The Earned Income Tax Credit (EITC) is, in effect, a wage subsidy
to low-income workersit makes work pay, in political jargon.
Enacted in 1975 on a smaller scale, the program has managed to gather
bipartisan political support over time and with it, much higher financial
incentives that allow it to pull more working families above the poverty
threshold than almost any other social program.
Here's how it works: A single parent with one child who works 20 hours
a week, year-round, at $6.25 an hour makes an annual gross income
of $6,500. Come tax time, that parent can claim the EITC and receive
a nice little bonus of $2,202. This "credit" typically includes
a full refund of any federal payroll and income taxes paid by the
worker and tacks on an additional cash grant.
But the unique part of the EITC is that it makes work pay on an upward
(though limited) sliding scale; additional work not only produces
higher salary earnings, but also is supplemented by still-higher EITC
payments. For example, add 10 more hours per week (520 annually) to
the example above, and work alone produces income of $9,750, and the
EITC hits its maximum credit of $2,506, which pushes this particular
household just over the poverty threshold of $12,120 for a family
A second design feature of the EITC is that it is more generous to
multiple-child familiesa nod to the fact that child poverty
rates grow as the number of children in a family increases. Give the
above worker two or more children, and the maximum EITC credit reaches
$4,140. Depending on family size, the EITC's maximum subsidy rate
can reach as high as 40 percent of earned income. (Much smaller credits
are also available to low-income workers with no children, maxing
out at $376 for those with incomes generally falling below $12,000.)
The EITC eventually takes away the punch bowl, cutting the credit
as incomes rise to what it calls the phase-out range. For single-parent
families, the EITC begins to drop once income reaches $13,550, and
hits zero at about $29,000; for two-parent, multiple-child families,
the phase-out starts at $14,550, and the credit lapses at about $34,000.
About one quarter of all EITC recipients live in states that also
offer supplemental EITC-like programs, according to a 2003 report
by the Brookings Institution. Currently, there are 15 states and two
local governments (Montgomery County, Md., and Denver, Colo.) that
supplement federal EITC payments. Ten states offer refundable credits
like the federal version, where a worker can get back all state tax
obligations plus an additional cash grant. Remaining state programs
stop after wiping out a worker's state tax obligations.
Minnesota and Wisconsin have two of the most generous state programs.
Minnesota's credit ranges from 25 percent to 45 percent (with a statewide
average of 29 percent) of the federal credit, depending on family
size and income. Wisconsin's credit ranges from 4 percent (one child)
to 43 percent (three or more children) of the federal EITC. At the
upper end for both states, some recipients can see an additional refund
of more than $1,000.
Return to: Anti-Poverty Design: The Cash-Out