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 general revenue, the primary state fund for ongoing expenses, which includes revenue from corporate, income, and sales taxes.4
The EITC Helps Millions of Workers Each Year, but Working Parents Benefit the Most
In 2022, 31 million workers and families received about $64 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, but 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
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.8,2 The average federal EITC amount received per tax filer was $2,411 in 2020, according to the National Conference of State Legislatures.9 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 $265.10 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.11 However, these policies can work together to lift families with children out of poverty.
Search the Prenatal-to-3 Policy Clearinghouse for an ongoing inventory of rigorous evidence reviews, including more information on the state earned income tax credit.
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 outcomes12 and poverty rates.13 In one study, Black mothers in states with an EITC saw greater reductions in the likelihood of low birthweight for their infants (compared to states without an EITC) 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.12
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.14 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.15
As a step toward reducing these barriers, 11 states (California, Colorado, the District of Columbia, Illinois, Maine, Maryland, Minnesota, New Mexico, Oregon, Vermont, 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 of these 11 states (the District of Columbia and Illinois), enacted legislation in 2022 to expand their states’ credits to ITIN holders in tax year 2023. Three additional states (Maryland, Minnesota, and Vermont) have newly enacted and expanded credits for ITIN holders this year as well.
Additionally, eight states (California, Colorado, Illinois, Maine, Maryland, Minnesota, New Jersey, and New Mexico) currently provide EITC benefits to younger (ages 18 to 24) filers. One of those eight states (Illinois) enacted legislation in 2022 to extend their state’s tax credits to young workers beginning this tax year.
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.16
For more information on what we know and what we still need to learn about the state earned income tax credit, see the evidence review on the state earned income tax credit.
WHAT PROGRESS HAVE STATES MADE IN THE LAST YEAR TO ADOPT AND FULLY IMPLEMENT A REFUNDABLE STATE EITC OF AT LEAST 10%?
Two new states – Hawaii and Michigan – began fully implementing a refundable EITC of at least 10% of the federal credit effective tax year 2023. In 2022, Hawaii enacted legislation to make their nonrefundable credit refundable beginning in tax year 2023, and this year legislators doubled the size of the credit from 20% to 40% of the federal EITC. Michigan enacted legislation this year to increase their refundable state EITC from 6% to 30% of the federal credit effective tax year 2023.
As of tax year 2023, 22 states have fully implemented a refundable state EITC of at least 10% of the federal credit. In the last year, Montana also enacted legislation to increase its refundable state EITC from 3% to 10% of the federal credit, however, it will not be implemented until tax year 2024. Minnesota enacted legislation this year to modify the existing state EITC and adopt a new child tax credit. In doing so, the state EITC is now less than 10% of the federal credit for many tax filers, but the new state child tax credit is the most generous in the country.
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 analyze state legislation and track states’ efforts toward adopting and fully implementing each of the effective policies in this State Policy Roadmap.
The figure below summarizes the legislative activity and progress states made toward adopting and expanding state EITCs since the 2022 Roadmap release.
In subsequent sections, we describe how states vary in the generosity of their state EITCs. We also highlight how a state’s tax credits combine with other policy choices including minimum wage, child care subsidies, and nutrition benefits to impact the level of resources available to a single parent with an infant and toddler in our Policy Impact Calculator.
State EITCs Gained Momentum This Past Session
In the past year, 30 states introduced legislation to establish or expand a state EITC. Although unsuccessful, 13 states that do yet have a refundable EITC of at least 10% of the federal credit introduced legislation to newly adopt or expand an existing state EITC. Of these, all but two states introduced at least one bill that would have established a refundable EITC of at least 10% of the federal credit. Only six states without an EITC of any kind considered legislation to establish one, and no state enacted legislation in the past year to create a new EITC.
2 States Newly Adopted a Refundable State EITC of at Least 10% of the Federal Credit
This year, Michigan and Montana enacted legislation to increase their refundable state EITCs. Michigan increased their credit from 6% to 30% of the federal credit effective this current tax year (tax year 2023). Montana’s state EITC will increase from 3% to 10% of the federal credit in tax year 2024.
7 States Expanded the Generosity of Their State EITCs
Seven additional states also increased the generosity of their state EITC this past session. Connecticut and Maryland enacted legislation to permanently increase their refundable state EITCs to 40% and 45% of the federal credit, respectively. The increases in both states are effective in tax year 2023. Hawaii enacted legislation to increase its newly refundable state EITC from 20% to 40% of the federal credit beginning in tax year 2023, and Massachusetts enacted a tax package that included an increase to the refundable state EITC from 30% to 40% of the federal credit in tax year 2023 as well. Colorado enacted legislation to increase the generosity of its refundable state EITC from 25% to 38% of the federal credit, and Rhode Island included an increase to the refundable state EITC from 15% to 16% of the federal credit in the state budget. The increases in both Colorado and Rhode Island are effective next tax year. Utah also enacted legislation to increase its state EITC from 15% to 20% of the federal credit this tax year, however, its credit remains nonrefundable.
4 States Expanded Eligibility for Their State EITC
Among the states with an existing refundable EITC of at least 10% of federal credit, three states – Maryland, Vermont, and Washington – enacted legislation to expand eligibility to additional populations. Maryland and Vermont extended eligibility to taxpayers with an ITIN effective tax year 2023, and Washington expanded eligibility to taxpayers filing as “married filing separately” effective tax year 2024.
Additionally, in revising the structure of their tax credits, Minnesota also expanded eligibility for their state EITC to taxpayers with an ITIN, however, their new state EITC is now less than 10% of the federal credit for many families.
HOW DOES THE STATE EITC VARY ACROSS STATES?
EITC Value, Refundability, and Eligibility Varies Across States
Currently, the levels of the refundable state credits range from 3% of the federal credit in Montana to 70% in the District of Columbia.
Three states (California, Minnesota, and Washington) have refundable earned income tax credits that are not based on a percentage of the federal credit, however. To compare the value of these states’ credits to other states, we used the value of their state credit for a tax filer with one dependent whose income is $11,750, as a percentage of the federal credit at that same income level. The income level aligns with the lowest income necessary to receive the maximum federal credit.
California’s refundable credit varies depending on income, and the very lowest income households receive 85% of the federal EITC, but the maximum state credit in our comparison to other states is 14% of the federal credit. As of tax year 2023, Minnesota’s refundable EITC is now based on a percentage of income and does not vary by number of dependents. Tax filers with one dependent receive approximately 9% of the federal credit, based on our comparison. Because Washington does not have a state income tax, the refundable EITC, called the Working Families Tax Credit, provides a tax rebate between $50 and $1,200 depending on the number of dependents. The state credit is equivalent to 15% of the federal EITC, based on our comparison. Washington is the only state without a state income tax to implement an EITC.
Two other states have refundable EITCs that are based on the federal credit, but the value varies based on household size. 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 three or more children.
Currently, only four states have a nonrefundable state EITC. The highest nonrefundable EITC rate is 125% of the federal credit in South Carolina. Of the 19 states that do not have any state EITC, eight have no state income tax, the typical mechanism used to finance and provide administrative structure for a state EITC.
States also vary in the additional populations who are eligible for the credit. Eleven states currently offer EITCs to workers with an ITIN. Eight states currently expand eligibility for their state credits to younger tax filers (ages 18 to 25). Only New York and the District of Columbia currently offer enhanced credits for noncustodial parents.
Although individuals must file as “married filing jointly” to receive the federal EITC, Washington enacted legislation this year to expand eligibility to taxpayers who file as “married filing separately” in tax year 2024.
States also vary in how they choose to fund the credit. For example, Washington does not have a state income tax, so state leaders drew from other revenue sources to provide the state EITC, called the Working Families Tax Credit, when it was newly implemented in 2022.19
Many States Also Adopted or Expanded Child Tax Credits This Past Session, Highlighting the Need for Additional Research
Like the EITC, there are other tax credits that taxpayers may receive that reduce to tax liabilities and provide a refund, and the child tax credit is the most common. Although distinct credits, taxpayers typically receive these benefits as one – for example, if entitled to a refund, a taxpayer receives one lump-sum refund, perhaps partially due to the EITC and partially due to other credits; these amounts are often indistinguishable to the recipient at that time.
The federal child tax credit is a partially refundable tax credit designed to help families with low incomes alleviate the cost of raising children. Households with qualifying children can receive the federal credit as a reduction in tax liability or as a refund if the household has no tax liability or the credit amount exceeds total taxes owed. For tax year 2023, families could receive credits of up to $2,000 per qualifying child. The value of the credit begins to phase out when income exceeds $200,000. If the household has no tax liability or the credit amount exceeds total taxes owed, taxpayers can be eligible for a refund of up to $1,600. Among other eligibility criteria, receipt of the child tax credit is means-tested and requires the child to be under age 17 at the end of the calendar year.
