STATE EARNED INCOME TAX CREDIT
WHAT IS AN EARNED INCOME TAX CREDIT AND WHY IS IT IMPORTANT?
The Federal EITC is a Refundable Tax Credit for Low-Income Workers
Households with at least one working adult can receive the federal EITC either as a reduction in taxes owed or as a refund if the household has no federal tax liability (or if the credit value exceeds taxes owed).1 The amount of the federal EITC increases as a percentage of earned income until a plateau income range is reached, after which the credit amount decreases slowly as income continues to rise, until the credit phases out completely.2 The federal credit amount varies by family size, marital status, and income level.
The State EITC is an Additional Credit Often Based on a Percentage of the Federal EITC
For states with an EITC, the credit is typically calculated as a percentage of the federal EITC, though a few states have unique credit structures.3 The value and administration of the state EITC is determined by each state, including whether the credit is refundable or nonrefundable. States most often finance their state EITCs through state income and sales taxes and general revenue.4
The EITC Helps Millions of Workers Each Year, but Working Parents Benefit the Most
In 2020, over 25 million workers and families received over $60 billion in federal EITC benefits.5 Most recipients of the federal and state EITCs are parents with children. Because many low-income families are headed by working single mothers, and women of color in particular, the EITC is expected to improve outcomes for these families more than for other families.6
Although a small credit is available to working individuals without dependents and to noncustodial parents, it is harder to qualify for the EITC as an adult without custodial children because income limits are set much lower. As a result, 97% of benefits go to families with children in the home, including many single-parent families.7 However, the American Rescue Plan Act of 2021 temporarily tripled the maximum credit amount for workers without children in the home, including noncustodial parents, and this change is expected to benefit 17 million workers.8
The EITC Lifts Millions of Families Out of Poverty
The federal EITC lifts up to 6 million people out of poverty in a given year, including 3 million children.9,10 The average federal EITC amount received per tax filer was $2,476 in 2019, according to the National Conference of State Legislatures.11 The average state EITC receipt is not reported in a central national source, as a result of differences in administration across states, but a 2021 study found that the average state amount was $265.12 That amount represents over 90% of a 40-hour week’s salary at the federal minimum wage of $7.25 per hour.
Research finds that the state EITC is the most effective anti-poverty policy for children in the US when compared to the Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families, and state child tax credits.13 However, all of these policies can work together to lift families with children out of poverty.
WHAT IMPACT DOES A STATE EITC HAVE?
A refundable state EITC of at least 10% of the federal EITC promotes healthier and more equitable birth outcomes, boosts parents’ workforce participation, and improves household economic security, with the greatest effects for single mothers and their children.
The State EITC Reduces Racial Disparities in Birth Outcomes, but State Policy Choices Could Increase Access and Further Improve Equity
Rigorous research shows that the state EITC can reduce racial disparities in birth outcomes14 and poverty rates.15 In one study, Black mothers in EITC states saw greater reductions in the likelihood of low birthweight for their infants (compared to no-EITC states) than did White mothers. Given pre-existing disparities in healthy births between Black mothers and mothers of other races, this result demonstrates the potential for the EITC to promote better health outcomes among Black infants.16
However, uptake of the EITC is not equal across racial and ethnic groups, and differences in access may prevent the credit from promoting equity in family outcomes. For example, research demonstrates that Hispanic families have lower EITC take up rates than families of other races and ethnicities.17 Some scholars suggest that Hispanic families may face language or administrative barriers or may fear immigration enforcement, and these factors may deter uptake even when families are fully eligible.18
As a step toward reducing these barriers, five states (California, Colorado, Maine, Maryland, and New Mexico) currently provide EITC benefits to individuals without a Social Security Number, and two additional states (Oregon and Washington) passed legislation in the last year to extend benefits to workers with Individual Taxpayer Identification Numbers (ITIN) beginning in 2022. Four states (Connecticut, Illinois, Massachusetts, and Minnesota) considered, but did not adopt legislation to extend their benefits to workers with an ITIN, but without a Social Security Number.
