Posted by Fred Lake

The State of the Earned Income Tax Credit

The State of the Earned Income Tax Credit

In a bid to support low-income earners, the federal government, with the support of some state of the U.S., came up with the Earned Income Tax Credit (EITC). The aim is to support low-income families with children by reducing tax liabilities. Their income level, number of kids, and marital status usually determine the tax liability.

Since its inception, it has helped reduce poverty, support the development of families, encourage education, and boost the economy. Not only that, kids get a better education with their health taken care of as well. Although, some antagonist of the policy feel that it leads to reduced tax revenues. Also, they fear that it could discourage workers from advancing their carriers as increase in earning means more tax.  

Federal EITC

The Federal Earned Income Tax Credit value changes with each year and paid to taxpayers as a refund. In the 2017 tax year, for instance, the maximum Earned Income Tax Credit value was as followed:

  • Three or more qualifying kids with earning under $48,340 as a single parent or $53,930 as married qualified for $6,318 as EITC
  • Taxpayers without kids earning less than $15,010 if unmarried or $20,600 if married qualifies for a maximum EITC value of $510

State EITCs

States also do provide extra credit as a supplement to the federal government's credit. The state's EITC policy follows the federal credit policy in a model, although the eligibility criteria differ. Also, the outreach effort, awareness, and the way they calculate the credit amount varies.

The eligibility criteria in some states are similar to the federal requirements. States like New York, Colorado, and some other states, for instance, automatically qualifies taxpayers who claim federal EITC for state credit. The differences there are rather minute; for example, Wisconsin’s Credit has no provision for workers without kids. California’s credit also has a narrow income bracket compared to the federal bracket. 

The Earned Income Tax Credit in many states is refundable. Tax filers in Maryland have the liberty to claim either a 50% nonrefundable credit or a 27 percent refundable credit. You need to file a tax return to qualify for the EITC refund at both the state and federal level. Many low-income earners do not have to file a return. This makes them forfeit the full value of refundable credit. As a result, many states have come up with measures that make people more aware of EITC. 

In Vermont, Oregon, and Virginia, some laws mandate state agencies to lead EITC outreach programs. The Bureau of labor and industries in Oregon has to enact laws that mandate employers to disseminate information on federal and state EITC with their workers. Many other states like Oklahoma, Texas, and Virginia have special funds set aside to help families eligible for EITC file their tax.

All in all, the state legislative in EITC policies have increased. In the past years, over 200 bills related to EITCs were created. Nine states also created new laws. Montana, Hawaii, and South Carolina also formed their state EITCs. States like New Jersey, Rhode Island, and California increased the percentage of their credits.

Return on EITC Investments 

It is safe to say that Earned Income Tax Credit is the most extensive anti-poverty program. There has been a positive effect on the life of the participants. It has impacted the economy, health, and educational status of participants.

Five years ago, records had it that approximately 6.5 million people escaped poverty thanks to the Earned Income Tax Credit. Half of this figure was children. Also, almost 22 million people received a financial boost.

Even the economy benefits from EITC. This is because the majority of EITC recipients spend their refunds on day to day expenses. In the city of San Antonia, Texas, for instance, it was estimated that for every extra EITC dollar, there was a $1.58 boost in local economic activity.

What is the Cost of State EITC?

  • Montana estimates that the new EITC that started last year will reduce 2020 revenue by $4.6 million
  • Hawaii speculates that the new EITC which will start previous year will affect and reduce the general revenue by $16.7
  • California also speculates that the improved earned income tax credit will trigger a revenue loss of $140 million. 
Fred Lake
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