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How Much Would a State Earned Income Tax Credit Cost in Fiscal Year 2017?

UPDATED
January 13, 2016

Twenty-six states and the District of Columbia have enacted earned income tax credits (EITCs) to supplement the federal EITC, one of the nation’s most effective tools for boosting the incomes of low-paid working families to help them meet basic needs and pay for things that allow them to keep working, such as child care and transportation. Earned income tax credits help millions of workers with low incomes get on a path to economic stability. Earned income tax credits help millions of workers with low incomes stay on their feet and get on a path to economic stability.  In 2013, the federal EITC kept 6.2 million people — more than half of them children — out of poverty.  

The EITC also has lasting benefits for children.  Because the additional resources help parents better meet their needs, young children in low income families getting an income boost like that from the EITC tend to do better and go further in school, and the greater skills they attain as a result tend to increase their earnings in adulthood.[1]

State EITCs are a common-sense way to amplify the positive impact of the federal credit.  They help working families keep more of what they earn by reducing the substantial state and local taxes they pay, leaving them more to pay for the basics and give their children a better start in life.  

Policymakers considering a state-level EITC can estimate its cost using the 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 2013 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 2017, the JCT estimates that the federal EITC will cost some $76 billion.[3]

The federal EITC is refundable, meaning that workers get the full value of the credit they earned, even if it exceeds their federal income tax liability; EITC refunds help offset other taxes that low-income workers pay, like Social Security and Medicare payroll taxes and the federal gas tax.  Most state EITCs are refundable as well, so they both reduce or eliminate state and local income taxes and help offset low-income workers’ sales taxes, property taxes, and other state and local taxes and fees.  

Three Steps to Estimating the Cost of a State EITC

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 (2013).  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 2013, Alabama EITC claims were $1.44 billion, or 2.14 percent of the nationwide total.  Assuming that Alabama’s share of federal EITC claims remains constant, Alabama’s federal EITC claims in fiscal year 2017 would be 2.14 percent of $76 billion, or $1.62 billion, as the fourth column of Table 1 shows.

Step 2:  Multiply the expected value of the state’s federal EITC claims by the percentage of the federal credit at which the state credit will 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 enacts a credit, 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 last three columns of Table 1 show the estimated fiscal year 2017 costs to states of implementing a refundable EITC for tax year 2016 set at 5, 10, or 20 percent of the federal credit.  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. 

TABLE 1
Estimated Cost of Refundable State Earned Income Tax Credits, Fiscal Year (FY) 2017
State Federal EITC Claims in Tax Year 2013 (in thousands) Percent of Total U.S. EITC Claims, Tax Year 2013 Estimated  Federal EITC Claims in FY 2017 (in millions) Estimated Cost of State EITC in FY 2017* (in millions)
Set at 5% of Federal Credit Set at 10% of Federal Credit Set at 20% of Federal Credit
States That Have Not Enacted Refundable EITCs
Alabama $1,437,905 2.14% 1,624 73 146 292
Alaska $103,910 0.15% 117 5 11 21
Arizona $1,489,323 2.21% 1,682 76 151 303
Arkansas $789,317 1.17% 892 40 80 160
Delaware** $174,099 0.26% 197 9 18 35
Florida $5,352,624 7.96% 6,047 272 544 1088
Georgia $3,029,086 4.50% 3,422 154 308 616
Hawaii $247,426 0.37% 280 13 25 50
Idaho $319,091 0.47% 360 16 32 65
Kentucky $980,404 1.46% 1,108 50 100 199
Mississippi $1,118,189 1.66% 1263 57 114 227
Missouri $1,267,252 1.88% 1,432 64 129 258
Montana $175,065 0.26% 198 9 18 36
Nevada $606,040 0.90% 685 31 62 123
New Hampshire $158,584 0.24% 179 8 16 32
North Carolina $2,349,522 3.49% 2,654 119 239 478
North Dakota $90,880 0.14% 103 5 9 18
Ohio** $2,326,447 3.46% 2,628 118 237 473
Pennsylvania $2,102,875 3.13% 2,376 107 214 428
South Carolina $1,266,079 1.88% 1,430 64 129 257
South Dakota $146,089 0.22% 165 7 15 30
Tennessee $1,671,871 2.49% 1,889 85 170 340
Texas $7,314,092 10.87% 8,262 372 744 1487
Utah $473,565 0.70% 535 24 48 96
Virginia** $1,440,634 2.14% 1,627 73 146 293
West Virginia $355,150 0.53% 401 18 36 72
Wyoming $83,533 0.12% 94 4 8 17
Other Jurisdictions $64,266 0.10% 73 3 7 13
States That Have Enacted Refundable EITCs
California $7,670,273 11.40% 8232      
Colorado $813,304 1.21% 873      
Connecticut $489,158 0.73% 525      
District of Columbia $128,373 0.19% 138      
Illinois $2,539,201 3.77% 2725      
Indiana $1,334,191 1.98% 1432      
Iowa $473,523 0.70% 508      
Kansas $507,574 0.75% 545      
Louisiana $1,454,045 2.16% 1560      
Maine $214,425 0.32% 230      
Maryland $991,135 1.47% 1064      
Massachusetts $860,908 1.28% 924      
Michigan $2,010,280 2.99% 2157      
Minnesota $752,909 1.12% 808      
Nebraska $317,396 0.47% 341      
New Jersey $1,415,169 2.10% 1519      
New Mexico $528,239 0.79% 567      
New York $4,225,984 6.28% 4535      
Oklahoma $853,987 1.27% 916      
Oregon $614,022 0.91% 659      
Rhode Island $196,572 0.29% 211      
Vermont $88,181 0.13% 95      
Washington $997,181 1.48% 1070      
Wisconsin $867,358 1.29% 931      
Total $67,276,706 100% $76,000      

* Estimates assume that the cost of a state EITC will be 90% of the cost of the federal EITC in each state.

** For Delaware, Ohio, and Virginia, cost shown is the total cost of a refundable credit; since those states already offer non-refundable credits, the added cost of making the credit refundable would be substantially less than the amount shown. Source: State claims data from Historic Table 2 State Data Tax Year 2013.  FY 2017 cost calculated based on JCT estimates using CBO macroeconomic forecasts.

End Notes

[1] See Chuck Marr et al., “EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds,” Center on Budget and Policy Priorities, updated October 1, 2015, http://www.cbpp.org/research/federal-tax/eitc-and-child-tax-credit-promote-work-reduce-poverty-and-support-childrens.

[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 costs 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 JCT estimate of the federal EITC’s cost includes both the tax expenditure (non-refundable) and outlay (refundable) portions.

[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.