CFED Assets & Opportunity Scorecard
Tax Credits for Working Families
To augment low wages, state governments have increasingly used tax credits to help families escape poverty and put them on a path to prosperity. Tax credits available to low-and moderate-income families, such as the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and Child and Dependent Care Tax Credit (CDCTC), reduce the regressive tax burden on the working poor, put more money in their pockets, and make saving for the future possible. States should adopt versions of the EITC, CTC, and CDCTC that piggyback on the federal credit. Ideally, state credits should be fully refundable so that all low-income families, even those without a tax liability, can benefit from the credit.
CFED evaluated the strength of each state’s tax policies for working families against the four criteria described in the Elements of a Strong Policy tab. The following table shows which criteria each state met.
CFED uses the following icons to denote the strength of state policies:
Strength of State Policies: Tax Credits for Working Families 1
|State||Has the state enacted an EITC?||Is the state EITC refundable?||Is the credit at least 15% of federal EITC?||Has the state enacted a CTC or CDCTC? (must have enacted at least one to receive credit) 2||Rating|
|California||No||—||—||CTC and CDCTC|
|Colorado||Yes- currently suspended 3||(Yes)||(10%)||CDCTC|
|District of Columbia||Yes||Yes||40%||CDCTC|
|Kansas||Yes||Yes||18%, 2010-2012; 17% after||No 7|
|Maryland||Yes||Partially||Refundable rate: 25%; non-refundable rate: 50%||CDCTC|
|Minnesota||Yes||Yes||In 2008, the average Minnesota credit was approximately 33% of the federal EITC 9||CDCTC|
|New York||Yes||Yes||30%||CTC and CDCTC|
|North Carolina||Yes 10||Yes||5%||CTC and CDCTC|
|Oklahoma||Yes 11||Yes||5%||CTC and CDCTC|
|Rhode Island||Yes||Partially||25% of federal EITC, 15% refundable||CDCTC|
|Washington||Yes-currently unfunded 14||(Yes)||(10%)||No|
|West Virginia||No, but does have limited low-income exclusion to decrease liability for taxpayers below FPL||—||—||No|
|Wisconsin 15||Yes||Yes||Average 18%||No|
1. The Hatcher Group, "Tax Credits for Working Families 50 State Resource Map." Accessed August 14, 2012. www.taxcreditsforworkingfamilies.org. CFED thanks Amy Greene of The Hatcher Group for assistance in data collection and provision of additional data. Note: "-" indicates that the data is not applicable because the state does not currently have an EITC.
2. States receive credit for enacting either a Child Tax Credit or Child and Dependent Care Tax Credit.
3. Colorado funds an EITC only in years with surplus state revenue. Although credit was awarded to Colorado for enacting a state EITC, no credit was awarded for refundability as low-income taxpayers will not have acccess to the credit until 2014--the next year Colorado is projected to have surplus revenue.
4. In November 2011, Illinois passed a bill to double the EITC from 5% to 10% of the federal credit by 2014. The credit will be 7.5% in 2012 and 2013.
5. In 2012, the Indiana Senate approved a bill to review the EITC from 2012-2013 and will consider eliminating the credit in 2013.
6. In 2012, the Iowa legislature passed a bill to increase the EITC from 7% to 20% over several years, but the governor vetoed it.
7. In 2012, Kansas repealed its CDCTC, which was 25% of the federal credit.
8. In 2012, Michigan introduced a bill to raise the EITC to 20%. The EITC was cut from 20% to 6% in 2011.
9. Minnesota restructured its "Working Family Credit" from a percentage of the federal EITC to a percentage of earnings.
10. The EITC was scheduled to sunset at the end of 2012, but the legislature passed and the Governor signed a one year extension.
11. In 2012, Oklahoma introduced several bills to eliminate the EITC but none were successful.
12. Oregon's EITC is scheduled to sunset in 2013.
13. In 2012, the Utah Senate passed a bill to create a state EITC at 5% of the federal credit, but the session ended with no resolution.
14. Although Washington created the Working Families Tax Credit in 2008 to supplement the federal EITC refund, it has yet to fund the state credit and thus will not receive credit for refundability. Washington remains the only state without an income tax to enact an EITC.
