An earned income tax credit (EITC) is a tax reduction and wage supplement for low- and moderate-income working families. To qualify, one’s income must be earned; welfare benefits, interest on savings, or dividends on stocks don’t count.
Seventeen states(inc. District of Columbia) now offer state EITCs based on the federal credit. In addition, two local governments – Montgomery County, Maryland (see Montgomery County Council June 2002 press release), and Denver, Colorado (see Denver Mayor’s January 2002 Press Release)- offer local EITCs. Like the federal credit, state EITCs have gained support across the political spectrum. EITCs have been enacted in states led by Republicans, states led by Democrats, and states with bipartisan leadership. The credits are supported by business groups as well as social service advocates.
The Federal tax system has included an EITC since 1975, with major expansions in 1986, 1990, and 1993, and an additional expansion in 2001. More than 19 million families and individuals filing federal income tax returns -roughly one out of every seven families who file – claim the federal EITC.
The EITC has been widely praised for its success in supporting work and reducing poverty. The federal credit now lifts more children out of poverty than any other government program. Some 4.8 million people, including 2.6 million children, are removed from poverty as a result of the federal EITC. The federal EITC also has been proven effective in encouraging work among welfare recipients; studies show it has a large impact in inducing more single mothers to work. Support for the EITC has come from across the political spectrum.
12of the 17 states with EITCs follow the federal practice of making the credit “refundable.” This means a family receives the full amount of its credit even if the credit amount is greater than its income tax liability. The amount by which the credit exceeds annual income taxes is paid as a refund.
- A HAND UP – How State Earned Income Tax Credits Help Working Families Escape Poverty In 2003 – Center on Budget and Policy Priorities, March 2003