How Much Would a State Earned Income Tax Credit Cost in Fiscal Year 2016?

PDF of this Report (4pp.)

By Erica Williams and Michael Leachman

Updated January 28, 2015

Half of the states and the District of Columbia have enacted earned income tax credits (EITCs) to supplement the federal EITC, the nation’s most effective tool for reducing poverty among working families and children.  The federal EITC lifted 6.2 million people — more than half of them children — out of poverty in 2013 and has lasting benefits for low-income children, helping them do better (and go further) in school and improving their earnings as adults.[1] 

State EITCs combat poverty further by reducing state and local taxes for low-income people and helping families keep working despite low wages.  Like the federal EITC, a state EITC allows working families to keep more of what they earn and helps them meet basic needs.  

Policymakers considering a state-level EITC can estimate its budget cost using a simple three-step process outlined below.

Data Sources

CBPP’s methodology for estimating the cost of a state EITC employs two data sources.  First, we use Internal Revenue Service (IRS) statistics on the value of all federal EITC claims filed by residents of each state to determine the state’s share of total U.S. EITC claims.  The most recent full-year data, shown in the second column of Table 1, are for claims made for the 2012 tax year.[2]

Second, projections by the congressional Joint Committee on Taxation (JCT) of the future cost of the federal EITC provide a base for estimating the cost of a state EITC.  For fiscal year 2016, the JCT estimates that the federal EITC will cost some $71.1 billion.[3]

 The federal EITC is refundable, meaning that people whose EITC exceeds their federal tax liability receive the difference as a refund.  Most state EITCs are refundable as well.  The JCT estimate of the federal EITC’s cost includes both the tax expenditure (non-refundable) and outlay (refundable) portions.

Step 1:  Estimate the total value of federal EITC claims in a given state for a future fiscal year.

To estimate the total value of the federal EITC in a state in a future fiscal year, we first use the IRS data on EITC claims to divide the value of EITC claims in a given state by the value of all U.S. EITC claims.  This percentage is the share of the federal EITC cost attributable to that state in the base year (2012).  Then, to estimate the cost of the federal EITC in the state for a future year, we apply that percentage to JCT’s projected total cost of the federal EITC for the chosen year. 

For example, for tax year 2012, Alabama EITC claims were $1.42 billion, or 2.21 percent of the nationwide total.  Assuming that Alabama’s share of federal EITC claims remains constant, Alabama’s federal EITC claims in fiscal year 2016 would be 2.21 percent of $71.1 billion, or $1.57 billion, as shown in the fourth column of Table 1.

Step 2:  Multiply the expected value of the state’s federal EITC claims by the percentage at which the state credit is to be set.

Most states’ EITCs provide benefits as a set percentage of the federal credit.  This percentage ranges from 3.5 percent to 40 percent, depending on the state.  To estimate the cost of a state EITC, multiply the federal EITC cost for the state, as determined in Step 1, by the percentage at which the state EITC is to be set.  This calculation yields an estimate of what the state credit would cost in a given fiscal year if everyone who received the federal credit also received the state credit.

Step 3:  Adjust the estimate for the fact that not all federal EITC claimants will claim the state credit.

In practice, a substantial portion of those who receive the federal EITC fail to claim state EITCs. This is especially true in the first few years after a state credit is enacted, when awareness of it may be limited.[4]  In addition, some eligible families have the IRS compute their federal credit and may not receive a state EITC if the state does not compute the state credit amount for them.  For these and other reasons, the cost of a refundable state EITC in its initial years will likely be lower than the full cost of the federal credit multiplied by the state percentage.  To account for this, the cost estimate should be reduced by at least 10 percent.

The Results

The estimated fiscal year 2016 costs to states of implementing a refundable EITC for tax year 2015 set at 5, 10, or 20 percent of the federal credit are shown in the last three columns of Table 1.  Other percentages may be calculated based on those numbers; for instance, a 15 percent credit would cost one-and-a-half times as much as a 10 percent credit.  The methodology outlined above may be used for other years using the projections of federal costs presented in Table 1. 

None of these figures includes the costs of changing tax forms to include a space to claim an EITC or the costs of processing and administering EITC claims; these would likely raise the overall cost of the credit by less than 1 percent.  The estimates presented here apply only to credits that are refundable and are set at a flat percentage of the federal EITC. 

Further information on these estimates, as well as methods of estimating the costs of non-refundable credits and different credit structures, may be obtained from the staff of CBPP’s State Fiscal Project.  Information on the policy implications of state EITCs may be obtained by reviewing the CBPP publication, A Hand Up: How State Earned Income Tax Credits Help Working Families Escape Poverty, available on our website.

