The Potential of State Earned Income Tax Credits
(Click here for a bigger version of the map.)
State legislatures play an increasingly important role in setting social and health policies. Earned income tax credit laws, enacted at the state level, offer a potentially fruitful area for policy action. The programs have been shown to play an important role in reducing poverty while encouraging participation in paid work. Currently 28 states plus Washington DC have a state-based EITC that provides cash support in addition to the federal benefit. However, state EITCs vary tremendously in terms of generosity and many states still lag behind in this income support program.
State EITCs have been shown to play a role in reducing poverty while encouraging work participation. But their generosity varies greatly.
- State-level Earned Income Tax Credits (EITC)s are modeled closely after the federal program. The U.S. Federal Earned Income Tax Credit (EITC) has been praised as the largest and most effective anti-poverty program for families in the United States (see here and here). The federal EITC is designed to supplement the incomes of low-wage workers — in particular those with children — and to reduce their tax burden, while encouraging recipients to work. Administered through the income tax filing process, recipients earn a tax credit that varies with the level of earned income and with family structure. The average amount of the 2018 Federal EITC benefit is $2,488, with a range from a low of $2 for people with no children to a high of $6,431 for families with three or more children.
- State EITCs add to the federal credit and provide additional cash transfers for low-income working families. Beginning in 1988, U.S. states began introducing their own EITCs; just a few states at first, growing to 28 states plus Washington DC by 2018. (The total number of states goes up to 29 if you count Washington State, as it also has an EITC on the books. However, as of 2019 it had yet to be implemented due to lack of funding.) State EITCs add to the federal dollars, with amounts varying based on state and family size. For example, workers with children in states such as New Mexico, Colorado, Nebraska, Illinois, and Ohio receive an additional 10 percent of the federal benefit.
- The generosity of state EITC programs varies widely across the states that have implemented the program. State EITCs vary tremendously in terms of generosity, ranging from 3.5 percent of the federal benefit to as high as 85 percent of the federal benefit (see map). Currently 12 of these states have rather low EITC levels at 10 percent or less of the federal benefit: the maximum additional dollar amounts provided by the credits in these states range from $220 in Louisiana to $627 in Nebraska. The maximum benefit provided in the less generous states is dwarfed by that of more generous states such as Minnesota and California, where eligible families could receive up to $2,104 and $2,879, respectively. Most of the states’ EITC programs provide refundable credits, meaning that when the benefit exceeds the taxes owed, the remainder is paid directly to the individual. With the exception of Washington, states that do not have an income tax do not provide EITC benefits. (It must be noted though that Washington State’s program has not been implemented due to lack of authorized funding.)
- There is firm evidence that both the federal and state EITC programs contribute to reducing poverty and increasing labor force participation. Research shows that the federal program has been successful in reducing poverty and increasing labor force participation, especially among single mothers. As a result, it is recommended by a consensus study of the National Academies of Sciences as a key policy to reduce child poverty. As with the federal EITC, research on state EITCs shows these state programs encourage work among low-income single parents and among women.
- Research finds evidence that the federal EITC contributes to improved health outcomes and other benefits to recipient families. The federal EITC has been associated with positive outcomes that result from its effect of increasing family incomes by both directly providing credits and by encouraging participation in paid work. For instance, there is evidence of increases in math and reading scores for children in families who receive EITC credits. The increased income resulting from either the work incentives or the cash benefits may also be used by recipients to improve health through increased health insurance coverage and increased spending on nutrition including fresh fruits and vegetables. In addition, the increased income may also contribute to better health via reductions in stress and increased income security. Indeed, studies have shown improvements in various measures of health associated with the federal EITC including fewer bad mental health days and self-reported health among mothers and higher birth weight among newborns.
- Studies on state EITCs also find improved health outcomes for children. In research we conducted together with co-authors we find small improvements in birth weight and in gestation length in states with EITCs. We find larger effects among states with more generous credits. Improvements in birth weight are important indicators of infant health because low birth weight is one of the most important predictors of infant mortality and increases the risk of negative health and economic effects into adulthood (see here). State EITCs are also associated with increased private health insurance and improved health status among older children (see this study).
- How costly would it be for states to adopt or expand existing EITC programs? The costs to states will vary depending on the generosity of the EITC, and includes the costs of the credits, forgone tax receipts, and costs of detecting erroneous filings. However, the administrative costs are low, with states needing to only add a line or schedule to the income tax form.
What this Means:
Extending the EITC in states that do not provide one and increasing the generosity in those that do can result in sizeable benefits. More generous state EITCs can raise incomes, encourage employment, increase private health insurance coverage, and improve health – outcomes with numerous individual and public benefits. However, these benefits need to be considered along with the monetary costs of providing the credit.