Additionally, four states (California, Maine, Minnesota, and New Jersey) currently provide EITC benefits to younger (ages 18 to 24) filers, and three states (Colorado, Maryland, and New Mexico) enacted legislation this last year that will extend their states’ tax credits to young workers for the first time. New Jersey also enacted legislation in the last year to extend EITC benefits to even younger filers (further extends eligibility to workers ages 18 and older). State decisions such as offering the credit to immigrants of various legal statuses or workers of younger age ranges, conducting greater tax preparation outreach, and ensuring greater access for noncustodial parents may increase equity and improve outcomes for more children and families.19
WHAT PROGRESS HAVE STATES MADE IN THE LAST YEAR TO ADOPT AND FULLY IMPLEMENT A REFUNDABLE STATE EITC OF AT LEAST 10%?
Although no states have newly adopted and fully implemented a refundable state EITC of at least 10% of the federal credit since the 2020 State Policy Roadmap, many states made considerable progress in the last year to increase the generosity of their earned income tax credits or to enact new ones. Two states voted to fully implement a refundable EITC of at least 10% in 2022, five states that already have an EITC of at least 10% expanded their benefit levels, four states voted to offer their workers a nonrefundable EITC or a credit that is less than 10% of the federal credit, and 21 states considered, but did not pass legislation to adopt a new EITC or expand the generosity of their existing EITC.
These state policy choices will benefit millions of workers. This year, workers in Connecticut, Maryland, and New Mexico will receive a larger refundable credit, based on the choices of their states’ leaders. In 2022, workers in Indiana and Washington will have an EITC that is at least 10% of the federal credit for the first time, and workers in Colorado, the District of Columbia, New Mexico, and Oklahoma will receive a higher benefit amount. Several states are set to further expand EITC benefits in subsequent years.
Tracking State Policy Progress
Policy adoption does not typically happen quickly. States may introduce legislation several times before adopting a policy and take even more time to fully implement it. Every year we track states’ efforts toward adopting and fully implementing each of the five effective policies in this State Policy Roadmap. The figure below illustrates the change in each state’s policy status between 2020 and 2021. This change in status toward full policy implementation may mask the legislative activity that states engage in throughout the year. Therefore, we also document and summarize the legislative progress states are making toward full implementation of a refundable state EITC of at least 10%. In subsequent sections, we describe how states vary in the generosity and implementation of their state EITCs.
18 States Have a Refundable State EITC of at Least 10% and 2 More States Will in 2022
As of tax year 2021, 18 states have adopted and fully implemented a refundable state EITC of at least 10% of the federal credit that applies to all eligible taxpayers with children under age 3. Although no new states fully implemented a refundable state EITC of at least 10% this last year, two states took legislative initiative that will put them over this threshold in 2022. Indiana passed a bill to increase the state’s 9% refundable credit to 10% in tax year 2022, and Washington passed legislation to begin funding the state’s EITC in tax year 2022 after originally enacting it in 2008.
Many States Pushed to Expand Their EITC Benefit Levels
Thirteen of the 18 states with an existing refundable EITC of at least 10% considered bills to expand the value of their credits. Legislation passed in five of the 13 states (Colorado, Connecticut, the District of Columbia, Maryland, and New Mexico). Once signed by the mayor, the District of Columbia’s EITC will increase from 40% to 100% of the federal credit by 2026, with a temporary increase to 70% in tax year 2022 and 85% in 2025. Additionally, beginning in 2021, Connecticut’s refundable EITC benefit will increase from 23% to 30.5%, and Maryland’s benefit will increase from 28% to 45% through 2022. This year, workers in New Mexico will see an expansion of their EITC benefits from 17% to 20% through 2022, and then to 25% in 2023. Colorado will expand its credit from 10% to 20% in 2022, and increase it to 25% in 2023.
