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How Much Would a State Earned Income Tax Credit Cost in Fiscal Year 2019?

UPDATED
June 8, 2018

Twenty-nine 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.  Federal and state EITCs help workers meet basic needs and pay for things that allow them to keep working, such as child care and transportation.  This support helps millions of people struggling to get by on low incomes stay on their feet and work toward economic stability.  The federal EITC kept 5.8 million people — more than half of them children — out of poverty in 2016.

The EITC also has lasting benefits for children.  Because the additional resources help parents better meet their needs, 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]  Research suggests that young children, boys, and children of color particularly benefit.

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 with more to cover basic expenses 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 2015 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 2019, the JCT estimates that the federal EITC will cost over $72 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 given state in a future fiscal year, we first use the IRS data on EITC claims to divide the value of EITC claims in that 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 (2015).  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 2015, Alabama EITC claims were $1.44 billion, or 2.12 percent of the nationwide total.  Assuming that Alabama’s share of federal EITC claims remains constant, Alabama’s federal EITC claims in fiscal year 2019 would be 2.14 percent of $72.6 billion, or $1.541 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 are a set percentage of the federal credit.  This percentage for refundable credits ranges from 3 percent to 40 percent, depending on the state.[4]  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.[5]  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 2019 costs of providing a refundable EITC for tax year 2018 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) 2019
State Federal EITC Claims in Tax Year 2015
($ in thousands)
Percent of Total U.S. EITC Claims, Tax Year 2015 Estimated  Federal EITC Claims in FY 2019
($ in millions)
Estimated Cost of State EITC in FY 2019*
($ in millions)
Set at 5% of Federal Credit Set at 10% of Federal Credit Set at 20% of Federal Credit
States Without Refundable EITCs
Alabama 1,444,699 2.12%  1,541 69 139 277
Alaska 99,054 0.15%  106 5 10 19
Arizona 1,557,532 2.29%  1,661 75 149 299
Arkansas  806,570 1.19%  860 39 77 155
Delaware** 181,160 0.27%  193 9 17 35
Florida 5,455,386 8.02%  5,819 262 524 1047
Georgia 3,097,961 4.55%  3,305 149 297 595
Hawaii** 239,484 0.35%  255 11 23 46
Idaho 318,997 0.47%  340 15 31 61
Kentucky 989,797 1.45%  1,056 48 95 190
Mississippi 1,128,013 1.66%  1,203 54 108 217
Missouri 1,270,289 1.87%  1,355 61 122 244
Nevada 639,724 0.94%  682 31 61 123
New Hampshire 156,004 0.23%  166 7 15 30
North Carolina 2,396,002 3.52%  2,556 115 230 460
North Dakota 93,540 0.14%  100 5 9 18
Ohio** 2,354,212 3.46%  2,511 113 226 452
Oklahoma** 877,455 1.29%  936 42 84 168
Pennsylvania 2,149,696 3.16%  2,293 103 206 413
South Carolina** 1,289,787 1.90%  1,376 62 124 248
South Dakota 140,910 0.21%  150 7 14 27
Tennessee 1,690,333 2.48%  1,803 81 162 325
Texas 7,349,094 10.80%  7,839 353 706 1411
Utah 469,097 0.69%  500 23 45 90
Virginia** 1,472,705 2.16%  1,571 71 141 283
West Virginia 364,329 0.54%  389 18 35 70
Wyoming 80,353 0.12%  86 4 8 15
Other Jurisdictions 48,192 0.07%  51 2 5 9
States With Refundable EITCs
California 7,655,742 11.25%  8,166      
Colorado 814,851 1.20%  869      
Connecticut 501,490 0.74%  535      
District of Columbia 127,184 0.19%  136      
Illinois 2,573,670 3.78%  2,745      
Indiana 1,351,269 1.99%  1,441      
Iowa 482,748 0.71%  515      
Kansas 512,239 0.75%  546      
Louisiana 1,485,851 2.18%  1,585      
Maine 217,302 0.32%  232      
Maryland 1,011,898 1.49%  1,079      
Massachusetts 871,023 1.28%  929      
Michigan 2,020,128 2.97%  2,155      
Minnesota 760,353 1.12%  811      
Montana 174,131 0.26%  186      
Nebraska 321,924 0.47%  343      
New Jersey 1,453,381 2.14%  1,550      
New Mexico 537,800 0.79%  574      
New York 4,258,153 6.26%  4,542      
Oregon 616,661 0.91%  658      
Rhode Island 196,016 0.29%  209      
Vermont 88,414 0.13%  94      
Washington 995,541 1.46%  1,062      
Wisconsin 873,417 1.28%  932      
Total 68,061,561 100% 72,597      

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

** For Delaware, Hawaii, Ohio, Oklahoma, South Carolina, 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 2015.  FY 2019 cost calculated based on Joint Committee on Taxation estimates using Congressional Budget Office 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,” CBPP, 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 2015 EITCs were incurred in federal fiscal year 2016, which ended September 30, 2016.  Similarly, in most states the cost of tax year 2018 claims will fall in the state fiscal year that ends in 2019.

[3] Estimates of the future cost of the federal EITC come from JCT’s “Estimates of Federal Tax Expenditures for Fiscal Years 2017-2021.”  The JCT estimate of the federal EITC’s cost includes both the tax expenditure (non-refundable) and outlay (refundable) portions.

[4] Refundable state credits range from 3 percent to 40 percent of the federal credit except for the District Columbia, where workers without qualifying children receive 100 percent of the federal credit. California’s credit is worth up to 85 percent of the federal credit for workers earning up to $7,250, depending on family size, and it is only available to workers earning up to $22,300, also depending on family size. South Carolina’s non-refundable EITC is set at 125 percent of the federal credit, but in dollar terms is about half as generous as a refundable EITC worth 5 percent of the federal credit, because families with low incomes tend to not owe much in state income taxes.

[5] 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.