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Amid Slow Recovery, Some States Turn to Tax Credits for Working Poor

Last year, at least 15 states sought to help the working poor by building upon the federal Earned Income Tax Credit.

At a time when the country’s poverty rate is the highest in two decades, some state lawmakers think a partial solution lies in expanding tax credits for the working poor. Last year at least 15 states considered legislation that would either create, expand or retain a state version of the federal Earned Income Tax Credit (EITC), according to a recent analysis by the National Conference of State Legislatures. Five states enacted laws that somehow strengthen the federal anti-poverty program.

The federal tax credit helps the working poor by reducing the amount of taxes a person or family owes on annual income and wages. The size of the credit depends on earnings and household size. For instance, a low-income family with three or more children could receive a maximum credit of $6,044 in 2013. The tax credit is refundable, which means that if the size of the credit exceeds the amount of taxes owed, the remaining value of the credit goes to the tax filer.

The EITC owes its origins to efforts by the Nixon administration and Congress to stimulate the national economy during the recession of 1974 and to relieve low-income families from the burden of rising payroll taxes in the 1970s. Congress designed the credit to incentivize finding a job and increasing earnings since the size of the credit would increase (to a point) as one's earnings increased. The program has historically enjoyed bipartisan support because numerous empirical economic studies have shown that it encourages work while providing incentives for people to leave welfare.

This week, however, a potential presidential candidate in 2016, Sen. Marco Rubio of Florida, proposed replacing the credit with wage enhancements for certain low-paying jobs. Rubio criticized the current federal tax credit for coming in a lump sum once a year, rather providing aid on an ongoing basis -- the way actual paychecks do.

Twenty-five states, plus New York City and the District of Columbia, have local tax credits that match a percentage of the federal credit someone receives. The size of the state percentage match ranges from Louisiana’s 3.5 percent to Vermont’s 32 percent.

The following map shows states with matching EITC programs. Click a state for details:

NOTE: Please zoom out to view Alaska and Hawaii.
The match percentages listed for each state apply for the tax year 2013.
Source: Internal Revenue Service

Map Key
State does not have Earned Income Tax Credit
State has Earned Income Tax Credit

In recent months, some conservatives discussing poverty and income inequality, including economist Gregory Mankiw, have said they would prefer that policymakers focus on tax credits for the working poor in lieu of raising the minimum wage. In a column last week in The New York Times, Mankiw argued that the tax credit is better because it doesn't create incentives for businesses to automate jobs and avoid new hiring. Forcing businesses to pay higher wages, by contrast, seems unfair to Mankiw since "this group is already doing more than its share. After all, it is providing jobs to the unskilled."

Mankiw’s comments come at a time when President Barack Obama and Democrats in the U.S. Senate are pushing for an increase to the federal minimum wage, currently set at $7.25 per hour. Last year several states, such as New Jersey, New York and California, approved raises to state minimum wages, either through legislation or by popular vote. The District of Columbia and its two neighboring counties in Maryland decided to coordinate hyper local increases to their minimum wage requirements. Seattle may be on a course to do the same in 2014.

Comparable proposals to enhance the federal EITC do exist, but they have yet to receive the same fanfare as raising the minimum wage. Legislation introduced last year in Congress never left committee, for example. Robert Reich, a former secretary of labor under the Clinton administration, argues that the federal credit should be enlarged and available to people making slightly higher incomes (although his proposals call for a raise to the minimum wage in tandem with an expanded EITC). In general, economists on the left say expansions to the tax credit should be balanced by raises to the minimum wage because recent research suggests the EITC alone functions as a subsidy for the employers of low-wage workers, keeping pay artificially low.

Unlike proposals to raise the minimum wage, where support is significantly higher among Democrats than Republicans, both liberals and conservatives tend to like the EITC. Perhaps that explains why some state lawmakers, even in states with Republican governors, passed laws to strengthen tax credits for the working poor. Ohio, for example, created a non-refundable credit for tax filers in 2014 worth 5 percent of the federal EITC. Iowa, Minnesota and Oregon expanded their credits, either by extending eligibility to more people or by increasing the percentage match. Colorado essentially reinstated its tax credit program, which was previously contingent on budget surpluses and hadn't been paid since 2001.

In all, 18 states considered 29 bills that dealt with changes to state versions of the federal tax credit, according to a recent analysis by the National Conference of State Legislatures. Eight bills would have created a new state tax credit and another 13 would have expanded a state credit in some way. Three others sought to retain an expiring credit. Five bills in the three states went the other direction by actually reducing or repealing existing state tax credits for the working poor. Ultimately lawmakers in Connecticut reduced their percentage match and North Carolina opted to repeal its program entirely in 2014.

State Legislative Actions in 2013

Eighteen states introduced legislation last year to create, retain, increase or reduce Earned Income Tax Credits, shown in the table below.

State Legislative Action
Colorado Enacted legislation to retain EITC.
Connecticut Enacted legislation to reduce EITC.
Massachusetts Introduced legislation to create an EITC for early childhood education, increase EITC.
Hawaii Introduced legislation to create an EITC.
Iowa Passed legislation to increase EITC.
Kansas Introduced legislation to reduce EITC.
Maine Introduced legislation to increase EITC.
Michigan Introduced legislation to increase EITC.
Minnesota Passed legislation to increase EITC.
Montana Introduced legislation to create an EITC.
New Jersey Passed legislation to increase EITC, but vetoed by governor.
North Carolina Enacted legislation to reduce EITC, repeal for future tax years.
Ohio Passed legislation to create an EITC.
Oregon Passed legislation to increase EITC and retain until 2020.
Rhode Island Introduced legislation to increase EITC.
South Carolina Introduced legislation to create an EITC.
Utah Introduced legislation to create an EITC.
Wisconsin Introduced legislation to increase EITC.
Source: National Conference of State Legislatures
J.B. Wogan is a Governing staff writer.
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