2, there is an income range of several thousand dollars over which families remain eligible for the maximum EITC benefit. This range is from $9,390 to $12,250 for families with two or more children and from $6,680 to $12,250 for families with one child. In most states, families with incomes in these ranges either have become ineligible for welfare benefits entirely or remain eligible for only modest benefits. This means the largest EITC benefits go to families that are transitioning off welfare but continue to have very low incomes.
Third, the EITC provides continuing assistance to working families as income rises modestly above poverty, unlike most other means tested programs. This is because EITC benefits phase out gradually as incomes rise above the range for the maximum credit. Families with two or more children will be eligible for some EITC benefit in 1998 up to incomes of $30,100, while families with one child will remain eligible for some EITC benefit until income exceeds $26,500. The gradual phaseout and availability of the EITC at above-poverty income levels may stabilize a parent's employment by helping meet the ongoing expenses associated with working such as transportation and by allowing families to cope with unforeseen costs that otherwise might drive them back onto public assistance.
Research evidence suggests that the EITC has been effective at meeting the goals of making work pay better and reducing poverty among working families. Academic studies show that the federal EITC has contributed to a substantial increase in work among single mothers over the past decade. (See the box below.) And data from the Census Bureau's most recent Current Population Survey show that in 1996, the EITC lifted out of poverty 4.6 million people in low-income working families who would have been poor without it, including 2.4 million children.(4) Roughly one-fourth of all children in working poor families were lifted out of poverty by the EITC in 1996.
State EITCs Build on the Strengths of the Federal EITC
State earned income tax credits are a useful policy option to further the two primary goals of the federal EITC bringing working families closer to or above the poverty line and providing tax relief for low-income working families. Despite the substantial expansions of the federal EITC since 1986, many families who work still fall into poverty, including some families with a full-time worker. And while the federal EITC helps offset federal taxes paid by low-income working families, such families still pay a substantial share of their income in state and local taxes in every state.
Nine states have enacted state EITCs to build on the strengths of the federal EITCs. In 1997 alone, two states enacted new EITCS Massachusetts and Oregon while Minnesota greatly expanded its EITC. The other states with an EITC are Iowa, Maryland, New York, Rhode Island, Vermont, and Wisconsin.
State EITCs Help Reduce Poverty, Complement Welfare Reform
Despite the substantial benefits of the federal EITC and the 1996 legislation raising the federal minimum wage, work does not guarantee an escape from poverty for many working families, including many with a full-time worker.
- In 1998, the cash income of a married couple with one child and a parent working full-time at the minimum wage will fall $920 below the poverty line, even after the federal EITC is taken into account.
- The "poverty gap" the difference between income including the EITC and the poverty line will be more than $3,100 for a family of four with two or three children.(5) The poverty gap will be even larger for families of five or more.
It should be noted that these estimates of the "poverty gap" do not include the value of food stamps, which are nearly equivalent to cash, because most working poor families do not receive food stamp benefits. For example, just 35 percent of poor families with children with a full-time worker received food stamps in 1995. The low rate of food stamp participation partly reflects the fact that many working poor families do not meet the program's somewhat stringent asset limits, including a limit on the value of a family car. In addition, some eligible families do not apply for food stamps, in part because they face barriers to participation such as a limited number of food stamp offices and limited hours of operation at these offices.(6)
The above examples all reflect families in which a parent works 52 weeks at 40 hours per week, but this is not the reality for many low-wage working parents. Census Bureau data indicate that in 1995 nearly half of the working parents in poor families with children 2.1 million working poor parents were either employed part-time because they could not find full-time work or spent a portion of the year unemployed because they were temporarily laid off or no work was available. Parents that work less than full-time year-round can fall into poverty even if they receive the federal EITC and even if they earn above the minimum wage.
- For example, a mother of two children who works 30 hours per week earning $6.00 an hour would have cash income of $12,500 if she worked year-round, including the federal EITC. That is more than $600 below the poverty line for a family of three. If she were able to work only 40 weeks in the year, the family's cash income would fall $3,500 below poverty.(7)
Research Findings on the Effectiveness of the EITC
Several recent academic studies indicate that the EITC has positive effects in inducing more single parents to go to work, reducing welfare receipt, and moderating the growing income gaps between rich and poor Americans.
Harvard economist Jeffrey Liebman, who has conducted a series of studies on the EITC, has noted that workforce participation among single women with children has risen dramatically since the mid-1980s.a In 1984, some 72.7 percent of single women with children worked during the year. In 1996, some 82.1 percent did. The increase has been most pronounced among women with less than high school education. During this same period there was no increase in work effort among single women without children.
A number of researchers have found that the large expansions of the EITC since the mid-1980s which have resulted in substantial increases in income for parents who work have been a major factor behind this trend. Studies by Liebman and University of California economist Nada Eissa find a sizable EITC effect in inducing more single women with children to work.b In addition, a new study by Northwestern University economists Bruce Meyer and Dan Rosenbaum finds that "a large share of the increase in employment of single mothers in recent years can be attributed to the EITC." They find that the EITC expansions explain more than half of the increase in employment among single mothers over the 1984-1996 period.c
These findings are consistent with an earlier study by Stacy Dickert, Scott Hauser, and John Karl Scholz of the University of Wisconsin, which projected that the EITC expansions in the 1993 budget law would generate a reduction in welfare receipt. The Dickert, Hauser, and Scholz study estimated that the 1993 EITC expansions would induce approximately 500,000 families to move from welfare to the workforce.d
Finally, Liebman also has found that the EITC moderates the gap between rich and poor. During the past 20 years, the share of national income received by the poorest fifth of households with children has declined, while the share of income received by the top fifth has risen sharply. Liebman found that the EITC offsets between one-fourth and one-third of the decline that occurred during this period in the share of income the poorest fifth of households with children receive.
a) Jeffrey B. Liebman, "The Impact of the Earned Income Tax Credit in Incentives and Income Distribution," October 1997.
b) Nada Eissa and Jeffrey B. Liebman, "Labor Supply Response to the Earned Income Tax Credit," Quarterly Journal of Economics, May 1996, 112(2), pp. 605-637
c) Bruce D. Meyer and Dan T. Rosenbaum, "Welfare, The Earned Income Tax Credit, and the Labor Supply of Single Mothers," November 1997.
d) Stacy Dickert, Scott Hauser, and John Karl Scholz, "The Earned Income Tax Credit and Transfer Programs: A Study of Labor Market and Program Participation," in James M. Poterba, ed., Tax Policy and the Economy, Vol. 9., MIT Press, 1995.
These findings do not mean that the federal EITC expansions and federal minimum wage hike have made little progress toward "making work pay." Indeed, the combined income from work and the EITC will be sufficient to lift a single parent who has two children and works full-time year-round at the minimum wage out of poverty in 1998. Nevertheless, these figures indicate that state EITCs can help other working families escape poverty.
In addition to further reducing poverty among working families, state EITCs undoubtedly enhance state welfare reform efforts. In recent years, nearly all states have adopted policies either to boost the incomes of welfare recipients who find work or to provide services to families that successfully make the transition to work. For example, the vast majority of states have adopted "enhanced earnings disregards" in their welfare programs, under which welfare benefits phase out gradually as family earnings increase, thereby helping ease the transition from welfare to work. Many states also have expanded access to child care and to health insurance for working poor families.
Enactment of a state EITC would complement these efforts by further boosting the incomes of families as they move from welfare to work and by providing additional support to families that have left welfare but continue to have modest incomes.
State EITCs Provide Needed Tax Relief
In addition to reducing poverty or the depth of poverty among working families, state EITCs can play an important role in providing relief from state and local taxes paid by low-income working families, just as the federal EITC serves to relieve the burden of payroll taxes on such families. In every state, low-income working families pay a substantial share of their income in state and local taxes. State EITCs thus can help ensure that state tax systems do not push poor working families deeper into poverty.
In 1996, income taxes were levied on below-poverty families in 24 of the 42 states with a personal income tax. In the states that imposed a tax on poor families of four, the average income tax threshold for a family of that size the point at which families begin owing tax was $10,300, or roughly $5,700 below the poverty line of $16,036 for a family of four. The average tax burden in these states was $223 for a family of four with earnings at the poverty line.
While the personal income tax burden on poor families is notable in many states, other parts of state and local tax codes often contribute even more to the tax burden on poor families. Most states rely to a large extent on revenue from sales and excise taxes. These taxes are regressive, which means they absorb a much larger proportion of the incomes of lower-income households than of higher-income households. In 1995, the average state and local tax burden on the poorest fifth of married, non-elderly families was 12.5 percent of income. By contrast, the wealthiest one percent of such families spent an average of 7.9 percent of income for state and local taxes.(8) Sales and excise taxes alone accounted for half of the state and local tax burden on the poorest families.
