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States Should Strengthen EITCs To Respond To COVID

Update, March 10, 2021: this post has been updated to reflect a provision in the American Rescue Plan Act.

The COVID-19 pandemic and resulting economic downturn have caused significant hardship for people already struggling to make ends meet. States should provide timely support for families that have lost jobs and income during the pandemic, including enacting and expanding state earned income tax credits (EITCs) to help families thrive now and in the future, as we describe in a new paper.

The hardship caused by COVID-19 has hit hardest people who are paid low wages. Not only have these individuals been more likely to lose jobs and income due to COVID-19, but if they work as front-line, essential workers — and have been able to keep their job — they tend to be at higher infection risk for coronavirus. People of color, women, and immigrants are overrepresented in many of these jobs, largely due to structural barriers like wealth and income disparities, inadequate access to health care, and discrimination in hiring. As a result, they are disproportionately likely to be paid wages that don’t provide for their basic needs. While the pandemic has intensified hardship, low wages have long been a barrier for families to afford the basics.

State EITCs are an important part of a state’s pandemic response. States can give families immediate support through direct stimulus payments or similar measures, and ongoing support through new and expanded state credits (along with increasing their state minimum wages). Such policies not only bolster families’ incomes, but also boost local communities and state economies.

Twenty-nine states plus the District of Columbia and Puerto Rico have enacted their own EITCs. States that haven’t yet taken this step should do so. Those with a credit should continue expanding access and boosting the size of the credit, especially for immigrants who file taxes with an Individual Tax Identification Number (ITIN) and workers without children in the home. Those expansions would promote broader economic opportunity, supporting essential workers earning low pay who are immigrants and supplementing the low and extremely limited federal EITC for people paid low wages who don’t have children in the home.

Recognizing the potential for EITCs to help families afford the basics, several states have already begun strengthening their credits, and more are considering it.

  • California will issue $600 one-time payments to California EITC recipients and to immigrants who file taxes with an ITIN who were excluded from previous federal stimulus payments and earn less than $75,000.
  • In Georgia, two proposals under consideration would create a new state credit.
  • Maryland took a big step forward by boosting its EITC twice this year. First, the RELIEF Act temporarily expands the credit for the next three years. It is now worth 45 percent of the federal credit for families with children, and 100 percent for those without children in the home (capped at $530). Maryland also enacted additional legislation to make its credit inclusive for immigrants by enabling people filing taxes with an ITIN to receive it. These changes will boost the credit for 400,000 Marylanders and give an estimated 40,000 newly eligible families access to the credit.
  • New Mexico’s House of Representatives passed a bill that boosts the state’s EITC. It would increase the state’s credit from 17 to 20 percent, make it inclusive of immigrants who file taxes with an ITIN, and extend the credit to young workers 18-24.
  • Washington State may finally update and fund its credit, which was created in 2008 but never implemented due to the Great Recession and resulting budget shortfalls. A new bill would provide a larger credit and would give an instructive example of how an EITC could work in a state without an income tax.

States considering creating or expanding an EITC will need to consider a provision in the American Rescue Plan Act that Congress recently passed and the President is expected to sign this week. That provision states that if a state passes a law after March 3 that reduces state tax revenue on net, the state must repay an equivalent amount of the federal aid provided in the Act. The most straightforward policy response to this provision will be for states to raise revenue from another source to cover the cost of creating or expanding an EITC. States may also consider using the federal aid to provide direct payments to individuals.

By investing in an EITC or strengthening an existing credit, states can reduce hardship caused by the pandemic, help families in the long term, and strengthen local economies. They shouldn’t hesitate to take this step.