States boost earned income tax credits for pandemic relief

  • A growing number of states have added or improved earned income tax credits in response to the coronavirus pandemic.
  • Leveraging American Rescue Plan funds, 10 states have boosted the write-off, and Delaware and the District of Columbia have pending legislation.
  • More than 1 million low-income families may qualify for state-level relief, according to the Center on Budget and Policy Priorities.

A growing number of states have leveraged funds from the American Rescue Plan to add or improve earned income tax credits for families most affected by the coronavirus pandemic.

The earned income tax credit, known as EITC, provides low- to moderate-income families with a write-off. To qualify, taxpayers must have earned income, which is wages and payments other than investments.

The federal EITC is refundable, meaning it can reduce tax bills or provide a refund, regardless of liability. However, some state-level EITCs may be nonrefundable, covering only up to taxes owed.

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Ten states — Colorado, Connecticut, Indiana, Maryland, Missouri, New Jersey, New Mexico, Oklahoma, Oregon and Washington — have passed bills to improve EITCs, and there is pending legislation in Delaware and the District of Columbia.

"The earned income tax credit is a great tool for states to use to help lower-income workers because they get to piggyback off the work of the federal government," said Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center. 

Workers may receive the federal EITC based on earnings, phasing out above certain income levels, and the state-level tax breaks are typically a percentage of the federal credit, following the same eligibility rules.

"They just copy and paste the federal rules, stick them in the state tax code, and then just give a percentage of the amount of money that they got from the federal credit," he said.

However, every state is different and the latest round of changes may vary, Auxier said.

For example, Indiana boosted its EITC to 10% from 9% of the federal credit, whereas the District of Columbia is pushing for a hike to 70% from 40%. While the difference may be tens of dollars in Indiana, it may be worth thousands in the district, he said.

Still, policy experts say these state-level changes may offer much-needed relief at tax time.

Low-wage workers have been among the hardest hit during the pandemic, said Samantha Waxman, senior policy analyst at the Center on Budget and Policy Priorities.

"These folks have been more likely to lose their jobs and their income due to Covid-19," she said. "Or if they work as front-line essential workers and have been able to keep their jobs, they tend to have higher infection risk."

Once these tax breaks go into effect, more than 1 million families may qualify for state EITCs, and many will receive higher refunds, according to the CBPP.

"Overall, it's a relatively well-targeted form of tax relief," said Katherine Loughead, senior policy analyst at the Tax Foundation. "It's means-tested in a way that benefits those most in need, while also encouraging participation in the labor force."

Federal EITC expansion

The American Rescue Plan expanded the federal EITC through 2021, allowing more workers without children to qualify. The expansion also lifted age limits, making the credit available to younger workers. 

President Joe Biden proposed making these changes permanent in the American Families Plan, which could provide $12.4 billion to families in 2022, affecting 19.5 million workers, according to research from the Institute on Taxation and Economic Policy.  

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