STATE EARNED INCOME TAX CREDIT
WHAT IS AN EARNED INCOME TAX CREDIT AND WHY IS IT IMPORTANT?
The federal earned income tax credit (EITC) is a refundable tax credit for low-income workers designed to reduce poverty and incentivize labor force participation. To further support parents’ workforce participation and household economic security, states can supplement the federal EITC by providing a state-level credit.
Typically set as a percentage of the federal credit, state EITCs also help low-income workers keep more of their wages. Nearly all recipients of the federal and state EITCs are parents with children.
WHAT PROGRESS HAVE STATES MADE SINCE THE 2020 ROADMAP TO ADOPT AND IMPLEMENT STATE EITCS?
6 States Have Newly Implemented a Refundable EITC Worth 10% of the Federal Credit
Since October 2020, six new states began implementing a refundable state EITC worth at least 10% of the federal credit, which is the threshold rigorous studies indicate garners positive impacts. Progress in these six states came primarily from incremental policy changes:
- Increased the generosity of an existing credit: Indiana and Montana both increased their credits to 10% of the federal EITC from 9% and 3%, respectively. Michigan increased its credit from 6% to 30% of the federal EITC.
- Made a nonrefundable credit into a refundable credit: Hawaii and Virginia built on their existing state EITCs by making their previously nonrefundable credits either partially or fully refundable. Hawaii made its credit, originally worth 20% of the federal EITC, fully refundable while increasing its generosity to 40% of the federal EITC. Virginia enacted legislation to give families the option to receive either the nonrefundable credit worth 20% of the federal EITC or a refundable EITC worth 15% of the federal credit.
- Funded an EITC: Washington implemented a new refundable credit of at least 10% of the federal EITC. The state first enacted legislation to create a tax rebate similar to a state EITC, called the Working Families Tax Credit, in 2009, but the credit was not implemented until lawmakers funded the program in tax year 2022. The credit is refundable and filers with one dependent who receive the maximum federal credit receive a state EITC of approximately 15% of the federal credit.
Two other states – Missouri and Utah – have enacted new state EITCs since October 2020. However, both credits are nonrefundable. Minnesota enacted legislation to modify the existing state EITC and adopt a new child tax credit. In doing so, the legislature reduced the generosity of the state EITC to less than 10% of the federal credit for some tax filers, but the new state child tax credit is the most generous in the country.
States with Existing EITCs Continue to Increase Their Generosity
Of the 30 states that had implemented a state EITC of any generosity as of October 2020, 17 states have since increased the value of their credit, and 4 states have made their existing credit refundable. Hawaii enacted both an increase in generosity and a change in refundability.
Increases in the generosity of refundable credits ranged from a single percentage point in Indiana and Rhode Island to 40 percentage points in Colorado. The District of Columbia increased the generosity of its credit by 30 percentage points, with an additional 30 percentage point increase scheduled by tax year 2026, when it will be equivalent to the federal EITC.
In addition to Hawaii and Virginia, two other states made their nonrefundable credits at least partially refundable. Delaware added a refundable option worth 4.5% of the federal EITC to the state’s existing nonrefundable credit, and Oklahoma made its nonrefundable 5% credit fully refundable.
The value of these increases on a family with one child who receives the maximum federal credit range from $42 per year to nearly $1,700 per year. The median increase across states that enacted a change was 10 percentage points, which translates to $421 per year for families with one child eligible for the maximum federal credit.
8 States Expanded Eligibility to Tax Filers Without Social Security Numbers
States can expand eligibility for their state EITCs to additional populations beyond those who qualify for the federal EITC, which may increase equitable access and improve outcomes for more children and families. One of the most common populations targeted for expansion is tax filers with an Individual Taxpayer Identification Number (ITIN) who have a legal work status but are ineligible for a Social Security number (SSN).
Since the 2020 Roadmap, eight states have expanded eligibility to tax filers with an ITIN, bringing the total to 11 states for tax year 2024. The number of states that expanded eligibility to this population more than tripled.
- In tax year 2020, only California, Colorado, and Maryland allowed ITIN holders to receive a state EITC, and all three states did so for the first time that year.
- The District of Columbia, Illinois, Maine, Minnesota, New Mexico, Oregon, and Vermont enacted legislation to expand eligibility to ITIN holders since October 2020. Washington made ITIN holders eligible when it began implementing its credit in tax year 2022.
For more information on state progress to implement state EITCs check out the 2024 Prenatal-to-3 State Policy Roadmap.
Moving Forward: As States Consider Additional Tax Credits to Support Families, More Research Is Needed to Understand the Intersection of Credits
In addition to expanding the generosity of and eligibility for state EITCs, states continue to enact other tax credits to support children and families. Since October 2020, the most notable change has been the increased adoption and generosity of state-level child tax credits (CTCs). The number of states implementing a state CTC nearly tripled since October 2020, from 6 states to 16 states. The District of Columbia is set to become the 17th state in 2025.
All but two states (Arizona and Idaho) with state CTCs also offer state EITCs. Although most states with CTCs offer both credits, the credits are calculated independently except in Minnesota and Illinois. When Minnesota adopted a state CTC in 2023, it revised the structure of the state’s existing EITC to reduce the value of the EITC by itself, but to provide substantially more benefits when combined with the state CTC for families with children. States may also design their CTCs to target different families than those who receive the maximum state EITC, such as those with no earned income.
Given the recent introduction and increased generosity of state CTCs in the past several years, researchers have not yet had the opportunity to rigorously study the impacts of these state-level policies on child and family outcomes. Temporary modifications to the federal CTC, through the American Rescue Plan Act in 2021, however, lifted an estimated 2.1 million children out of poverty, and research has shown the expanded federal credit, which provided up to $3,600 annually for each child ages birth to 5, reduced food insecurity and improved parents’ mental health.1,2,3,4
As states continue to implement and expand credits, further causal research is needed to establish the impact of state CTCs alone and in conjunction with other credits on families.
NOTES AND SOURCES
- Burns, K. & Fox, L. (2023). The impact of the 2021 expanded child tax credit on child poverty. United States Census Bureau. https://www.census.gov/library/working-papers/2022/demo/SEHSD-wp2022-24.html
- Shafer, P.R., Gutiérrez. K.M., Ettinger de Cuba, S., Bovell-Ammon, A, & Raifman J. (2022). Association of the implementation of child tax credit advance payments with food insufficiency in US households. JAMA Netw Open. http://doi.org/10.1001/jamanetworkopen.2021.43296
- Batra, A., Jackson, K., & Hamad, R. (2023). Effects of the 2021 expanded child tax credit on adults’ mental health: A quasi-experimental study. Health Affairs, 42(1). https://doi.org/10.1377/hlthaff.2022.00733
