States Eye Anti-Poverty Tax Credit to Ease Covid Impact

As Covid-19 ravages the health and finances of working families, communities of color, and immigrants, some states are providing support by expanding the most potent anti-poverty tool in their tax codes—the Earned Income Tax Credit.

In the last month, California and Colorado became the first states in the country to enact laws expanding their EITCs to non-citizens, who aren’t eligible for Social Security numbers but file returns with individual taxpayer identification numbers.

Lawmakers in both states depicted their expansions as efforts to provide equity to immigrant taxpayers who have been disproportionately impacted by the health emergency, but ignored in pandemic relief measures passed by Congress.

“People who have [individual taxpayer identification numbers] are just as responsible for paying taxes during good times and suffer just as much, if not more, during bad times,” said Rep. Matt Gray (D), who co-sponsored Colorado’s law. “Our tax code should treat all taxpayers the same.”

Iowa, New Jersey and Virginia also modified their credit programs this year, according to the National Conference of State Legislatures. All three states appropriated funds to boost EITC participation through outreach, education, and tax preparation assistance. New York passed a budget provision allowing eligible taxpayers to receive the credit even if they haven’t applied. EITC measures could be seen in a handful of additional states including Massachusetts, Missouri, and New Jersey.

The states’ action reflects growing evidence the federal EITC, coupled with a state credit, can relieve fiscal strains on working households with dependent children. The credit is particularly helpful to women and communities of color—two groups disproportionately represented in low-wage jobs. The credit gets high marks from both progressives and some conservatives for incentivizing work, improving long-term health outcomes, and attacking regressivity in the tax code.

“The reality is the EITC does have a huge impact on pulling people out of poverty,” said Donnie Charleston, director of state and local fiscal policy engagement at Urban Institute. “That grows when you add state earned income tax credits to lift even more people out of poverty.”

Enhancements to such programs have come quickly in the past five years in response to research pointing to benefits “particularly for improvements for child and maternal health and helping children perform better in school,” said Samantha Waxman, a policy analyst at the Center for Budget and Policy Priorities.

Millions Benefiting

State EITCs reflect features of the federal program, enacted in 1975. The federal EITC is refundable, meaning any portion of the credit not used to offset federal income taxes is refunded directly to the taxpayer. Credits are determined on a sliding scale depending on income level and the number of qualifying children on the tax return, with most of the advantages targeted to taxpayers with multiple children.

The Internal Revenue Service reports 25 million families took advantage of the credit in 2019, collecting $63 billion in tax benefits. The average federal credit totaled $2,476 last year.

In total, 29 states, the District of Columbia have enacted versions of the federal EITC since 1986. In 2017, 13 million Americans took advantage of state EITCs and collected more than $5 billion in benefits according to a CBPP analysis.

The various state programs differ widely with the key distinction being refundability. Twenty-three of the 29 EITC states have made their credits refundable—widely considered an important check against regressivity.

“Almost every state has an upside-down tax code, where the lowest income taxpayers pay a much higher share of their income in state and local taxes than those at the very top,” said Meg Wiehe, deputy director of the Institute on Taxation and Economic Policy. “The few states doing better have a large refundable tax credit that offsets the regressive nature of many of the taxes states rely on.”

Generous States

State EITCs are calculated as a percentage of the federal credit and some states have chosen to be more generous than others. At the low-end Montana offers a 3% credit, but New Jersey taxpayers can claim 40% of the federal EITC.

Eligibility rules also vary across the states. For instance, most states mirror the federal EITC by excluding workers between the ages of 18 and 24, and workers age 65 or older. In addition, state EITCs have historically provided minimal benefits to childless taxpayers and noncustodial parents.

Advocates would like to see refundable credit programs in every state. The CBPP released a cost analysis linked to that goal for fiscal year 2021. The price tag would be $1.8 billion if each state pegged its credit to 5% of the federal EITC, rising to $7.4 billion under a 20% scenario.

Missouri could take the leap soon, said Sen. Lauren Arthur (D), who is pushing for passage of S.B. 183. The bill proposes a 5% refundable credit for 2020, rising in steps to 20% in 2023.

Lawmakers are expecting a special legislative session later in the year focusing on the fiscal strains brought by Covid-19, Arthur said. Lawmakers hope to craft an omnibus tax bill that will include the S.B. 183 provisions.

Red States

Brand new tax credit schemes, however, could be a tough sell in a half-dozen Republican-dominated legislatures in the southeast, said Georgia Sen. Sam Park (D), who has pushed for a refundable EITC in his state.

“I attribute most of this to the Republican ideological philosophy, going back to the Reagan Administration, of deregulation and cutting taxes primarily for the wealthy—the trickle-down economic philosophy,” Park said. “They just don’t believe in a bottom-up economic growth approach, which the EITC provides.”

Advocates see some potential for the 29 EITC states to modify their credit programs over the next year and make them more useful to working families. Critical areas of expansion include raising the state percentage linked to the federal EITC and widening the eligibility rules.

Equity for Immigrants

Against the backdrop of the pandemic, more states could open their credits to immigrants before the end of the year, said ITEP’s Wiehe.

New Jersey is the state most likely to follow California and Colorado. The state is operating under an unusual three-month budget, but lawmakers need to hammer out a Fiscal Year 2021 plan by Sept. 30. Five EITC bills are in the mix, but the individual taxpayer identification numbers measure, S. 2194, is getting the most buzz.

“ITIN is the most likely to get done because undocumented immigrants and folks living in mixed-status households have been completely left out of the federal relief packages,” said Brandon McKoy, president of New Jersey Policy Perspective, a progressive advocacy group.

Massachusetts is a long-shot possibility for EITC action yet this year.

Lawmakers are up against a July 31 deadline for a new budget but a coalition of progressive groups, led by Boston Indicators, recently released a strategy for EITC expansion. The plan called for boosting the state match up to 50% of the federal EITC, a minimum $1200 credit for extremely low-income households and eligibility for filers using individual taxpayer identification numbers.

-- with assistance from John Herzfeld in New York and Sony Kassam in Washington, D.C.