Policy & RESEARCH

Capitol Ideas

CSG Knowledge Center

Research Services

MLC Policy Resolutions

Stateline Midwest

States Perform

policy

 

Earned Income Tax Credit enjoys bipartisan support, and may soon get a boost in some Midwest states

by Laura Kliewer ~ April 2017 ~ Stateline Midwest »
Since its inception in the 1970s, the federal Earned Income Tax Credit (EITC) has enjoyed wide bipartisan support. Designed to encourage and reward work, a low-wage worker’s EITC grows with each additional dollar of earnings until his or her wages reach a maximum value — an incentive for people to leave welfare for work and for low-wage employees to increase their work hours.
And the EITC is refundable: If the amount of the credit exceeds what the worker owes, he or she gets a refund.
“For conservatives, the EITC is pro-work, it is pro-personal responsibility. Liberals like that too, but also it is directed toward low-income people, so you get that mix,” says Chuck Marr, director of federal tax policy for the Center on Budget and Policy Priorities. “Plus, it works. There is very rigorous research to show that it encourages more work.”
According to the IRS, the 42-year-old Earned Income Tax Credit is one of the nation’s largest anti-poverty programs. In tax year 2015, for example:
In the 11-state Midwest, more than 4.6 million federal EITC claims for tax year 2015 provided almost $11.2 billion in credits. The average refund was $2,343. (The maximum federal credit in 2016 ranged from $506 for a childless individual to $6,269 for a family with three or more children.)
“If you’re thinking about this group, what can be done to push back against the wage pressure that working-class people face, the EITC is one of the most powerful tools the government has,” Marr says.
Eligibility for the credit and the amount that a worker can receive depend on factors such as income levels and his or her number of dependent children. For childless tax filers, the EITC’s income cap is much lower and the size of the credit much less generous. The largest credit goes to the parents of “qualifying children” with low wages. The credit for moderate-income workers is not as large because of a phase-down in the EITC. I
n tax year 2016, the eligibility cap on earned income ranged from $14,880 for a single, childless filer to $53,505 for a married couple with three children.
State-level credits in place
The Earned Income Tax Credit also has proven to be popular in state legislatures. In all, 26 U.S. states, along with the District of Columbia, offer an additional credit for state income taxes by matching the federal EITC, at rates that range from 3.5 percent in Louisiana to 40 percent in Washington, D.C.
Nine states in the Midwest currently provide some kind of match to the federal EITC: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Nebraska, Ohio and Wisconsin. (South Dakota has no income tax.) In each of these nine states except for Ohio, the EITC is also refundable. This mix of federal and state credits can have a big impact on low- and moderate-income workers with children. (The program is much less generous for childless workers.)
Take, for example, the hypothetical case of a single mother raising two children in the state of Nebraska with yearly earnings of $30,000. She is eligible for a federal tax credit of $3,080 on that earned income. On top of that, Nebraska’s tax credit provides another $308, for a total of $3,388 a year (approximately $282 a month). In some states, such as Iowa, Kansas, Minnesota and Wisconsin, the EITC match is higher.
Expansions, contractions of the EITC
The federal Earned Income Tax Credit has been expanded in some way by each of the past seven U.S. presidents, but at the state level, the policy trend in recent years has been more mixed.
Since 2013, seven states have increased their EITC, including Iowa and Ohio in the Midwest:
But in 2011, two Midwestern states, Michigan and Wisconsin, reduced their EITCs as part of other budget-cutting moves. Michigan lawmakers reduced the credit from 20 percent of the federal EITC to 6 percent, while in Wisconsin, the state match was decreased from 43 percent to 34 percent for families with three or more children and from 14 percent to 11 percent for families with two children (the rate for workers with one child remained at 4 percent; childless low-income workers in Wisconsin do not receive a tax credit).
This year, changes to the state EITC have been proposed in both Michigan and Wisconsin, along with several other Midwestern states.
“For me, it’s about making sure that working families have money in their pockets,” says Michigan Rep. Kristy Pagan, the primary sponsor of HB 4341, which would raise Michigan’s EITC to 25 percent of the federal credit. “If the increase in the EITC did pass, the average would be about $50 a month back into working families’ pockets.”
According to the Michigan League for Public Policy, when the state’s EITC was set at 20 percent of the federal tax credit, 22,000 families were being lifted out of poverty every year. With the decrease to 6 percent of the federal EITC, that number fell to about 6,800 families.
“The bottom line is that no one working a full-time job should be living in poverty,” Pagan says. “The minimum wage is simply not enough for families to make ends meet, so we need to create tax credits for them to put money directly back into their pockets. And when that happens, everybody benefits — not only the families, so they can put food on their table, but the local economies where they are spending money.”
As part of a larger package dubbed “Wisconsin Works for Everyone,” Gov. Scott Walker wants to increase the state’s EITC for families raising just one child, from 4 percent to 11 percent of the federal credit. Democrats in Wisconsin’s Republican-led Legislature want to raise the credit for all families, no matter how many children they have.
Here are the other bills from the Midwest this year that seek changes in states’ EITCs:
The value of outreach in Iowa
Another way states can boost the reach of their EITCs is through education and outreach. About one-fifth of those eligible for the credit either don’t know about it or don’t claim it for other reasons. Iowa is among the U.S. states that offers funding ($195,678 in FY 2017) for outreach services, including free tax-preparation services.
Since the state’s first appropriation in 2005, these have gone to The Iowa Center for Economic Success. The center, in turn, distributes a combination of state and federal funding to partners in communities across Iowa.
For tax year 2015, 27 partners and more than 700 volunteers served more than 20,000 taxpayers, resulting in $11.6 million in federal and state EITC refunds, says Michelle Bartusek, the center’s director of education and resources.

