Some States Support Earned Income Tax Credits for Working Families, Others Fall Short

Earned Income Tax Credits (EITCs) are one of the most popular and effective tools available for fighting poverty through the tax code. In 2013 alone, the federal EITC helped lift 6.2 million working families, including 3.2 million children, out of poverty. Numerous studies show that federal EITC expansions in the 1990s helped boost work effort among single mothers and female heads of households, and that the women who participated in the program saw higher wage growth over time. The EITC has also been associated with better health and educational outcomes for the families that it benefits. It’s no wonder that EITCs have gained bipartisan support at both the federal and state level.

Maryland offered the first state EITC to its residents in 1987, and 25 states and the District of Columbia now provide their own version modeled on the federal credit. During this legislative session, two more states – California and Massachusetts – are considering EITC proposals that would provide a hand up to working families.

California lawmakers are considering implementing a state EITC for the first time, with competing proposals from the Assembly, Senate and governor. Gov. Jerry Brown   included an EITC proposal in his revised budget plan last week which would provide qualifying working families in California an average credit of $460 a year; the maximum credit for a family with three or more kids would be $2,653. Qualifying families can earn a maximum of $13,870 under the governor’s proposal, about the average income of California’s bottom fifth of taxpayers but relatively low considering California’s median household income of $60,194. Brown’s plan is much less generous than two bills under consideration in the legislature, but the fact that the governor’s budget contains an EITC proposal and both houses of the legislature are considering their own plans is a good sign that California will adopt an EITC in the near future. Senate Bill 38 and Assembly Bill 43 propose EITCs with no income cutoff for eligibility. According to an ITEP analysis, SB 38 would provide an average credit of $781 to the bottom fifth of taxpayers, as well as generous credits to middle-income taxpayers. AB 43 would provide an average credit of $602 to the bottom fifth.

In Massachusetts, leaders in the Senate want to fund an expansion of the state’s existing EITC by freezing the state’s personal income tax rate at 5.15 percent. Otherwise, the rate will fall to 5.1 percent in January. The Senate plan also includes a modest increase in the personal exemption. An ITEP analysis of the Senate plan found that the average taxpayer in the bottom 60 percent of Massachusetts’s income distribution would get a tax cut. According to senators who support the plan, this is all about fairness: “It’s about rewarding work and not just rewarding wealth,” argues state Sen. Ben Downing. Gov. Charlie Baker wants to double the state EITC by eliminating the state’s film tax credit and leaving the planned income tax cut in place, a good sign that the state EITC will be strengthened if the governor and legislature can agree on how to pay for it.

Sadly, some states are moving backwards on state EITCS. In North Carolina, where legislators have an unexpected revenue windfall, progressive groups have called on lawmakers to restore the state EITC that was allowed to expire last year, costing nearly one million families an important lifeline. A House Committee rejected an amendment that would do that, electing moments later to instead renew a tax break for buyers of airplanes and yachts.

After the defeat of a ballot measure to raise additional road funding through a sales and gas tax expansion, conservative lawmakers in Michigan unveiled a proposal that would fund road repairs in part by eliminating the state EITC. About 780,000 Michiganders received the EITC in 2013, with most of the benefits going to those earning between $15,000 and $20,000. Many legislators want to avoid raising sales or gas taxes in order to fund roads, but eliminating this crucial program for working families is not the answer.

To learn more about the role that state EITCs can play in supporting working families and creating more prosperity for everyone, check out this ITEP report.