State Earned Income Tax Credits
Bartik, Alexander, Fong, Brandon, Geusic, Gregory, Kafka, Eric, Policy Studies Journal
Nationwide, America's working families are struggling. The national poverty rate for 2003 was 12.5 percent and purchasing power parity continues to decline. The federal Earned Income Tax Credit already serves as a major federal program to address these problems. In 2004, 21.4 million taxpayers received the EITC for a total amount of $39.3 billion in assistance. Families with children received, on average, $2,100 from the EITC. State Earned Income Tax Credits, or EITCs, serve as an easy, proven way to reduce poverty and make work more rewarding for low-income individuals.
The federal Earned Income Tax Credit was established in 1975 as a way to reduce poverty by encouraging work. It does this by supplementing the wages of low-income workers with a tax credit. In principle, the federal EITC seeks to keep all working citizens above a poverty threshold, above which the credit is gradually phased out. Currently, the EITC serves as the largest means-based federal anti-poverty assistance program. The success of the federal EITC has inspired similar supplemental programs in twenty-one states. Generally, using similar criteria as on the federal level, state programs provide the financial support for additional income supplements in order to reduce poverty and reward work. Additionally, several local municipalities, including New York City, San Francisco, CA, and Montgomery County, MD, have established their own EITCs to refund local taxes.
Earned Income Tax Credits are useful and effective anti-poverty programs that can be implemented at any level of government that imposes an income tax. States can implement these programs with very little administrative work by simply piggybacking off of the federal eligibility program. This policy has proven effective in twenty-one states to date.
The EITC is a refundable credit against federal income taxes for low-wage workers. As a result, individuals must work to qualify for the credit, and the credit varies depending on earnings. The EITC is "refundable," meaning that if the amount of tax credit a worker qualifies for exceeds the amount of federal income taxes he or she pays, the worker receives a refund from the federal government. Essentially, the EITC allows claimants to pay less income tax, no income tax, or receive a tax refund. This refundable nature allows the EITC to help even those who pay very little federal income tax.
By supplementing wages, the Earned Income Tax Credit serves as a positive incentive for impoverished Americans to transfer from welfare to the work force. EITCs have been particularly effective in encouraging single parents, who compose two-thirds of EITC recipients, to increase work.
On a state level, any state that has an income tax and has not established a refundable state EITC should …
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Publication information: Article title: State Earned Income Tax Credits. Contributors: Bartik, Alexander - Author, Fong, Brandon - Author, Geusic, Gregory - Author, Kafka, Eric - Author. Journal title: Policy Studies Journal. Volume: 35. Issue: 3 Publication date: August 2007. Page number: 520+. © 1999 Policy Studies Organization. COPYRIGHT 2007 Gale Group.