Incentives Watch: More States Turning Towards Earned Income Tax Credit to Help the Poor

One of the major trends in this year’s legislative session is discussion over the Earned Income Tax Credit (EITC). California enacted an EITC, while New Jersey, Massachusetts and Rhode Island increased the amount of the EITC in those states. Meanwhile, Maine modified its EITC to turn it into a refundable credit. The trend has been noted by both The Pew Charitable Trusts and The Brookings Institution.

States model their credits on the federal EITC. The federal EITC provides a credit for low- and moderate- income workers equal to a percentage of the wages they earn, up to a maximum limitation amount. The percentage of the EITC and the maximum credit amount vary based on the number of dependent children that the worker has. The marital status of the worker is also considered when calculating the maximum annual income that the worker can earn and still be eligible for the credit. Instead of providing their own calculation, states generally offer their EITC as a percentage of the federal credit.

One of the most interesting aspects of the EITC is that it enjoys support from both Democrats and Republicans. Indeed, in the states that have implemented or strengthened the EITC this year, two states (California and Rhode Island) have Democratic governors while the other three (New Jersey, Massachusetts and Maine) have Republican governors. The EITC is popular partially because the credit may only be claimed on “earned income,” which is defined in I.R.C. § 32(c)(2)(A) as “wages, salaries, tips and other employee compensation.” In other words, the EITC helps the poor, but also requires that taxpayers work to earn the credit. In fact, Warren Buffett has proposed an expansion of the EITC as an alternative to raising the minimum wage.

In California, S.B. 80 was passed nearly unanimously. The bill creates the EITC in California. Interestingly, the EITC must be reauthorized each year in the state budget, as the bill sets the EITC as zero percent of the federal credit “unless otherwise specified in the annual Budget Act.” For 2015, the California EITC was set at 85 percent of the federal credit.

New Jersey increased its EITC percentage from 20 to 30 percent in A.B. 4602. For tax years starting on or after Jan. 1, 2016, Massachusetts increased its EITC from 15 percent to 23 percent of the federal credit in H.B. 3671. Gov. Baker in Massachusetts originally wanted to eliminate the film credit in order to increase the EITC to 30 percent, but failed to get support from the legislature, according to the Boston Globe. In H.B. 5900, this year’s budget bill, Rhode Island increased its EITC from 10 percent to 12.5 percent for taxable years beginning on or after Jan. 1, 2016.

However, the EITC isn’t necessarily loved across the land. The Michigan House has passed a plan to eliminate the EITC to fund roads, according to Tax Credits for Working Families. However, the Michigan legislature finds itself at an impasse as the Senate favors a plan that preserves the EITC, but raises the tax on diesel fuel, according to the Detroit Free Press.

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