In recent years, many states have created and modified their child tax credits, and most are based on a percentage of the federal credit. As of October 1, 2023, 11 states (California, Colorado, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Oregon, and Vermont) have implemented refundable state child tax credits and three states have implemented nonrefundable credits (Idaho, Oklahoma, and Utah). Many other states have recently introduced legislation to create a state-level child tax credit. In tax year 2023, Minnesota revised the structure of their existing EITC and adopted a new child tax credit, which provides $1,750 per child, the most generous state child tax credit in the country. In doing so, the state reduced the value of its EITC.
For more information on the state policy levers to help maximize the effectiveness of a state EITC see our State Policy Lever Checklists.
Notes and Sources
Tax Policy Center. Urban Institute & Brookings Institution. (2021). What is the earned income tax credit? https://www.taxpolicycenter.org/briefing-book/what-earned-income-tax-credit
Center on Budget and Policy Priorities. (2019). Policy basics: The earned income tax credit. https://www.cbpp.org/sites/default/files/atoms/files/policybasics-eitc.pdf
California, Minnesota, and Washington have unique structures distinct from that of the federal credit.
Center on Budget and Policy Priorities. (2019). Policy basics: The earned income tax credit. https://www.cbpp.org/sites/default/files/atoms/files/policybasics-eitc.pdf
Internal Revenue Service (2022). EITC fast facts. https://www.eitc.irs.gov/partner-toolkit/basic-marketing-communication-materials/eitc-fast-facts/eitc-fast-facts
National Center for Children in Poverty. (n.d.). United States: Demographics of low-income children. http://www.nccp.org/profiles/US_profile_6.html
Tax Policy Center. Urban Institute & Brookings Institution. (2021). What is the earned income tax credit? https://www.taxpolicycenter.org/briefing-book/what-earned-income-tax-credit
Maag, E. & Airi, N. (2021). Options to increase the EITC for workers without children at home. Tax Policy Center (Urban Institute & Brookings Institution). https://www.urban.org/sites/default/files/publication/103594/options-to-increase-the-eitc-for-workers-without-children-at-home.pdf
National Conference of State Legislatures. (2022). Earned income tax credit overview. https://www.ncsl.org/research/labor-and-employment/earned-income-tax-credits-for-working-families.aspx
Collin, D., Shields-Zeeman, L., Batra, A., White, J., Tong, M., & Hamad, R. (2021). The effects of state earned income tax credits on mental health and health behaviors: A quasi-experimental study. Social Science & Medicine, 276, 1-7. https://doi.org/10.1016/j.socscimed.2020.113274 [State EITC Evidence Review Study QQ]
Pac, J., Garfinkel, I., Kaushal, N., Nam, J., Nolan, L., Waldfogel, J., & Wimer, C. (2020). Reducing poverty among children: Evidence from state policy simulations. Children & Youth Services Review, 115, 1-12. https://doi.org/10.1016/j.childyouth.2020.105030 [State EITC Evidence Review Study KK]
Komro, K. A., Markowitz, S., Livingston, M. D., & Wagenaar, A. C. (2019). Effects of state-level earned income tax credit laws on birth outcomes by race and ethnicity. Health Equity, 3(1), 61–67. https://doi.org/10.1089/heq.2018.0061 [State EITC Evidence Review Study II]
National Academies of Sciences, Engineering, and Medicine. (2019). A roadmap to reducing child poverty. Washington, DC: The National Academies Press. https://doi.org/10.17226/25246. [State EITC Evidence Review Study ZZ]
Thomson, D., Gennetian, L., Chen, Y., Barnett, H., Carter, M., & Deambrosi, S. (2020). State policy and practice related to earned income tax credits may affect receipt among Hispanic families with children. Child Trends. https://www.childtrends.org/publications/state-policy-and-practice-related-to-earned-income-tax-credits-may-affect-receipt-among-hispanic-families-with-children
Goldin, J. & Liscow, Z. Tax benefit complexity and take-up: Lessons from the earned income tax credit. 72 Tax Law Review 59 (2018). https://law.stanford.edu/publications/tax-benefit-complexity-take-lessons-earned-income-tax-credit/
The Rockefeller Foundation. (2021). Thirteen-year effort to implement a Working Families Tax Credit ends in success. https://www.rockefellerfoundation.org/case-study/thirteen-year-effort-to-implement-a-working-families-tax-credit-ends-in-success/