CFED Assets & Opportunity Scorecard
To augment low wages, state governments have increasingly used tax credits to help families escape poverty and put them on a path to prosperity. Tax credits available to low- and moderate-income families, such as the Earned Income Tax Credit (EITC), reduce the regressive tax burden on the working poor, put more money in their pockets, and make saving for the future possible. The EITC is the largest and most well-known tax credit for low-income workers. The federal credit and some state credits are refundable, meaning that if the EITC is greater than the amount of taxes owed, the taxpayer receives a refund.
States can create their own versions of the EITC based on the structure and eligibility criteria of the federal credit. The amount of the state credit should be at least 15% of the federal credit. Ideally, state credits should also be fully refundable so that all low-income families, even those without a tax liability, can benefit from the credit.
Each state can determine the amount of the credit, its coverage and family size adjustments, as well as whether it will be refundable. States can also encourage families to save all or part of their refund by offering a “split refund” option on state income tax returns whereby filers can divide their refunds into more than one account. Working in conjunction with the Internal Revenue Service, even states without a broad-based income tax can create a refundable EITC structured around the federal credit.
Strength of State Policies: EITC State Funding
|Has state enacted an EITC? 1||Is credit refundable? 2||Is credit at least 15% of federal EITC? 3|
|State||State EITC?||Refundable EITC?||State EITC is 15% of federal?||Percentage|
|California 3||85% for up to half of the federal phase-in range|
|District of Columbia||40%|
|Maryland 5||25.5% in 2015, 26% in 2016, 27% in 2017 and 28% thereafter. Non-refundable: 50%|
|Minnesota||Calculated as a percentage of income (ranges from 25%-45%)|
|New Jersey 6||30%|
|Ohio||10%, but limited to 50% of liability for Ohio taxable income above $20,000|
|Rhode Island 7||12.5%|
|Washington 8||10% or $50, whichever is greater|
|Wisconsin||4%-one child; 11%-two children; 34%-three children|
Notes on the Data
1. "Tax Credits for Working Families 50 State Resource Map," The Hatcher Group, July 2015. Accessed July 20, 2015. Note: "-" indicates that the data is not applicable because the state does not currently have an EITC.
2. In 2011, Arkansas created a credit for heads of households with two or more dependents, exempting all families below the poverty line from paying state income taxes. The state still does not have an official EITC.
3. The new California state EITC was signed into law by Gov. Jerry Brown in June 2015.
4. In May 2013, a permanent Colorado EITC was enacted; however, it was made payable only when state revenues reach a specified level. Revenues exceeded that level in 2015 and recipients will now be able to collect the credit in 2016.
5. Maryland's EITC is partially refundable. The non-refundable 50% credit is applied to your tax liability. If this equals or exceeds the amount you owe, you can also claim an additional 25.5% refundable credit. In May 2014, the governor signed a bill to incrementally increase the state refundable credit to 28% of the federal credit over four years.
6. In 2015, the governor offered a conditional veto in order to increase New Jersey's proposed 25 percent credit to a 30 percent credit, which was signed into law in June 2015.
7. Rhode Island Gov. Raimondo included a proposed increase of the state EITC from 10% to 15% of the federal credit. Instead, the state legislature voted unanimously to increase the EITC to 12.5%. The budget was signed into law in June 2015.
8. Washington is the first and only state without an income tax to have an EITC, called the Washington Working Families Credit. It has not yet been funded or implemented.
How States Are Assessed
States receive credit for offering a state EITC if they have a program which provides tax credits as a fixed percentage of the federal credit. States receive credit for a refundable EITC if taxpayers receive a refund when the credit exceeds their state income tax liability. States receive credit for offering an EITC which is at least 15% of the federal credit only if all classes of eligible individuals receive a 15% credit. For instance, Wisconsin does not receive credit because recipients with one child qualify for a 4% credit. However, recipients with three children qualify for a 34% credit.
What States Have Done
Twenty-six states and the District of Columbia have enacted EITCs to supplement the federal credit and reduce the state tax burden on low- and moderate-income working families. In 23 states and D.C., the EITC is at least partially refundable. Only 12 states and the District of Columbia have an EITC that is 15% of the federal EITC or greater.
In June 2015, California became the most recent state to enact an EITC. Phased-in increases took effect in Maryland (25.5%), while the Rhode Island, Massachusetts and New Jersey Legislatures voted to increase state EITCs to 12.5%, 23% and 30%, respectively. Maine made its EITC fully refundable.
In 2008, Washington became the first of the nine states without a broad-based income tax to enact a state EITC. Although Washington’s credit has yet to be fully funded, it nevertheless serves as an innovative example for other states that depend largely on regressive sales taxes for revenue. When fully funded, “Washington’s Working Families Credit” will benefit up to 370,000 Washington households, with an estimated 97% of expenditures going to families with children.
CFED thanks Lauren Pescatore of The Hatcher Group for her input and expertise on this policy issue.