Changes in state tax systems in the 1990s have made the need to provide relief tax relief for low-income residents increasingly important. In the typical state, taxes were raised in the early 1990s in response to the recession and were reduced more recently as the economy improved. The net effect of these changes was to make tax systems more regressive.
- In the early 1990s, as many states experienced recession-induced fiscal crises, 43 states raised taxes to balance their budgets. Nearly half of the additional revenues came from regressive sales and excise taxes.
- Many states have cut taxes in recent years in response to the strong economy, but they generally have not reversed the sales and excise tax increases of the early 1990s. Less than two percent of the state tax cuts enacted from 1994 through 1997 were net reductions in sales and excise taxes.(9)
Because sales and excise taxes fall heavily on low-income residents, the net increase in sales and excise taxes are likely to have increased the tax burden on working poor families in many states. State EITCs could serve to offset recent increases in taxes on low-income families in many states.
State EITCs, 1998
Percentage of Federal Credit, 1998 States with Refundable EITCs Massachusetts 10% Minnesota 25% New York 20% Vermont 25% Wisconsin 4% - One Child
14% - Two Children
43% - Three+ children
States with Non-refundable EITCs Iowa 6.5% Maryland 50% Oregon 5% Rhode Island 27%* * As a result of cut in the basic rate for the state's income tax, the EITC will fall to 25 percent of the federal by 2002.
Creating a State Earned Income Tax Credit
Each of the nine state EITCs piggy-backs on the federal EITC; the states use federal eligibility rules and express the state credit as a specified percentage of the federal credit. This method is relatively easy for a state to administer and also is easy for families claiming the EITC. To determine its state EITC benefit, a family need only write its federal benefit on its state return and then multiply the federal amount by the state EITC percentage.
For these reasons, it is likely that any state considering the creation of a state EITC would also choose to piggy-back on the federal credit. In that case, there are two principal decisions to make when designing a state EITC: whether the credit will be refundable or non-refundable, and the percentage of the federal credit at which the state credit will be set.
Refundable Vs. Non-Refundable EITCs
Under a refundable state EITC, a family would receive a refund check if the size of its EITC exceeds its tax bill. For example, if a taxpayer owes $80 in state income taxes and qualifies for a $200 state EITC, the first $80 of the EITC offsets the income tax and the remaining $120 is received as a refund check. If the credit were non-refundable, the family's income tax liability would be eliminated, but the remaining $120 of the credit would be forfeited.
A refundable state EITC thus can serve a wider variety of purposes than a non-refundable credit. While a non-refundable credit can be used only to provide income tax relief, a refundable EITC can be used to boost the incomes of low-income working families, including those making the transition from welfare to work, as the federal EITC does. Making a state EITC refundable also allows it to be used to offset sales and excise taxes paid by low-income families. Refundable EITCs are especially important in states that already exempt most or all poor families from the income tax, since poor households in these states would not even gain much income tax relief from a non-refundable EITC.
Five of the nine states with a state EITC Massachusetts, Vermont, Minnesota, Wisconsin, and New York have made their credits refundable. The EITCs in these states range from 10 percent to 25 percent of the federal credit, with the exception of the Wisconsin EITC, which ranges from four percent of the federal credit for families with one child to 43 percent of the federal credit for families with three or more children.
Setting the Size of a State EITC
Choosing the percentage of the federal EITC at which the state credit is set should be based on two factors. One is the level of state income tax relief desired. In the case of a refundable EITC, the size of the desired income boost for poor families that would qualify for a refund is also a factor. Because the cost of a state EITC is related to the percentage of the federal credit at which it is set, cost considerations also are an integral element of this decision.
Table III shows the benefit if a refundable EITC were set at 15 percent or 25 percent of the federal credit for various low-income working families. For example, a family of four with two or three children and one minimum wage worker will qualify for a federal EITC of $3,756 in 1998. If the family lives in a state with a 25 percent state EITC, the family would receive a state credit of $939. If the state credit were set at 15 percent of the federal credit, the family's state credit would be $563.