15. The Wisconsin EITC is calculated based on the number of children claimed as dependents by the filer. For tax year 2011, filers with one child may claim 4% of the federal credit, filers with two children may claim 11%, and filers with three or more children may claim 34% of the federal EITC.The average percentage of the federal credit was computed based on a comparison of the average Wisconsin EITC ($467) against the average federal credit ($2,587) for tax year 2009, the most recent year for which Wisconsin EITC data is available. That percentage does not reflect the 2011 law that decreased the maximum state credit that can be claimed by filers with three or more dependents from 43% to 34%.
WHAT STATES CAN DO
States can create their own versions of the EITC, CTC and CDCTC based on the structure and eligibility criteria of the federal credit. Ideally, state credits should be fully refundable so that all low-income families without a tax liability can benefit from the credit.
For the EITC, each state can determine the amount of the credit, its coverage and family size adjustments, as well as whether it will be refundable. States can also encourage families to save all or part of their refund by offering a “split refund” option on state income tax returns whereby filers can divide their refunds into multiple accounts. Working in conjunction with the IRS, even states without a broad-based income tax can create a refundable EITC structured around the federal credit.
States are similarly empowered to create CTCs and CDCTCs to reduce the tax burden on low- and moderate-income families. Although these credits are often structured simply as a percentage of the federal credits, states can expand eligibility, adjust income thresholds, and design other features specifically targeted towards working families. For example, states can structure the CDCTC to encourage the use of higher-quality child care by offering a larger credit for families who enroll children in state-certified facilities.
What States Have Done
To date, 26 states (including the District of Columbia) have enacted EITCs; the most recent was Connecticut, which enacted an EITC in 2011. State EITCs range from 3.5% to 40% of the federal credit, and 23 credits are at least partially refundable.1
In 2008, Washington became the first of the nine states without a broad-based income tax to enact a state EITC. Although the credit has yet to be fully funded, it nevertheless serves as an innovative example for other states that depend largely on regressive sales taxes for revenue. When fully funded, “Washington’s Working Families Credit” will benefit up to 370,000 Washington households, with an estimated 97% of expenditures going to families with children.2
Four states – California, North Carolina, Oklahoma and New York – have enacted state Child Tax Credits. Enacted in 2006, New York’s Empire State Child Credit remains the only fully refundable state CTC in the country, with recipients eligible for 33% of the federal CTC or $100 per qualifying child. Oklahoma allows eligible families to claim either 5% of the federal CTC or 20% of the federal CDCTC, but not both.
Seventeen states provide a Child and Dependent Care Tax Credit that is based on a percentage of the federal credit, with percentages ranging from 20% to 110% of the federal credit.3 Four states – Louisiana, Oregon, North Carolina and South Carolina – offer credits structured as a percentage of child care expenses eligible for the federal credit, but not as a percentage of the federal credit itself. Unlike the federal credit, these state credits are not explicitly targeted to lower-income families. Several other states offer state income tax deductions for child care expenses, but not credits.4
1 This includes Maryland’s and Rhode Island’s EITCs, which are partially refundable, as well as Colorado’s and Washington’s, which are not currently funded.
3 Nancy Duff Campbell, Making Care Less Taxing: Improving State Child and Dependent Care Tax Provisions (Washington, DC: National Women’s Law Center, 2011).
ELEMENTS OF A STRONG POLICY
CFED considers a state’s tax policy for working families strong if it meets the following criteria:
1. Has the state enacted an EITC policy? A first step that states should take to is to get a state EITC – no matter how small – on the books. Even a relatively small credit will make a difference for some low-income families and can lay the groundwork for subsequent expansion.
2. Is the credit refundable? Refundability is the single most important component of the EITC. Because families with very low earnings are likely to have little or no state income tax liability, only a refundable credit reaches them, giving them an added incentive to work and helping to offset the other state taxes they pay.
3. Is the credit at least 15% of federal EITC? Credit levels should be large enough to ensure that working poor families receive adequate support to benefit from the program. Primary considerations in setting a state credit level include the affordability of the program for the state, the level of tax relief desired and the size of the desired income boost for poor families.
