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In 2012, the Earned Income Tax Credit (EITC) benefited more than 27 million workers and helped lift 6.5 million people out of poverty, including 3.3 million children. EITC, a federal tax credit, works by supplementing the earnings of low-wage workers, encouraging work and off-setting payroll and income taxes. In 2013, a family of three could receive the maximum tax benefit of $6,044.
More than half of the states have adopted their own version of the EITC to supplement the federal credit. EITC at the federal level, and in most states that have created EITC programs is refundable, which is a critical aspect of the program. Twenty-one states and DC offer a fully refundable EITC, which helps families remain out of poverty by allowing families with no income tax liability to receive the entire EITC as a refund. The four states that do not provide a refundable EITC restrict benefits to the reduction of state income taxes, unfortunately, this does not do much to compensate for the other tax costs that low-income families are responsible for paying.
In addition to creating or expanding state EITC programs , several recommendations have been made to strengthen the federal EITC, which include extending the EITC to single, childless workers. EITC for single workers without children can provide a strong incentive to enter the workforce and increase the hours worked, while providing a significant wage supplement to low-wage earners. Some advocates suggest that combing the EITC with a raise in the minimum wage to $10.10 can save federal dollars since taxes would be higher and less low-wage workers would rely on public benefits.
Two-parent families with two children and a full-time, minimum-wage worker should not have to raise their children in poverty. For these working families, the supplement of wages through EITC goes a long way in helping improve outcomes for children living in poverty, since parents have extra financial resources to mitigate obstacles that come as a result of financial strains. For childless workers, a small group of workers that are heavily taxed into poverty, extending the EITC in their favor could have significant returns. State policymakers should consider the positive impact of maintaining, restoring, or expanding one of the most effective safety-net programs in preventing poverty. The EITC is an important resources for encouraging work, providing income, and improving outcomes for young children.
For more information on improving outcomes for young children, stay tuned for our Child Poverty section soon to be released on PolicyforResults!