January 26, 2009 —

Introduction

The economic recovery package currently under consideration by the U.S. House of Representatives, as well as corresponding legislation before the Senate Finance committee, includes a number of tax relief provisions that would benefit lower-income workers and their families. One such provision would temporarily expand the federal Earned Income Tax Credit (EITC). The EITC—a refundable tax credit for people who work but earn low incomes—is the country’s largest and most successful anti-poverty program. The EITC delivers over $40 billion dollars a year in wage supplements to lower-income workers and their families and lifts more than 4 million people out of poverty each year.

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As effective as the EITC has been at encouraging work and alleviating poverty, the credit could do more for certain groups of taxpayers to help make work pay, especially given the nation’s current economic challenges. In particular, larger families—those with three or more children—receive no additional support under current EITC eligibility rules, though these families are more likely to be low-income even when they are working. In addition, married couples face a “penalty” when they claim the EITC in that they must report their joint income, resulting in a smaller credit (or no credit) compared to what they might claim if they were not married.

These two groups—larger families and married couples—are the focus of the EITC expansion included in House and Senate versions of the economic recovery package.

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