Talking Points - Earned Income Tax Credit

Nearly one in six American children live in poverty.
While welfare reform has been hailed as a success, former welfare recipients and other low-income Americans often earn wages at or below the poverty level at their new jobs, not nearly enough to support a family. In the current economic downturn, the financial position of low-income families will only worsen.

The federal Earned Income Tax Credit (EITC) was created in 1975 to support low-income workers.
The program was expanded in 1986, 1990, 1993 and most recently in 2001, and has now become a central part of federal efforts to fight poverty and move Americans from welfare to work. Only wage-earners qualify for this program, and the value of the tax credit depends on a worker’s income and family size. Workers who earn around the minimum wage benefit the most from EITCs.

Most of the federal EITC’s benefits are targeted towards families with children.
In tax year 2002, qualifying families with two or more children could receive up to $4,140 and families with one child up to $2,506. Workers with no dependent children are only eligible to receive a maximum of $376 from the federal EITC.

The federal program is a “refundable” credit. That means that if a credit exceeds a family’s total income tax liability, the difference is paid to the family as a refund.
If a family doesn’t earn enough to owe income tax, it receives a check based on its annual household income. Eleven states and the District of Columbia  offer a refundable credit that is a percentage of the federal EITC, while five states have less effective “non-refundable” EITC statutes. In those states, the credit can erase tax liability, but the poorest wage earners, those with incomes too low to owe any state income taxes, receive no state benefit at all.

The EITC has only recently gained momentum at the state level.
Of the 16 states and the District of Columbia which currently have an EITC, nine states and DC adopted or substantially increased EITCs in 2000 or 2001. In 2002, Indiana enacted a refundable credit and Kansas increased its credit from 10 to 15 percent of the federal EITC.

This policy package relies in large part on information from the Center on Budget and Policy Priorities and the Center for Policy Alternatives, and ALICE would like to thank these two groups for blazing the trail to the High Road.

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