States Continue to Work Toward Policy Adoption, but Have Room for More Progress
Many of the 33 states that have not yet adopted and fully implemented a refundable credit that is at least 10% of the federal credit introduced legislation to expand their credits or offer a state EITC for the first time. Four states passed legislation this past year: Oklahoma voted to change the state’s 5% nonrefundable EITC to a refundable credit; Louisiana voted to continue to offer its 5% refundable credit until 2030; and Missouri enacted legislation to provide workers a 10% nonrefundable credit beginning in 2023. Delaware passed a bill to allow EITC recipients to choose between an existing 20% nonrefundable credit or a new refundable EITC of up to 4.5% of the federal EITC.
Other states introduced legislation that did not pass this session. Two states (Michigan and Montana) considered legislation to expand the benefit level of their refundable EITCs to at least 10% of the federal credit, and Ohio proposed a bill that would reduce the value of its state credit, but add partial refundability, which would benefit low-wage workers. Eight other states that do not currently have an EITC introduced bills to create one, and the credit would have been at least 10% in all states but one.
Among the 17 states without any EITC, eight states have no state income tax, the typical mechanism used to finance and provide administrative structure for a state EITC. Six of the 17 states without any EITC or tax break similar to a nonrefundable EITC took at least some initiative to adopt an EITC, but no bills passed and few moved past introduction. Only 11 states do not have an EITC and did not introduce any legislation to adopt one.
States Are Also Extending the EITC to More Workers
Additionally, 12 states considered, and in many cases passed, legislation that will expand eligibility for their state EITCs to include additional populations historically not eligible for the federal credit (although the American Rescue Plan Act temporarily expanded eligibility to some of these populations). This includes expansions to Individual Taxpayer Identification Number (ITIN)/undocumented individuals, younger tax filers without dependents (those 18 to 24-years-old), and older tax filers (those over 65 years old).
How Does Indiana Compare to Other States in Making Progress toward Adopting and Fully Implementing a Refundable State EITC of at Least 10% of the Federal Credit?
The figures below show how states compare to one another in making progress toward adopting and fully implementing a refundable state EITC of at least 10% of the federal credit that applies to all eligible taxpayers with children under age 3.
Of the 18 states that have fully implemented a state EITC of at least 10%, 10 states have a credit that is 20% or greater, and eight of those states extend the credit to populations that are not typically eligible for the benefit.
In 2021, 16 states are counted as making some progress toward full implementation; the states either have a credit that is less than 10%, nonrefundable, not currently available to workers, or have a tax break for low-income residents that is similar to a nonrefundable EITC.
Seventeen states have not made substantial progress toward full implementation. Six of these states considered legislation this past year, but 11 states have not seriously considered implementing a state EITC.
HOW DOES THE STATE EITC VARY ACROSS STATES?
EITC Value, Refundability, and Eligibility Varies Across States
The levels of the refundable state credits range from 3% of the federal credit in Montana to 45% in Maryland (or 85% in California, but California has its own phase-in structure that does not directly mirror that of the federal credit).20 The highest nonrefundable EITC rate is 83.3% in South Carolina. Only New York and the District of Columbia currently offer enhanced credits for noncustodial parents, and five states (California, Colorado, Maine, Maryland, and New Mexico) currently offer EITCs to workers without a Social Security Number.
States also vary in how they choose to fund their credit. For example, Washington does not have a state income tax, so state leaders will need to draw from other revenue sources to provide their state EITC, called the Working Families Tax Credit, when it is implemented in 2022.21
The Percentage of Eligible Tax-Filing Households with Children Not Claiming the Federal EITC Varies by State
Available state-level data on receipt of the state EITC among eligible tax filers are insufficient to track the percentage of households claiming a state EITC. To receive the state EITC, most tax filers must first claim the federal EITC, therefore, we use the variation in the percentage of eligible households with qualifying children that do not claim the federal EITC as a proxy for the percentage of eligible individuals in states that have a state EITC who do not claim the benefit.
The percentage of eligible tax filers who do not claim the federal EITC ranges from a low of 8.4% in Mississippi to a high of 28.4% in Hawaii, and the US average is 12.9% of eligible tax filers who do not claim their EITC.