How Much Would a State Earned Income Tax Credit Cost in Fiscal Year 2015?

PDF of this Report (4pp.)

By Erica Williams and Michael Leachman

Updated December 19, 2013

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 6.5 million people — half of them children — out of poverty in 2012, 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

The Center’s methodology for estimating the cost of a state EITC employs two data sources.  First, Internal Revenue Service statistics on the value of all federal EITC claims filed by residents of each state are used 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 2011 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 2015, the JCT estimates that the federal EITC will cost some $66.5 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 (2011).  Then, to estimate the cost of the federal EITC in the state for a future year, we apply that percentage to the JCT’s projected total cost of the federal EITC for the chosen year.  For example, for tax year 2011, Alabama EITC claims were $1.41 billion, or 2.25 percent of the nationwide total.  Assuming that Alabama’s share of federal EITC claims remains constant, Alabama’s federal EITC claims in fiscal year 2015 would be 2.25 percent of $66.5 billion, or $1.49 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 is likely to 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 2015 costs to states of implementing a refundable EITC for tax year 2014 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, the cost of a 15 percent credit would be one-and-a-half times the cost of 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 are likely to increase the overall cost of the credit by less than 1 percent.  The estimates presented here apply only to credits that are refundable and that are set at a flat percentage of the federal EITC. 

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

Table 1: Estimated Cost of Refundable State Earned Income Tax Credits, FY 2015
State Amount of Federal EITC Claims, TY 2011 (in thousands) Percent of Total U.S. EITC Claims, TY2011 Estimated Cost of Federal EITC in FY 2015 (in millions) Estimated Cost of State EITC in FY 2015
(in millions)
Set at 5% of Federal Credit* Set at 10% of Federal Credit* Set at 20% of Federal Credit*
Alabama 1,413,774 2.25% 1,493 67 134 269
Alaska 98,065 0.16% 104 5 9 19
Arizona 1,381,176 2.19% 1,459 66 131 263
Arkansas 759,930 1.21% 803 36 72 144
California 7,251,211 11.52% 7,660 345 689 1,379
Delaware** 159,321 0.25% 168 8 15 30
Florida 4,841,136 7.69% 5,114 230 460 920
Georgia 2,833,044 4.50% 2,993 135 269 539
Hawaii 235,605 0.37% 249 11 22 45
Idaho 302,468 0.48% 320 14 29 58
Kentucky 924,565 1.47% 977 44 88 176
Maine** 199,851 0.32% 211 9 19 38
Mississippi 1,106,784 1.76% 1,169 53 105 210
Missouri 1,196,672 1.90% 1,264 57 114 228
Montana 169,315 0.27% 179 8 16 32
Nevada 540,001 0.86% 570 26 51 103
New Hampshire 150,292 0.24% 159 7 14 29
North Carolina 2,200,620 3.50% 2,325 105 209 418
North Dakota 87,000 0.14% 92 4 8 17
Ohio** 2,183,483 3.47% 2,306 104 208 415
Pennsylvania 1,929,653 3.07% 2,038 92 183 367
South Carolina 1,206,997 1.92% 1,275 57 115 229
South Dakota 134,299 0.21% 142 6 13 26
Tennessee 1,587,753 2.52% 1,677 75 151 302
Texas 6,840,529 10.87% 7,226 325 650 1,301
Utah 451,717 0.72% 477 21 43 86
Virginia** 1,334,103 2.12% 1,409 63 127 254
West Virginia 335,500 0.53% 354 16 32 64
Wyoming 74,722 0.12% 79 4 7 14
Other Jurisdictions 73,986 0.12% 78 4 7 14
States That Have Enacted Refundable EITCs
Colorado 757,380 1.20% 800  
Connecticut 432,218 0.69% 457
District of Columbia 128,382 0.20% 136
Illinois 2,418,298 3.84% 2,555
Indiana 1,242,184 1.97% 1,312
Iowa 437,211 0.69% 462
Kansas 478,922 0.76% 506
Louisiana 1,415,334 2.25% 1,495
Maryland 902,588 1.43% 953
Massachusetts 782,530 1.24% 827
Michigan 1,912,050 3.04% 2,020
Minnesota 695,978 1.11% 735
Nebraska 295,609 0.47% 312
New Jersey 1,274,398 2.02% 1,346
New Mexico 502,839 0.80% 531
New York 3,887,837 6.18% 4,107
Oklahoma 821,189 1.30% 867
Oregon 570,485 0.91% 603
Rhode Island 175,773 0.28% 186
Vermont 82,990 0.13% 88
Washington 923,327 1.47% 975
Wisconsin 812,305 1.29% 858
       
Total 62,953,399 100.00% 66,500
* 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 Bulletin, Tax Year 2011: Historical Table 2, April 2013. FY 2015 cost calculated based on Joint Committee on Taxation estimates of federal tax expenditures.
Spreadsheet of this table (XLS)

End notes:

[1] See Arloc Sherman, Danilo Trisi, and Sharon Parrott, Various Supports for Low-Income Families Reduce Poverty and Have Long-Term Positive Effects on Families and Children, Center on Budget and Policy Priorities, July 30, 2013, http://www.cbpp.org/cms/index.cfm?fa=view&id=3997.

[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 2011 EITCs will be incurred in federal fiscal year 2012, which ends September 30, 2012.  Similarly, in most states the cost of tax year 2014 claims will fall in the state fiscal year that ends in 2015.

[3] Estimates of the future cost of the federal EITC come from the Joint Committee on Taxation’s “Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017.”  The federal EITC was expanded in 2009 under the American Recovery and Reinvestment Act, thereby slightly raising the cost of a state EITC. This expansion of the credit has been extended on multiple occasions, most recently through tax year 2017.

[4] Compared to the cost each state would have incurred 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, 91 percent in Colorado, and 97 percent in Massachusetts.  In the second year of availability in each state, the cost in Vermont rose to 85 percent, the cost in New York rose to 90 percent, and the cost in Minnesota rose to 93 percent relative to the full-participation cost.

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