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Earned Income Tax Credit

More than one in six American children live in poverty.
Nearly 13 million children live in families that earn less than the federal poverty level. For 71 percent of these children, a family member works but simply does not earn enough to support the household.1
The federal Earned Income Tax Credit (EITC) was created in 1975 to support low-income workers.
The program was expanded in 1986, 1990, 1993 and 2001, and has become a central part of federal efforts to fight poverty and move Americans from welfare to work. Only wage earners qualify for this program, and the value of the tax credit depends on a worker’s income and family size. Workers who earn the minimum wage benefit most from EITCs.2
Most of the federal EITC’s benefits are targeted toward families with children.
In tax year 2006, qualifying families with two or more children received up to $4,536, and families with one child received up to $2,747. Workers with no dependent children were eligible only to receive a maximum of $412 from the federal EITC.3
The federal program is a “refundable” credit.
If a credit exceeds a family’s total income tax liability, the difference is paid to the family as a refund. If a family doesn’t earn enough to owe income tax, it receives a check based on its annual household income. Fourteen states (CO, IL, IN, KS, MD, MA, MN, NJ, NY, OK, OR, RI, VT, WI) and the District of Columbia offer a refundable credit that is a percentage of the federal EITC. Four states (DE, IA, ME, VA) have less effective “non-refundable” EITC statutes. In those states, the credit can erase tax liability, but the poorest wage earners—those with incomes too low to owe any state income taxes—receive no state benefit at all.
The EITC is the most effective anti-poverty program in America.
The federal EITC helps more working parents and children move out of poverty than any other government program. In 2003, the federal EITC lifted 4.4 million people out of poverty, including more than 2.4 million children.4 The addition of a state EITC helps to offset the rising costs of health care, child care, housing, and other necessities of life.
EITCs are finely-targeted and effective in reaching the working poor and near-poor.
The EITC program puts extra dollars directly into the pockets of people who need help the most: those who work for poverty-level wages. Extensive research has found that this enhances incentive to work and is substantially responsible for increased employment among single parents.5 Studies have found that as many as 81 to 86 percent of those eligible for the credit apply for it.6
EITCs are administratively simple, efficient and nonbureaucratic.
Because it is a straightforward tax credit, the EITC is simple to administer. Nearly all of the funds spent on EITC programs go to workers who need the money, rather than government administration costs.
EITCs garner bipartisan support.
The federal EITC was enacted during the presidency of Gerald Ford and expanded under the Reagan, Clinton and both Bush Administrations. Similarly, state EITC programs have been created by governments led by both Democrats and Republicans, and have been supported by both business groups and social service advocates.
The EITC has gained momentum at the state level.
Sixteen states and the District of Columbia have adopted or substantially increased their EITCs since 2000. In 2006, Michigan and Nebraska adopted refundable EITCs. In 2005, Delaware adopted a 20 percent EITC, and Rhode Island increased its refundable credit from five to ten percent. Oregon made its five percent credit refundable and will increase its EITC to six percent in 2008, and Indiana extended its EITC for another six years. The District of Columbia increased its EITC to 35 percent.

This policy summary relies in large part on information from the Center on Budget and Policy Priorities.

Endnotes
  1. U.S. Bureau of Labor Statistics and U.S. Census Bureau, “Annual Demographic Survey, March Supplement,” Current Population Survey, March 2005.
  2. Robert Greenstein, “The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor,” Center on Budget and Policy Priorities, August 17, 2005.
  3. Ifie Okwuje and Nicholas Johnson, “A Rising Number of State Earned Income Tax Credits are Helping Working Families Escape from Poverty,” Center on Budget and Policy Priorities, October 20, 2006.
  4. “The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor.”
  5. Ibid.
  6. Michael O’Connor, “Using the Internet to Make Work Pay for Low-Income Families,” The Brookings Institution, May 2002.
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