4. Has the state enacted a state CTC or state CDCTC? The CTC and CDCTC help working families offset the rising cost of caring for children and dependents. States should create state-level CTCs and CDCTCs that piggyback on the federal credits. Ideally these credits should be fully refundable and represent a significant percentage of the federal credits.
To see how each state’s policy stacks up against these criteria, see the State Data tab above.
MAKING THE CASE
Lessons from Advocates1
Most state EITCs, CTCs and CDCTCs were enacted because citizen groups, advocacy organizations, business groups, human service providers, legislators and/or executive branch officials identified poverty among working families as a problem and tax credits as an appropriate solution – and then organized campaigns to get them enacted.
1. Clear information and messaging. Each campaign to enact a state EITC began by reviewing data on the impact of the credit and the potential cost. Often this information was pulled together in a report and distributed to the media, policymakers and other advocates. For example, advocates in Maine produced a report providing statistics describing hours worked and wages earned by the working poor. This report also provided recommendations of policies to support the working poor, including a state EITC. Advocates in North Carolina and New York produced detailed estimates of the projected impact and distribution of a state CTC in the lead-up to adoption. But the numbers are not enough. Groups working on state EITCs collected other kinds of information to help make the case for enacting a state EITC. For example, advocates in Illinois conducted focus groups with residents and community leaders to gather information on perceptions of the EITC and to test what messages helped them to best describe its impact. This information was used in creating reports and campaign materials.
2. Strong coalition partners. Getting a state to enact an EITC, CTC or CDCTC often requires collaboration. Most successful efforts were undertaken by coalitions of organizations working together to raise awareness of the importance of these credits. Who participates in these coalitions varies widely and is influenced by historic partnerships, the ability of core advocates to organize among their peers, the time available to build a coalition and other factors. For example, in Rhode Island 170 organizations and more than 450 individuals worked to establish and, later, make refundable the state EITC.
Coalition members came from a broad array of sectors including health, consumer justice, children’s services, faith-based groups, housing, higher education, mental health and aging. Coalition members worked together on EITC issues, each taking a different role, ranging from researching the issue to getting the word out across the state. For other states, the key was establishing a small and pivotal group to work on the effort. For example, in Oklahoma, engaging a highly respected children’s organization that does not usually take positions on fiscal issues was a key to the coalition. This unusual partner helped to open doors that often are closed to advocates working on economic security policy. In other states, notably Illinois, business groups proved to be key.
Advocates hoping to enact a state CTC or CDCTC should ensure that child advocacy organizations are involved in coalition efforts. Childcare providers and women’s equity organizations specifically can play a pivotal role in convincing policymakers of the importance of the CDCTC.
3. Effective political leadership. As with most state policy changes, political leadership can spearhead the issue, raise awareness among policymakers and ensure that the issue stays in the forefront of policy debates. Advocates report that often a natural leader emerges – a policymaker with a history of championing policies to support low-wage workers. In other cases, advocates cultivated a relationship over a period of years with a policymaker to raise his or her understanding of the issues faced by his/her low-wage constituents, the importance of tax credits for working families to the local economy, and the link between these tax credits and state policy goals. In some cases, it is most effective to identify a champion who is not routinely associated with low-income issues. For example, advocates in Virginia worked with a Republican state senator who was a leader in tax reform. The advocates talked with the senator about fiscal conditions of the state, the impact of fiscal policies on the working poor and policies, including the EITC, that help the working poor. When he was crafting a major tax reform package, the senator decided to include a state EITC in his tax reform package and became an effective voice for its passage.
4. Strategic use of opportunities. In some cases, advocates were able to take advantage of policy debates or actions and link the passage of tax credits to other policy changes that had momentum. For example, in Delaware a state-sponsored Task Force for Financial Independence was meeting to debate changes to the tax code. Advocates worked to raise awareness of the EITC among members, and a state EITC was ultimately part of the task force’s recommendations. This work helped lead to the passage of a non-refundable state EITC. In Oregon, policy analysts and advocates raised awareness of corporate tax loopholes that needed to be closed. In their work, they made the connection between the revenues that would be available to the state by closing the loopholes and dedicating the funds to enable the state’s EITC to become refundable. In New York, a proposal by a Democratic governor to provide a refundable credit for education was effectively seized by advocates as a platform for a state CTC.
