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While every state’s tax system is regressive, meaning lower income people pay a higher tax rate than the rich, some states aim to improve tax fairness through a state Earned Income Tax Credit (EITC). Federal lawmakers established the in 1975 to bolster the earnings of low-wage workers, especially workers with children and offset some of the taxes they pay. State EITCs generally match a portion of the federal credit—ranging from 3.5 percent of the federal credit in Louisiana to 40 percent in Washington, D.C.
State EITCs can also be refundable or non-refundable, but the former is among the most effective and targeted tax reduction strategies to help offset states’ upside tax systems. If a credit is refundable, taxpayers receive a refund for the portion of the credit that exceeds their income tax bill. Refundable credits can therefore be used to help offset all taxes paid, not just income taxes, thereby offsetting some of the regressive effects of state and local sales, excise and property taxes.
In 2015, six states adopted or strengthened their EITC (California, Colorado, Massachusetts, Maine, New Jersey and Rhode Island) followed by more expansions in Rhode Island and New Jersey in 2016. By the end of 2016, 27 states offered a state EITC, 22 of which were refundable.
So far in 2017, we’ve seen proposals to establish EITCs in Georgia, Hawaii, Missouri, Montana, South Carolina, Utah, and West Virginia, and a proposal to expand Minnesota and Maryland’s credits for adults without children in the home. (For more details on EITC proposals this year check out this post from Tax Credits for Working Families.)
Unfortunately, sometimes EITC proposals are paired with other proposals that would hurt the most economically vulnerable. For instance, the Georgia House passed a bill with a new nonrefundable EITC in the same legislation that converted the state’s graduated income tax to a flat rate. As a result, many low- and moderate-income taxpayers could still face a tax increase while wealthier taxpayers would see a tax cut. Separate bills in Missouri would cut the state’s corporate income tax rate, and jeopardize long-term investments in the state.
In addition to making state tax structures more fair, a new study from the University of New Hampshire found that EITCs also serve as an important anti-poverty tool, helping to lift families, particularly children, out of poverty. The study evaluated 17 states that had a refundable EITC implemented from 2010 to 2014. Across the states in the study, the EITC pulled 0.3 percent of the population out of poverty, and 0.7 percent of children out of poverty. These results demonstrate that children in poverty stand to gain the most from refundable EITCs.
The study also estimated the potential poverty reduction if a state were to adopt an EITC. The five states with the greatest potential reductions to child poverty are Arizona, Arkansas, Georgia, Nevada, and Texas. For instance, Arizona’s child poverty rate would have been an estimated 20.2 percent in 2010–2014 rather than 22.0 percent if it had adopted a 30 percent federal match.
State lawmakers should stop thinking of EITCs as a bargaining chip to win over progressives when passing tax cuts for the rich, or as politically favorable enough to pass but not to fund (Colorado and Washington). State EITCs help poor working families stay afloat. Because of their effectiveness, state lawmakers should consider establishing a state EITC, expanding existing credits, or making the credit fully refundable.