Understanding the potential costs of a state EITC is important, because any such proposal will be considered in the context of the state's budget situation. There is a simple way to approximate the cost of a refundable state EITC that is set as a percentage of the federal credit. The method for estimating the cost of a non-refundable state EITC is not included here because it is much more complicated and depends to a great extent on the parameters of a given state's income tax.
The procedure for estimating the costs of a refundable EITC first requires estimating the total amount of federal EITC benefits that residents of a given state will receive in a given year. This figure is then multiplied by the percentage of the federal credit at which the state credit will be set. The result is an estimate of what the state credit would cost if everyone who receives the federal credit also receives the state credit.
Appendix Table I includes estimates of the total federal EITC benefits that will be received by each state's residents for fiscal years 1999 through 2003.(10)
Earned Income Tax Credit Benefit Levels for
Families at Different Income Levels, 1998
Gross Earnings Federal EITC 25% State EITC 15% State EITC Families of Four, Two or Three Children Half-Time Minimum Wage
Full-Time Minimum Wage
Wages Equal Poverty Line
Wages Equal 150% of Poverty
Families of Three With One Child Half-Time Minimum Wage
Full-Time Minimum Wage
Wages Equal Poverty Line
Wages Equal 150% of Poverty
Center on Budget and Policy Priorities
Because this procedure assumes full participation in the state credit, it provides an upper-bound estimate of the costs of a state EITC at a given percentage of the federal credit. In practice, state EITC costs typically have been lower than the estimates derived from the above procedure, and this seems to be true for several reasons. First, not all families who file for the federal EITC claim the state EITC, especially in the first few years after enactment of the state credit when awareness of the credit may be limited. Second, some EITC recipients are part-year residents; all of the state EITC statutes either allow part-year residents to claim only a part of the state EITC or make part-year residents ineligible for the state credit entirely. Finally, some eligible families have the IRS compute their federal credit; such families may not receive a state EITC if the state does not compute the credit amount for them.
For these and other reasons, the costs of refundable state EITCs in their initial years of existence are likely to be lower than the costs estimated using the above procedure. In New York, for example, where the state EITC was implemented in 1994, the cost of the credit in the first year was roughly 83 percent of the cost the state would have incurred if every family claiming the federal credit also claimed the state credit. In the second year of the New York EITC, the cost equaled 90 percent of the full- participation cost.(11)
There are two other design features that are important for states considering a state EITC: whether to adjust the EITC for family size beyond the adjustments included in the federal credit and whether to include workers without a qualifying child.
Although the federal EITC provides higher benefits to families with two or more children than to families with one child, it does not fully compensate for the higher poverty line for larger families. The poverty line for a family of four is roughly $3,500 higher than for a family of three, while the maximum federal EITC for families with two children will be $1,500 higher than for families with one child in 1998. The federal credit also provides no distinction between families with two children and families with three or more children.
Because wages do not adjust for family size, larger low- and moderate-income working families fall further and further behind an adequate standard of living than smaller families with the same number of workers. Adjusting a state EITC for family size beyond the federal family-size adjustment thus could help larger working families keep pace with the cost of basic living expenses.
Every state with an EITC except Wisconsin sets the credit as a percentage of the federal credit, and the percentage is the same for all family sizes. This means that these state EITCs do not alter the family size-differential in the federal credit. The Wisconsin EITC, on the other hand, directs a greater share of the credit to larger families by setting the credit as a larger percentage of the federal credit for larger families. The Wisconsin credit equals four percent of the federal credit for families with one child which is smaller than any other state EITC percentage 14 percent for families with two children, and 43 percent of the federal credit for families with three or more children. The Wisconsin credit for families with three or more children is larger than any other refundable state EITC. Because this approach adds little to the administration of the credit or to its complexity for recipients, it is a reasonable way to meet this goal. It also does not necessarily add to the costs of a state EITC, since larger families are a relatively small share of the EITC-eligible families. The average Wisconsin EITC benefit is roughly 17 percent of the federal credit, or well within the range of other refundable state EITCs.
Another decision that must be made in designing a state EITC is whether or not to extend the credit to low-income workers who do not have a qualifying child living with them. Such workers between the ages of 25 and 64 were made eligible for a modest federal EITC for the first time as part of the 1993 expansion.
