The State Role in Rewarding Work through the EITC

Thank you for the opportunity to speak today about the state role in rewarding work through the federal earned income tax credit. I have been asked to do three things in my remarks:

• first, to describe generally what the earned income tax credit is, how it works, who it serves;
• second, to discuss the spatial distribution of the credit in your states based on analysis that Brookings has conducted; and
• third, to describe what states can do to leverage this important federal resource.

The Earned Income Tax Credit

The earned income tax credit is a proven federal tool that reduces poverty, rewards work, strengthens rural and neighborhood economies and needs little bureaucracy to implement.

The principle behind the EITC is simple–far too many Americans are trying to support families on jobs that don’t pay enough to make ends meet. The federal government uses the tax code to augment their earnings, by up to 40 percent for families with minimum-wage income. The size of the credit varies by the size and income level of the family.

• Families with two or more children can receive a credit of up to $4100
• Families with one child can receive a credit of up to $2500
• Workers who are childless can receive a credit of up to $375

About half of all EITC dollars goes to families who earn less than $12,000; the remainder goes to families earning up to $33,000.

The EITC is now the largest federal aid program targeted to the working poor. The EITC makes work pay, and in so doing lifts nearly 5 million people out of poverty every year. Overall, nearly 20 million families benefit from the credit annually.

Because they flow directly to families, EITC dollars can’t plug state budget gaps directly. But they can provide vital assistance to the families and neighborhoods that are hardest-hit by the economic downturn, and that are most affected by the budget cuts and tax hikes on the table for the coming year.

EITC in the States

What does this mean for states? It means that every year, between January and April, over $30 billion flows from Washington to working families in every state in the nation. All regions of the country and all kinds of jurisdictions benefit.

Brookings is preparing a report on how the EITC is distributed in every one of the 50 states. Let me give you a preview of our findings.

First, the percent of tax filers who receive the EITC varies from state to state.

• In Indiana, 13 percent of all tax filers received the credit in 2000. Total refunds: $560 million.
• In Florida, 17 percent of all tax filers received the credit. Total refunds: more than $2.1 billion dollars.
• In Mississippi, more than 30 percent of all tax filers get the refund for a total of $650 million.

Second, the EITC benefits a cross section of American communities. Our research shows that the cities of the 100 largest metropolitan areas benefit to the tune of $7.7 billion. Rural areas are also big recipients, receiving over $7 billion a year. Significantly, working families living in suburbs of these cities are the biggest recipients of federal aid, receiving close to $10.5 billion a year.

Finally, we have prepared maps for every Governor that display the spatial distribution of EITC in each of your states. These maps show that you can find EITC earners clustered in areas of all shapes and sizes–big cities, smaller cities, suburbs, and rural counties.

We think these maps–and other material that we are preparing for release this spring–can help states put together targeted and cost effective strategies for leveraging this federal resource.

What States can do to leverage the EITC

So what’s the play for governors and human services directors on the EITC? We believe states can help (and are helping to) maximize the impact of the credit in your communities in three important ways:

First, states can connect more families to the tax credits they’ve earned.

Most families who are eligible for the EITC claim it. But millions miss out on the credit–especially workers with very low incomes, women moving from welfare to work, and immigrant families.

The result–billions of federal dollars to support the working poor are left on the table every year. To make sure all eligible families get the EITC, governors and human service directors can actively engage in campaigns to publicize the availability of the EITC and other tax credits.

Some of this is already happening. In Indiana, Governor O’Bannon and the state human services agency are engaged in an EITC promotional blitz through April that includes media events, visits to newspaper editorial boards, letters to legislators and employers, and envelope stuffers for TANF recipients, childcare providers, and Section 8 landlords and tenants.

These efforts put money in the bank. In 1999, Washington State spent $315,000 on a public information campaign on EITC that included direct mail and TV, radio and transit advertising. The State also established a toll free hotline to distribute EITC material. The hotline received more than 16,000 calls. EITC refunds went up $29 million in one year.

Second, states can help families keep as much of their refunds as possible.

Most people who get the EITC need assistance navigating the tax code and filing their forms. Unfortunately, the fees they pay for tax preparation and “fast cash” refund loans cost them hundreds of dollars and erode the effectiveness of the credit. Alternatives exist, and governors can inform the public about them.

In Delaware, for example, Governor Minner’s “EITC-Plus” campaign partners with banks, nonprofits, chambers of commerce, and the IRS to promote volunteer tax preparation and financial education for low-income taxpayers.

Similar efforts are underway in North Dakota and other states.

Third, states can enact their own earned income credits to complement the federal one.

Today, 16 states and two local jurisdictions offer earned income credits through their own tax codes that build on the federal EITC. It’s not immediately apparent that you’d want to be thinking about new or expanded tax credits in a time of budget shortfalls. But a state EITC can serve as a “release valve” for working poor families who are disproportionately burdened by tax hikes and service cuts that will be adopted this year.

Governor Pataki has proposed an expansion of the New York State EITC this year that would make it the most generous in the nation. Governor Owens of Colorado championed the creation of a local EITC for Denver’s working poor families. Earned income credits at the state level can even increase participation in the federal EITC as more people become aware of the opportunity to claim tax refunds.

I would argue that states are in a unique position to leverage this vital federal program.

As the maps show, the EITC is more than just a city program. In fact, in about 21 states, rural areas are the big recipients of government work benefits.

States oversee and invest in health care, welfare and child care programs. Perhaps more than any other level of government, you see the connections between work, income, government support and family stability.

You have the potential to work closely with the federal government, large national foundations like the Annie E. Casey Foundation and other corporate and civic leaders on systemic and sustained approaches to leveraging the credit.

So, here’s the pitch. At a time of enormous fiscal constraints, the earned income tax credit offers one of the best opportunities out there to increase incomes and earnings for working families and stimulate hard-pressed urban and rural communities.

Brookings looks forward to working with you and your staff on realizing the potential of this important reward for work.