More Social, Family & Housing Policy Plays

Public policy should encourage work -- especially for the working poor. The principle is simple: No American family with a full-time worker should have to live in poverty. But many bottom-rung jobs do not pay enough to provide families with a minimally decent standard of living. Without additional support, a minimum-wage worker with a family of three would be unable to lift him- or herself over the poverty line. Thus, government, at all levels, should strengthen work incentives by supplementing the income of those low-wage earners who have families. The single most effective mechanism for providing that support has been the Earned Income Tax Credit (EITC), which supplements the income of low-wage earners through a refundable tax credit, allowing families without income tax liability to benefit from the full amount of the credit.

Because it boosts the earnings of low-income families while rewarding work, the EITC has enjoyed wide bipartisan support since its inception in 1975. President Clinton significantly expaned the EITC in 1993 and today, the program is the federal government's most effective anti-poverty program. The credit supplements the wages of 22 million low-income Americans and lifts 4 million people out of poverty every year.

"The Earned Income Tax Credit is perhaps one of the greatest tools low-income residents have at their disposal to improve their quality of life, pay for much needed projects, pay down debt or to begin to save and accumulate wealth for their future." -- Governor Martin O'Malley, Maryland

Since 1993, 23 states and the District of Columbia have built on the federal framework by enacting their own versions of the EITC. The majority of those states have adopted a refundable model, including Colorado, the District of Columbia, Illinois, Indiana, Kansas, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oklahoma, Oregon, Rhode Island, Vermont, and Wisconsin. Four states -- Delaware, Iowa, Maine, and Virginia -- have instituted a non-refundable credit, meaning that families only receive a credit to offset their state income taxes. Uniquely, Maryland offers taxpayers a choice of a refundable or non-refundable credit. Washington, the most recent state to adopt a state-level EITC, is unique in that it is the first state in the nation that offers the tax credit but does not have an income tax. This new law, scheduled to take effect in 2009, can serve as a model for other states that want to increase work incentives and wages for low-income working families, but also do not levy an income tax.

In the majority of states, the state version of the EITC equals a percentage of the federal credit -- ranging from 3.9 percent in North Carolina and Louisiana to 32 percent in Vermont. Most states finance the credits from general funds; if a state's credit is refundable, however, a portion of the cost of the credit can be paid for with funds from the Temporary Assistance for Needy Families (TANF) block grant. Four states have integrated commendable innovations into their versions of the credit: