Tax Reform Friday: Earned Income Tax Credit Expansions, the New Frontier?


As the bitter war over Pub. L. No. 115-97’s cap on SALT deductions appears to be nearing an end, a different tax reform movement—one centered on earned income tax credits (EITC)—has begun making waves on both the federal and state level. Sen. Kamala Harris (D-CA) recently announced the “LIFT (Livable Incomes for Families Today) the Middle Class Act,” a federal EITC expansion bill that proposes a credit for qualifying low and middle-income taxpayers of up to $6,000 annually per household, along with an option to collect a monthly pro-rated disbursement instead.

Since the enactment of federal tax reform in December 2017, several states have already passed legislation to strengthen their earned income tax credit programs.

States' reform efforts reflect varying components of these credits. California's, for example, focused on relaxing the state's eligibility provisions. Previously, its minimum age requirement for taxpayers without children mirrored the federal EITC requirement of 25 years. However, effective fiscal year 2019, taxpayers aged 18–24 will no longer be ineligible for the credit on the sole basis of not having children. Maryland similarly repealed its minimum age requirement this year. Interestingly, both states are also home to two of the few local jurisdictions that also operate EITC programs—San Francisco, CA, and Montgomery County, MD.

In Delaware, lawmakers tackled the issue of refundability. A refundable EITC entitles taxpayers to a refund in cases where the calculated credit value exceeds the amount of tax owed. H.B. 113, which proposed transitioning the state’s non-refundable credit to a refundable one, ultimately passed both houses in July 2018, but has yet to be signed by the governor.

Finally, New Jersey is an example of a state that prioritized increasing the amount of its credit. Like most states with an EITC, New Jersey’s rate is tied to the federal EITC; calculated as a percentage of the value computed for federal purposes. Accordingly, each state determines its own rate, and this year, New Jersey bumped up its EITC from 35 to 40 percent of the federal credit.

While Congress has signaled an interest in the issue, states have certainly taken the lead when it comes to EITC reforms. Whether this trend will continue, however, remains to be seen.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Do you think more states will create and/or strengthen EITCs?

Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.