More States Give Tax Credits to Working Poor

 

This tax season, even more low- and moderate-income taxpayers can look forward to a check from their states along with their federal refunds, thanks to new state laws that aim to put cash in the hands of the working poor. 

Washington state, New Mexico, North Carolina and Louisiana this year joined 20 other states in offering so-called Earned Income Tax Credit (EITC) programs - an initiative patterned after a successful federal tax credit program for the poor launched in the mid-1970s that gives federal taxes back to low-income taxpayers. In addition, several states with existing programs increased the amount of the benefits.

Under state EITCs, those who qualify for a federal credit also receive a state refund, which is calculated as a percentage of the federal rebate.

"EITCs do more to increase family incomes than any other federal or state anti-poverty program," said Elizabeth Lower-Basch of the Center for Law and Social Policy .

State EITC rates vary widely, ranging from a low of 3.5 percent of the federal credit in North Carolina and Louisiana to a high of 35 percent in the District of Columbia, 32 percent in Vermont, 30 percent in New York and 25 percent in Maryland and Rhode Island.

Rhode Island was the first state to enact an EITC in 1986, and other states followed, bringing to 24 the number of states that now give tax breaks to low-income taxpayers.

Washington state broke new ground this year, creating an income tax credit for the first time in a state that does not levy an income tax. Experts say the new law (scheduled to take effect in 2009 for the 2008 tax year) could open the door for eight other states - Alaska, Nevada, New Hampshire, Wyoming, South Dakota, Tennessee, Texas and Florida - with no income tax.

"We were unsure if states without an income tax would support an EITC," said Amy Beall of the State EITC Online Resource Center.

"Now that Washington has done it, we're watching to see whether others will follow."

Since residents do not file state tax forms, Washington state's Department of Revenue will use federal data to determine who is eligible. The state will then mail forms to qualifying families - some 350,000, the state estimates - to sign and send back.

As a result of the recent surge in new state EITCs and expansions of existing programs in eight states, benefits will reach 2.5 million more people than in 2006, bringing the total number who benefit from state EITCs to 7.8 million. New laws since 2006 have increased state benefits by $617 million, raising the total state benefits to $2.2 billion, according to data provided by the Center on Budget and Policy Priorities (CBPP).

The state tax benefits are designed to supplement the federal EITC, which amounted to $43.3 billion in 2007 and is expected to total $44.7 billion this year - more than the government spends on either Food Stamps or welfare.

"EITCs basically increase the take-home pay of low-income workers," said Elizabeth Kneebone of the Brookings Institution . "That's especially important now because wages have stagnated since 2000, and food, energy and housing prices have been rising. The extra money in workers' pockets helps fill the gap," she said.

Tax credits also are good for states, because research shows the money goes back into the local economies. "People spend their refunds on basic necessities like rent and school supplies for the kids," Kneebone said.

Because nearly all state EITCs are calculated as a straight percentage of the federal credit, the tax code is simple and inexpensive for states to administer, said Jason Levitis of CBPP. Only two states - Minnesota and Wisconsin - use different qualifying rules, giving bigger breaks to families with children. Another advantage is that states can easily predict the cost of EITCs, because state-by-state data is available on the cost of federal EITCs, and state plans are a simple percentage of that amount, he explained.

The simplicity of state EITCs also makes it easier for taxpayers: At least 90 percent of those eligible for state tax credits apply for them, Levitis said.

Under 2007 federal EITC rules, a family of four or more making from $11,750 to $17,400 qualifies for a maximum credit of $4,716 and an individual or married couple without children making $5,500 to $9,000 would receive up to $428. Married couples with one child making $8,350 to $17,400 would receive up to $2,853.

At the state level, that translates into a maximum credit of $1,509 for a family of four in Vermont and $165 for the same family in North Carolina or Louisiana.

Smaller credits are available for moderate income individuals and families. To receive EITC benefits, the maximum income level for a working family with two or more children is $39,783; for a couple with one child, the maximum is $35,241; for an individual, $12,590.

At the federal level, the EITC is "refundable," meaning low-income families can receive the credit even if they have little or no income-tax liability. For example, an individual making less than $9,000 might owe $100 in federal taxes. With a tax credit of $428, that would mean a refund of $328. An individual who did not owe federal taxes would receive a check for the full $428.

The same is true in the 21 states that have refundable EITCs.

But in three states - Delaware, Maine and Virginia - the EITC is non-refundable, meaning it can be used only to offset a tax liability. As a result, very low-income tax filers who don't make enough income to owe taxes may not receive the benefit of the credit. Last year, Iowa changed its credit from non-refundable to refundable, making more money available to the poorest tax filers.

Like minimum-wage laws, state lawmakers on both sides of the aisle have been eager to support EITCs, because they have broad popular support, Levitis said. "But now that some state budgets have tightened, we may see a slowdown."

The Earned Income Tax Credit in states

Twenty-four states and the District of Columbia have adopted Earned Income Tax Credit programs for low-income taxpayers. The benefits are calculated as a percentage of the federal credit for the poor.

State   Percentage of federal credit
Colo.*   10%
Del.   20%
D.C.   35%
Ill.   5%
Ind.   6% (up to 9% in 2009)
Iowa   7%
Kan.   17%
La.   3.5% beginning 2008
Maine   5%
Md.   20% (up to 25% in 2008)
Mass.   15%
Mich.   10% beginning in 2008 up to 20% in 2009)
Minn.   33% (average)
Neb.   8% (up to 10% in 2008)
N.J.   20% (up to 22.5% in 2008 and up to 25% in 2009)
N.M.   8%
N.Y.   30%
N.C.   3.5% beginning in 2008
Okla.   5%
Ore.   5% (up to 6% in 2008)
R.I.   25%
Vt.   32%
Va.   20%
Wash.   5% beginning in 2008 up to 10% in 2010)
Wis.   4% (with one child) 14% (with two children) 43% (with three children)
*Colorado's EITC is not currently funded.
Source: Center for Budget and Policy Priorities
 
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