5. Perseverance. Making a change in public policy can take a long time. Advocates who have worked on state tax credit policies report that it often took several years of raising awareness, encouraging political leadership and organizing at the local level before there was enough momentum to get state tax credits passed. In some places, advocates intentionally crafted a multi-year strategy to get a state EITC, starting with raising awareness of the issues faced by the working poor, raising awareness of high tax burdens and looking for strategic opportunities and political leadership to move a state EITC.
6. Preparation for defense: Although the EITC is a bipartisan policy with a strong track record of reducing poverty, it is not immune to demands for budget cuts. Once a state EITC is enacted, advocates should continue to document and publicize the benefits of the policy, and be ready to mobilize against proposals to cut the credit. Some ways to keep the issue alive after passage and prepare for threats include: documenting the impact of the state EITC through partner organizations that work with affected families; media outreach around tax day highlighting personal stories of EITC earners; and “thank you” events with legislators and workers who benefit, where the coalition honors legislators who helped with passage.
Budget cuts can happen fast, and advocates need to continually monitor the budget process for signs of threats to the EITC. When elimination or reduction of a state’s EITC does come under consideration, advocates should immediately come together and develop a plan of action.
State tax credits for low-income families can further the goals of federal policy by bringing working families closer to or above the poverty line. And just as the federal EITC helps offset federal taxes paid by low-income working families, state EITCs can help relieve the substantial burden of state and local taxes levied on working-poor families in every state. The following are messages that can help make the case for creating or expanding state tax credits:
1. The EITC makes work pay by allowing low- and moderate-income families to keep more of what they earn. Many families are poor despite the fact that they work. The EITC effectively boosts the income of working families earning low wages by offsetting their income and payroll taxes and increasing the incentive to work more. Moreover, despite the success of the federal EITC in reducing poverty among working families, wages plus the federal EITC do not guarantee an escape from poverty for all families. Even many families with a full-time, year-round worker remain poor. Other families with working parents remain poor because parents are unable to find full-time, year-round employment.
2. State EITCs lift additional families out of poverty and boost living standards. State EITCs can build on the success of the federal EITC in combating poverty and economic hardship among working families with children. Closing or at least substantially reducing the poverty gap for many working families is within the reach of many states.
3. State EITCs complement welfare-to-work strategies. The effectiveness of state EITCs in enabling low-wage workers to escape poverty is of particular relevance to the design of state welfare programs. Many welfare recipients who take jobs continue to have very low incomes, often below the poverty line. Recent evidence from several states shows that although most welfare recipients who found jobs are employed close to full-time, many of them earn wages at or only slightly above the minimum wage. Moreover, many do not qualify for paid vacation or sick leave, forcing them to take unpaid leave for reasons such as a child’s illness. A combination of the federal EITC and a state EITC, however, can close the poverty gap for many welfare recipients as they move into the workforce.
4. State EITCs provide needed tax relief. In addition to boosting living standards among working families, state EITCs can play an important role in providing relief from state and local taxes paid by low-income working families, just as the federal EITC serves to relieve the burden of payroll taxes on such families. In every state, low-income working families pay a substantial share of their income in state and local taxes. State EITCs thus can help ensure that state tax systems do not push working families closer to, or deeper into, poverty.
5. State EITCs play an important role in supporting families hit hard by the economic downturn. Families use EITCs to fill in for the loss of wages that can result from reductions in hours or layoffs. As long as they are still working at least some hours a year, families can benefit from the EITC.
6. EITCs create asset-building opportunities. Seminal research conducted in 2000 supports what many believe – EITCs create opportunities for low-income families to build financial security and increase social mobility. In addition to meeting immediate basic needs, federal and state tax refunds can be deposited into long-term savings vehicles to protect families against unforeseen losses.
CTC and CDCTC Messaging
Although many of the same campaign tactics and messaging techniques utilized for state EITCs can be applied to other policies, the unique structures of the CTC and CDCTC often necessitate their own communication strategies. The following messages can help make the case for enacting or expanding state CTCs and CDCTCs.3
1. Refundability is key. Many low-income families won’t be able to benefit from non-refundable CTCs and CDCTCs. Refundability ensures that both credits are effectively tailored towards poorer households and provides an added economic stimulus to communities.