 

Changes at federal level have enhanced Earned Income Tax Credit, mostly for workers with kids

The federal Earned Income Tax Credit dates back 42 years, and since its enactment, changes at the federal level have expanded eligibility and made the program more generous — for example, income levels began being indexed to inflation with the Tax Reform Act of 1986. More recently, enhancements were made with passage of the American Recovery and Reinvestment Act in 2009; those changes were made permanent in 2015.
In part, the Recovery Act mitigated concerns about a “marriage penalty” — the fact that single parents eligible for the EITC could have their credit reduced or eliminated if they married another low-income worker (because they had to combine their incomes for EITC purposes). But married couples can now earn more income before the credit phases out.
That 2009 law also expanded the EITC for families with three or more children (previously, these families received the same EITC that two-child households received). Today, families with three or more children can get an EITC benefit of up to 45 percent of their earned income, as compared to 40 percent for families with two children.
For low- and moderate-income workers, the EITC can change every year, based on factors such as their earnings, number of qualifying children and marital status. Under current law, those without a qualifying child must be between 25 and 65 at the end of the tax year and live in the United States for more than half the year.
Federal legislation is introduced on a regular basis to increase the EITC’s reach. This year’s HR 822, for example, would lower the age requirement (from 25 to 21) while expanding eligibility and the amount of the credit among low-income workers without children.
The current law provides a much more generous EITC to workers with qualifying children — for example, according to the Center on Budget and Policy Priorities, the average EITC for a family with children was $3,186 in tax year 2015, compared to $293 for a family without children. In addition, the income level of a childless adult working a full-time, minimum-wage job makes him or her ineligible to receive any credit at all.

 

Four states in Midwest offer tax credits to help low- and moderate-income workers pay for child care

For workers with children, two other types of tax credits can help ease their financial burdens and, in some cases, lift them out of poverty — the federal Child Tax Credit and the Child and Dependent Care Tax Credit.
First enacted in 1997, the Child Tax Credit provides a maximum tax credit of $1,000 per eligible child and is refundable, thus providing an additional boost to low-income workers’ earnings. It phases in for low-income families with earnings of more than $3,000 and begins to be phased out at higher income levels ($75,000 for single filers and $110,000 for married couples filing jointly). To be eligible, tax filers must be the parent of a child under 17 at the end of the tax year.
Six states, but none in the Midwest, currently provide a match to this federal Child Tax Credit.
Iowa, Minnesota, Nebraska and Ohio are among the 23 U.S. states that provide a match to the federal Child and Dependent Care Tax Credit (see table), which helps individuals pay expenses for the care of children, adult dependents or an incapacitated spouse.
Families can claim up to $3,000 in dependent care expenses for one child/dependent and $6,000 for two children/dependents per year. Under the federal program, eligible families with adjusted gross income of $15,000 or less can claim 35 percent of these expenses, for a maximum potential credit of $1,050 (one child) or $2,100 (more than one child). This percentage steadily decreases for higher-income families. For incomes of $43,000 or more, the credit is equal to 20 percent of expenses.
The federal Child and Dependent Care Tax Credit is nonrefundable, so if a family does not earn enough money to owe federal income taxes, it cannot benefit from the credit. But in Iowa, Minnesota and Nebraska, the state Child and Dependent Care Tax Credit is fully or partially refundable. (Ohio’s is not.)
In at least two other Midwestern states this year, bills have been introduced to provide a tax credit for child care assistance (Indiana) or to expand an existing program (Minnesota). Under Indiana’s SB 364, the state would provide a nonrefundable child care tax credit for low-income families (those with an adjusted gross income of $37,000 or less). The credit would be equal to one of the following (whichever is less): 1) an amount ranging from $50 to $500, depending on the taxpayer’s adjusted gross income; or 2) 20 percent of the taxpayer’s employment-related child care expenses.
Minnesota Gov. Dayton has proposed expanding eligibility for these tax credits to a total of 95,000 Minnesota families (from the current 33,000), providing $60 million in tax cuts. A bill backed by House Republicans (HF 4) would increase the state’s tax credits for child and dependent care by $35 million.