Table 1: Estimated Cost of Refundable State Earned Income Tax Credits, FY 2016
State
Amount of Federal EITC Claims, TY 2012 (in thousands)
Percent of Total U.S. EITC Claims, TY2012
Estimated Cost of Federal EITC in FY 2016 (in millions)
Estimated Cost of State EITC in FY 2016
(in millions)
Set at 5% of Federal Credit*
Set at 10% of Federal Credit*
Set at 20% of Federal Credit*
Alabama
1,417,969
2.21%
1,570
71
141
283
Alaska
101,907
0.16%
113
5
10
20
Arizona
1,409,991
2.20%
1,561
70
140
281
Arkansas
764,025
1.19%
846
38
76
152
California
7,289,949
11.35%
8,071
363
726
1,453
Delaware**
165,527
0.26%
183
8
16
33
Florida
5,099,789
7.94%
5,646
254
508
1,016
Georgia
2,900,740
4.52%
3,211
145
289
578
Hawaii
240,483
0.37%
266
12
24
48
Idaho
308,166
0.48%
341
15
31
61
Kentucky
940,851
1.47%
1,042
47
94
187
Maine**
205,791
0.32%
228
10
21
41
Mississippi
1,096,524
1.71%
1,214
55
109
219
Missouri
1,222,335
1.90%
1,353
61
122
244
Montana
169,861
0.26%
188
8
17
34
Nevada
553,790
0.86%
613
28
55
110
New Hampshire
153,548
0.24%
170
8
15
31
North Carolina
2,249,232
3.50%
2,490
112
224
448
North Dakota
87,796
0.14%
97
4
9
17
Ohio**
2,236,340
3.48%
2,476
111
223
446
Pennsylvania
1,976,028
3.08%
2,188
98
197
394
South Carolina
1,222,899
1.90%
1,354
61
122
244
South Dakota
138,866
0.22%
154
7
14
28
Tennessee
1,612,235
2.51%
1,785
80
161
321
Texas
6,923,938
10.78%
7,665
345
690
1,380
Utah
456,422
0.71%
505
23
45
91
Virginia**
1,373,900
2.14%
1,521
68
137
274
West Virginia
341,134
0.53%
378
17
34
68
Wyoming
81,641
0.13%
90
4
8
16
Other Jurisdictions
67,421
0.10%
75
3
7
13
States That Have Enacted Refundable EITCs
Colorado
775,244
1.21%
858
 
 
 
Connecticut
453,493
0.71%
502
 
 
 
District of Columbia
122,917
0.19%
136
 
 
 
Illinois
2,451,585
3.82%
2,714
 
 
 
Indiana
1,273,387
1.98%
1,410
 
 
 
Iowa
452,305
0.70%
501
 
 
 
Kansas
487,372
0.76%
540
 
 
 
Louisiana
1,422,469
2.21%
1,575
 
 
 
Maryland
930,605
1.45%
1,030
 
 
 
Massachusetts
809,976
1.26%
897
 
 
 
Michigan
1,942,605
3.02%
2,151
 
 
 
Minnesota
718,338
1.12%
795
 
 
 
Nebraska
303,218
0.47%
336
 
 
 
New Jersey
1,302,425
2.03%
1,442
 
 
 
New Mexico
511,475
0.80%
566
 
 
 
New York
3,989,000
6.21%
4,416
 
 
 
Oklahoma
822,032
1.28%
910
 
 
 
Oregon
586,432
0.91%
649
 
 
 
Rhode Island
181,446
0.28%
201
 
 
 
Vermont
85,885
0.13%
95
 
 
 
Washington
957,018
1.49%
1,060
 
 
 
Wisconsin
833,561
1.30%
923
 
 
 
Total
64,221,886
100.00%
71,100
 
 
 
* Estimates of state EITCs assume participation rate equal to 90% of federal participation.
** Delaware, Maine, Ohio, and Virginia already offer non-refundable credits. Since the cost shown is the total cost of a refundable credit, the added cost of making the credit refundable in these states would be substantially less.
Source: State claims taken from IRS Statistics of Income Tax Stats, Tax Year 2012: Historical Table 2, December 2013. FY 2016 cost calculated based on Joint Committee on Taxation estimates of federal tax expenditures.

End notes:

[1] See Policy Basics: The Earned Income Tax Credit, Center on Budget and Policy Priorities, updated January 28, 2015, http://www.cbpp.org/cms/index.cfm?fa=view&id=2505.

[2] All but a tiny fraction of federal EITCs for a given year are claimed and paid when taxes are filed in January through April of the following year.  As a result, nearly all of the federal cost for tax year 2012 EITCs were incurred in federal fiscal year 2013, which ended September 30, 2013.  Similarly, in most states the cost of tax year 2015 claims will fall in the state fiscal year that ends in 2016.

[3] Estimates of the future cost of the federal EITC come from JCT’s “Estimates of Federal Tax Expenditures for Fiscal Years 2014-2018.”  The 2009 Recovery Act expanded the federal EITC, thereby raising the cost of a state EITC slightly. Policymakers have extended the Recovery Act expansion on multiple occasions, most recently through tax year 2017.

[4] Compared to the cost if every family claiming the federal credit also claimed the state credit, the actual cost of a newly enacted state EITC in its first year of availability was about 81 percent in Vermont, 83 percent in New York, 85 percent in Wisconsin, 88 percent in Oklahoma, 90 percent in Kansas and Minnesota, and 97 percent in Massachusetts.  In the EITC’s second year of availability, the cost (relative to the full-participation cost) rose to 85 percent in Vermont, 90 percent in New York, and 93 percent in Minnesota.

  1. Jobs
  2. RSS
  3. Contact Us
 

Sign Up for E-Mail Alerts

RSS Feeds

Multimedia

Browse Reports