2. State CTCs and CDCTCs benefit both low-income and middle-class families. State CTCs and CDCTCs can provide tax relief to families with a wide range of incomes. The federal CTC phases out for married couples at $110,000, while all tax filers regardless of income qualify for the federal CDCTC. State credits modeled after their federal counterparts thus enjoy a broad political constituency that appeals to lawmakers. However, advocates should push for provisions within each credit – such as refundability – that benefit low-income families.
3. Equity for women. Women continue to bear the bulk of responsibility for child care. Tax code provisions such as the CTC and especially the CDCTC that help women afford care for children and adult dependents take some of the burden off women and reduce barriers to participation in the workforce.
4. CDCTC allows low-income families to afford higher quality child care. The CDCTC puts more money in families’ hands for employment-related care expenses, allowing them to purchase better care for their children and other dependents. Moreover, state CDCTCs can be structured to incentivize parents to place their children in higher-quality care facilities.
1 All EITC-related content in this section and the following section excerpted from Ami Nagle and Nicholas Johnson, Hand Up: How State Earned Income Tax Credits Help Working Families Escape Poverty in 2006, (Washington, DC: Center on Budget and Policy Priorities, 2006). Updated information on EITC advocacy efforts provided courtesy of CBPP. Information on CTC and CDCTC advocacy and messaging were gathered from advocacy organizations by CFED.
2 Ibid, p.9.
3 Portions of this material excerpted from Making Care Less Taxing: Improving State Child and Dependent Care Tax Provisions, (Washington, DC: National Women’s Law Center, April 2011)
For each edition of the Assets & Opportunity Scorecard since 2007, CFED has worked with experts in the field to capture detailed stories of noteworthy state policy changes—both policy victories and instructive defeats. These case studies appear in the Resource Guides for each policy priority.
A Decade of Advocacy Pays Dividends for Connecticut EITC (published October 2011)
Although the Connecticut statehouse approved a state EITC in the spring of 2011, the policy’s hard-fought road to passage dates back at least a decade. Bills to expand the tax credit for the state’s 187,000 federal EITC recipients were introduced as early as 2001, with initial advocacy efforts spearheaded by Connecticut Voices for Children. Early advocacy strategies centered primarily on touting the federal EITC’s history of bipartisan support and cultivating relationships with policymakers from both sides of the aisle. Click here to read more.
Establishing and Defending North Carolina’s EITC, CTC and CDCTC (published October 2011)
North Carolina is one of only four states to boast an EITC, CTC and CDCTC for working families. Although each tax credit enjoys different degrees of political support, advocates typically group them together under the banner of “making work pay” for low- and moderate-income households. Efforts to make North Carolina’s tax code more helpful to low-income families date back to 1981, when the state established a tax credit for child and dependent care of 7% of employment-related expenses. Click here to read more.
Advocating for a State EITC in Illinois (published September 2009)
Beginning in the 1990s, the Illinois Make Work Pay Coalition began building the case for a state EITC. Make Work Pay members range from public policy advocates to faith-based organizations to business groups and more. At the time, a chief obstacle to enacting an EITC was identifying and securing funding. However, because the Coalition laid strong, bipartisan groundwork, by the time Illinois tobacco lawsuit-settlement revenues were available in 2000, the proposed state EITC was well-positioned to claim a portion of those funds. Click here to read more.
Advocating for a State EITC in Hawaii (published September 2007)
In 2002, a refundable state EITC proposal was floundering in Hawaii, with no champions and little understanding of how it worked or what it could accomplish. A small group of advocates for women’s issues began researching the EITC, developing talking points, and building partnerships. Specifically, they looked at how many families in Hawaii were receiving the federal EITC, how much a refundable state EITC would cost, and how it compared to other tax proposals. Click here to read more.
For a two-page overview of tax credits for working families, download CFED’s Policy Brief.
For an in-depth compendium of analysis, research, and resources on tax credits for working families, download CFED’s Resource Guide.