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 between the ages of 25 to 64 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 2021, 25 million workers and families received about $60 billion in federal EITC benefits.5 Most recipients of the federal and state EITCs are parents with children. Because many families with low incomes are headed by working single mothers, and women of color, the EITC is expected to improve outcomes for these families more than for other families.6
A small credit is available to working individuals without dependents and to noncustodial parents, however 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 Although the American Rescue Plan Act of 2021 (ARPA) temporarily tripled the maximum credit amount for workers without children in the home, including noncustodial parents, the change was not extended for tax year 2022 and income limits remain low.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 $2,411 in 2020, 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, 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, increases 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 uptake 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, seven states (California, Colorado, Maine, Maryland, New Mexico, Oregon, and Washington) currently extend EITC eligibility to filers with an Individual Taxpayer Identification Number (ITIN), which means that workers who are undocumented or otherwise ineligible for a Social Security Number may still claim EITC benefits. Two additional states have passed legislation to extend eligibility beginning tax year 2023 (the District of Columbia and Illinois).
Additionally, seven states (California, Colorado, Maine, Maryland, Minnesota, New Jersey, and New Mexico) currently provide EITC benefits to younger (ages 18 to 24) filers, and one state (Illinois) enacted legislation this year that will extend their states’ tax credits to young workers beginning in tax year 2023. 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 equitable access to the EITC 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%?
This year, Virginia adopted and fully implemented a refundable EITC of at least 10% of the federal credit effective tax year 2022, joining Indiana and Washington, which previously enacted a refundable EITC of at least 10% of the federal credit, but are newly implementing the policy effective tax year 2022. The addition of three states to implement this effective policy brings the total number of states to 21. Hawaii also adopted a refundable EITC of at least 10% of the federal credit this year, but it will be implemented beginning tax year 2023.
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 summarizes the legislative activity and progress states made toward adopting a refundable state EITC of at least 10% the federal credit.
In subsequent sections, we describe how states vary in the generosity of their state EITCs.
21 States Have a Refundable State EITC of at Least 10% of the Federal Credit
As of tax year 2022, 21 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. Two states, Hawaii and Virginia, enacted a refundable EITC of at least 10% of the federal credit, but only Virginia’s refundable EITC will be effective for tax year 2022. Hawaii’s tax credit becomes refundable beginning in tax year 2023.
Two other states, Indiana and Washington, previously enacted (Indiana in 2021 and Washington in 2008) a refundable EITC of at least 10% of the federal credit, but are newly implementing the policy effective tax year 2022. Washington is the first state without a state income tax to implement a state EITC.
Many States Pushed to Expand Their EITC Benefit Levels and Expand Eligibility
Fourteen of the 18 states with an existing refundable EITC of at least 10% considered bills to expand the value of their credits or to extend the benefit to additional populations. Legislation passed in six of the 14 states (California, the District of Columbia, Illinois, Maine, New York, and Vermont). Five states enacted legislation to increase the value of their credit, although New York’s increase is temporary and effective for tax year 2022 only. In addition to increasing the generosity of the state EITC from 18% to 20% of the federal credit, Illinois also expanded EITC eligibility to individuals with an Individual Taxpayer Identification Number (ITIN) and childless workers ages 18-24. These changes are effective in tax year 2023. Additionally, the District of Columbia also enacted legislation this year to expand EITC eligibility to individuals with an ITIN effective tax year 2023.
States Continue to Work Toward Policy Adoption, but Have Room for More Progress
More than half of the states that have not yet adopted and fully implemented a refundable credit of at least 10% of the federal credit introduced legislation to expand their credits or offer a state EITC for the first time. Although unsuccessful, eight states in addition to Virginia and Hawaii, introduced legislation to adopt a refundable EITC of at least 10% of the federal credit. Another seven states introduced legislation to adopt an EITC that was either nonrefundable or less than 10% of the federal credit. Of these states, Utah enacted legislation to adopt a 15% nonrefundable state EITC effective tax year 2022. Arkansas and North Dakota both adopted temporary nonrefundable tax credits. Arkansas’s tax credit, called the Inflationary Relief Income Tax Credit, is available in tax year 2022 only. North Dakota’s tax credit is available in tax year 2021 and 2022 only.
HOW DO STATES COMPARE TO ONE ANOTHER IN MAKING PROGRESS TOWARD FULL AND EQUITABLE IMPLEMENTATION OF A REFUNDABLE STATE EITC OF AT LEAST 10% OF THE FEDERAL CREDIT?
Of the 21 states that have fully implemented a state EITC of at least 10%, 12 states have expanded eligibility to include ITIN holders, younger adults without dependents, survivors of domestic violence, and/or noncustodial parents.
One state, Hawaii, enacted a state EITC this year that becomes refundable beginning in tax year 2023. Hawaii previously had a nonrefundable EITC of 20% of the federal credit that was set to expire after tax year 2022.
Among the 15 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, and none took any steps toward introducing a state EITC. Three states with a state income tax, but no EITC of any kind (Mississippi, North Carolina, and West Virginia) did consider a refundable EITC of at least 10% of the federal credit, but no bills passed.
The figures below show how states compare to one another in 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.
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 70% in the District of Columbia. Several states have refundable earned income tax credits that are not based on the federal credit, or that vary based on household size, however. Minnesota’s refundable EITC, as an example, is based on a percentage of income rather than the federal credit, and Washington offers a flat rebate based on the number of dependents. Oregon’s refundable EITC is 12% of the federal credit for families with children under age 3 and 9% for all other filers, and in Wisconsin, the percentage of the federal credit increases from 4% for one child to 34% for 3 or more children.
The highest nonrefundable EITC rate is 104.17% of the federal credit in South Carolina.
Only New York and the District of Columbia currently offer enhanced credits for noncustodial parents, and seven states (California, Colorado, Maine, Maryland, New Mexico, Oregon, and Washington) currently offer EITCs to workers with an ITIN. Two states—the District of Columbia and Illinois—passed legislation in the last year to offer EITCs to workers with an ITIN beginning in tax year 2023.
States also vary in how they choose to fund their credit. For example, Washington does not have a state income tax, so state leaders drew from other revenue sources to provide their state EITC, called the Working Families Tax Credit, when it was newly implemented this year.20