How Much Would a State Earned Income Tax Credit Cost in Fiscal Year 2017?
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.
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.
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.
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.
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. 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 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.
|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|
|States That Have Enacted Refundable EITCs|
|District of Columbia||$128,373||0.19%||138|
 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.
 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.
 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.
 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.