Magazine article Policy & Practice

Transitioning to Work: The Critical Role of the Earned Income Tax Credit

Magazine article Policy & Practice

Transitioning to Work: The Critical Role of the Earned Income Tax Credit

Article excerpt

For working-age individuals and their families, having a job and staying in the workforce are critical to achieving self-sufficiency and economic well-being. Transitioning from federal or state cash assistance to gainful employment and independence is no easy task. Many recipients of public assistance, when they move into the workforce, have low-wage employment and, therefore, rely on transitional work supports as they climb the economic ladder and establish a career pathway.

Low-income working families can receive a significant annual wage supplement through the Earned Income Tax Credit (EITC), which is available to eligible filers of federal tax returns and state tax returns in the 26 states and the District of Columbia that have their own EITC program. The EITC is the most important of such wage supplements, followed closely by the cash transfer benefits from the Supplemental Nutrition Assistance Program (SNAP). Both programs phase benefits down very slowly as income from employment increases, thus avoiding the cliff effect inherent in other benefit programs, such as child care. A chart showing the wage supplemental impact of the EITC, other tax credits, and SNAP benefits that can be replicated in all other states is included here using New York State as the example. The New York chart demonstrates that, when combined with other cash-like tax credits and benefits, the EITC can boost the annual income of a single parent working full time in a $9-an-hour job to the equivalent of $16.81 an hour.

The EITC is designed to ensure that full-time workers do not have to live in poverty--particularly workers who are supporting families. This article explores the history and impact of the EITC, shows how it can work in concert with minimum wage laws as a poverty-fighting measure, and identifies ways of improving the credit.

HISTORY AND BACKGROUND

The federal EITC was enacted in 1975 to offset the burden of payroll taxes and provide a work incentive for low- and moderate-income families. The EITC is refundable--meaning that when the tax credit exceeds the amount of taxes owed, the difference becomes a tax refund. As a result, it effectively creates a form of negative income tax.

For tax year 2014, the federal EITC provided about 28 million households with $65 billion in tax credits. (1) As most low-income working families owe little or no income taxes, about 87 percent of EITC benefits come in the form of a tax refund.

Internal Revenue Service (1RS) estimates show that 79 percent of eligible tax filer households receive the credit, and that the vast majority of these households claim all available federal EITC credits. The "take-up rate" for the EITC is relatively high because, unlike other benefit programs, it is obtained simply by filing a tax return. (2)

By design, the EITC provides the greatest help for households with children, especially those with three or more children. (3) In order to minimize any marriage penalty, eligibility ceilings are slightly higher for married families with children than for single-parent heads of households. Low-income single individuals and childless couples are eligible for a smaller, but still significant wage supplement through the EITC. Many proposals to expand the EITC for childless working households are also being presented to Congress.

EITC benefits gradually phase out as income increases. Maximum EITC benefits are effectively targeted, with the highest benefits going to those households with the lowest income and the most children. Households then remain eligible for the maximum benefit along a plateau of income. After the plateau, the EITC begins to phase out gradually, until eligibility ends, for different households. This approach maximizes benefits for those most in need and avoids creating a sudden drop off in benefits or a "cliff effect." (4) The current EITC eligibility, maximum benefit levels, and phase-out ranges are outlined in Table 1, above. …

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