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Delaware Should Give Lowest-Income Working Families Full Access to EITC

Delaware policymakers have another chance this year to enable thousands more working households to get the full value of the state’s Earned Income Tax Credit (EITC), even if it exceeds their income taxes. This change, to make the credit “refundable,” would help working families earning very low wages better meet their basic needs.

Many low-wage jobs don’t provide enough income on which to live. Refundable EITCs encourage the lowest-earning families to work more hours and boost income, helping families afford things like child care and transportation and offsetting their other taxes and fees. That’s why 23 out of the 29 states with EITCs (plus the District of Columbia and Puerto Rico) follow the federal practice of making the credit refundable.

In Delaware, 30,000 working households that get the federal EITC don’t benefit from the state’s EITC because it’s non-refundable; many others receive very little. For example, a single mother of two who works half time at Delaware’s minimum wage owes no state income tax, so she receives no state EITC. A bill creating a refundable EITC set at 5.9 percent of the federal credit, which lawmakers passed last year with strong bipartisan support, would have given her a $195 boost, helping her afford rent and food. A similar single mother working full time at the state minimum wage gets $87 under the current credit but would have received $337 under the bill.

Governor John Carney vetoed last year’s bill to make the state EITC refundable because it also would have led to cuts in the credit for some current filers, but he said at the time that he’s “a strong supporter of the EITC because it incentivizes and rewards work, boosts opportunity, and increases household income.” Refundability is key to all of those goals. EITCs encourage work by rising with every additional dollar earned, but many working families with incomes below $14,290 — the level at which Delaware’s credit fully phases in for families with two or more children — owe little to no income tax and thus can’t receive the full credit they’ve earned.

Now, lawmakers are considering two bills to make the state’s EITC refundable. One would let families choose the larger of the current non-refundable credit, worth 20 percent of the federal EITC, or a refundable credit worth 4.25 percent of the federal EITC (rising to 10 percent by 2023). This proposal addresses the governor’s concern. The other proposal, which is very similar to last year’s, would convert the non-refundable credit into a refundable one at 5.9 percent of the federal credit.

While Delaware’s tax system is less costly to poor families than those of many other states, the absence of a refundable EITC is one reason why taxes are a higher share of income for the bottom fifth of families (those earning less than $19,500) than for families in the next two fifths (those earning between $19,500 and $34,700), as the chart shows. This year, policymakers shouldn’t miss the opportunity to extend the credit to the lowest-earning working families that are currently left out.