On one hand, state EITCs for workers without qualifying children will be very small because the federal credit is modest. For example, in a state with an EITC established at 15 percent of the federal credit, the maximum state credit for a worker without a qualifying child would be $51. Thus, some low-income workers without a qualifying child may find a state credit not worth the effort required to claim it, particularly if they owe no state income tax and are not otherwise required to file a state tax return. On the other hand, the cost of including workers without qualifying children in a state EITC is likely to be small, and some people will be helped by it.
Perhaps the key factor in a decision whether or not to include workers without a qualifying child in a state EITC may be ease of administration. Excluding workers without qualifying children from a state EITC would require additional instructions on state tax forms, and it is likely that some number of workers without children would miss the instructions and claim the credit anyway. At the same time, states could face an increase in the number of returns it would have to process if a refundable state EITC were extended to these residents, since federal EITC recipients without qualifying children have very low incomes and in many states owe no income tax.
For tax year 1998, each of the state EITCs except Wisconsin's covers workers without qualifying children.
APPENDIX TABLE I: EITC Parameters
There are different EITC parameters for families with one children, for families with two or more children, and for workers without qualifying children. Also, they are adjusted for inflation each year, in the same way that the exemptions, deductions and tax benefits in the federal tax code are adjusted. The EITC parameters are listed below for 1997 and 1998.
Families with Two or More Children
Families with One Child
1997 $0-$6,500 34% (.34) $2,210 $6,500 to
1998 $0-$6,680 34% (.34) $2,271 $6,680 to
Families with No Qualifying Children
1997 $0-$4,340 7.65%
$332 $4,340 to
1998 $0-$4,460 7.65%
$341 $4,460 to
1. Some 600,000 poor families had parents who were ill, retired or disabled, and thus were not able to work.
2. The poverty rate for workers rose from 5.7 percent in 1979 to 6.7 percent in 1996.
3. This includes both the portion of the payroll tax deducted from the worker's wages (the employee share) and the portion paid directly by the employer, which totals 15.3 percent of earnings. Economists generally note that both the employer and employee share of the payroll tax are in effect reductions in employee wages. In addition, the EITC was designed specifically to offset both shares of the payroll tax.
4. Unpublished Census data from the March 1997 Current Population Survey.
5. These calculations count the minimum wage, less payroll taxes, plus the EITC. For example, a family of four would have minimum wage earnings of $10,712, less $819 for the employee share of payroll taxes, plus an EITC of $3,756 for a total income of $13,649. This is $3,117 below the estimated $16,766 poverty threshold for a family of four for 1998.
It should be noted that this income measurement differs from the measurement used by the Census Bureau in its official poverty calculations. The official federal poverty threshold is based on cash income, both earned and unearned, but does not include the value of in-kind benefits or the effects of taxes on disposable income. Nevertheless, many analysts agree that the payroll taxes and EITC benefits should be counted in addition to wages for the purpose of determining how far a family with a full-time minimum wage worker falls below the poverty line.
6. Families of four or smaller with a full-time worker at the minimum wage that receive both the EITC and food stamps will have above-poverty income line in 1998. After 1998, however, only families of three or fewer people with a full-time year-round worker will be guaranteed to have above poverty incomes, even when both the EITC and food stamp benefits are counted. These calculations are based on the minimum wage under current law $5.15 an hour.
7. This example does not include cash assistance a family may receive either while working or unemployed. In most states, such a family would be ineligible for cash assistance while working. If it is assumed the family would receive cash assistance for the period of unemployment a period of roughly three months the typical state's welfare benefits would provide an additional $1,100 in cash income, leaving the family well below poverty for the year.
8. Citizens for Tax Justice and the Institute on Taxation and Economic Policy, Who Pays?: A Distributional Analysis of the Tax Systems in All 50 States, June 1996, p. AI-52.
9. For more information see Nicholas Johnson and Iris Lav, Are State Taxes Becoming More Regressive?, Center on Budget and Policy Priorities, September 23, 1997.
10. These figures for EITC costs in federal fiscal years can be matched in every state except New York with the same state fiscal year. That is because the overwhelming majority of EITC benefits are paid out between January and April as workers file their tax returns. The period from January through April 1998, for example, falls within the 1998 federal fiscal year and within the 1997-98 fiscal year for most states, which typically run from July through June.
11. New York state EITC figures are from New York State Department of Taxation and Revenue, Office of Tax Policy Analysis, Earned Income Tax Credit: Analysis of credit claims for 1995, February 1997, page 9.