Topic:
INCOME MAINTENANCE PROGRAMS; STATE AID; TAX CREDITS; INCOME TAX; STATISTICAL INFORMATION;
Location:
TAXES - INCOME; WELFARE;

OLR Research Report


January 12, 2007

 

2007-R-0053

STATE EARNED INCOME TAX CREDITS

By: Judith Lohman, Chief Analyst

You asked which states have state earned income tax credits (EITC). For each state with a state EITC, you also asked (1) when it was enacted,

(2) the amount of the state credit as a percentage of the federal EITC, (3) whether the state credit is refundable, (4) the name and party of the state's governor when the credit was enacted, (5) whether the credit passed in a separate bill or was part of large omnibus tax or budget bill, and (6) whether the state later modified the state EITC to change the percentage or make it refundable. Finally, you asked whether states with state EITCs have higher participation rates for the federal EITC and, if so, how their federal EITC participation rates compare to Connecticut's.

SUMMARY

Twenty states have state EITCs, although Colorado's is currently suspended for lack of funding. Of the 20, 16 are fully or partially refundable, meaning that if a taxpayer's credit exceeds his total tax liability, he receives a refund of the difference. All state EITCs are based on the federal EITC and provide a state income tax credit equal to a percentage of the federal credit amount. Percentage amounts range from a low of 4% of the federal credit to a high of 50%. Some state credits have varying percentages depending on income or number of children.

The federal EITC was passed in 1975 and the first state EITC was enacted in 1986. Six states passed state EITCs in the 1980s and seven more states followed in the 1990s. Since 2000, seven states have enacted state EITCs. Two state credits were enacted in 2006. Many of the states have increased their credits several times since first passing them and have also made them refundable. State credits have been approved by Democratic, Republican, and Independent governors and in stand-alone bills and as part of omnibus budget and tax bills.

The effect of state credits on federal EITC participation is unclear. To receive the federal credit, a person must file a tax return. It is generally conceded that not every person who is potentially eligible for the federal EITC receives it because not every eligible person files a federal income tax return. Consequently, there are no reliable statistics on participation rates of all EITC-eligible workers by state. But the Internal Revenue Service (IRS) publishes data on the people who file federal returns in each state who claim the EITC. The most recent statistics are from 2004. These statistics show Connecticut's participation rate to be the second lowest of all states. States with state EITCs all rank higher than Connecticut, but the states with the highest participation are not those with state EITCs. A fuller discussion of EITC participation rates and participation data appears in the attached 2005 OLR Report (2005-R-0164).

2006 FEDERAL EITC

The federal earned income tax credit (EITC) provides a refundable tax credit based on income and family size. For 2006, a person qualifies

if he has at least $1 of earned income, investment income of $2,800 or less, and maximum adjusted gross income (AGI) and maximum earned income of:

● $12,120 ($14,120 for married filing jointly) with no qualifying children,

● $32,001 ($34,001 for married filing jointly) with one qualifying child, and

● $36,348 ($38,348 for married filing jointly) with two or more qualifying children.

A worker must file a federal income tax form for the year to receive the EITC.

EITC credit amounts vary according to income and family size. Maximum credits are:

● $412 for a worker with no children and an income between $5,350 and $6,750,

● $2,747 for a worker with one child and an income between $8,050 and $16,850, and

● $4,536 for a worker with two or more children and an income between $11,300 and $16,850.

2006 STATE EARNED INCOME TAX CREDITS

As noted above, 20 states have state earned income tax credits ranging from 4% to 50% of the federal credit. Table 1 (attached) shows the requested information about each state's credit.

FEDERAL EITC PARTICIPATION RATES

Table 2 below shows the percentage of the taxpayers in each state who filed a federal income tax return and claimed the federal EITC for the most recent available tax year (2004). As already mentioned, this data does not provide complete information because it excludes those who might be eligible for the credit but fail to file a tax return.

The table ranks states by participation rates and shows that Connecticut has the second lowest rate of all states. Shaded states are those that have state EITCs.

Table 2: States Ranked by Percentage of Federal Income Tax Returns Claiming the EITC – 2004 Tax Year

STATE

% of Filed Tax Returns Claiming EITC

Mississippi

32.10%

Louisiana

28.86%

Alabama

25.69%

Arkansas

24.80%

New Mexico

24.12%

Texas

23.54%

South Carolina

23.38%

Georgia

22.88%

Oklahoma

21.42%

Tennessee

21.15%

North Carolina

20.32%

Florida

19.76%

Kentucky

19.65%

West Virginia

19.44%

New York

17.47%

Idaho

17.40%

Arizona

17.18%

Missouri

17.17%

Montana

16.97%

California

16.35%

South Dakota

15.42%

Indiana

15.23%

Illinois

15.06%

Nevada

15.01%

Ohio

14.68%

Delaware

14.65%

Hawaii

14.64%

Kansas

14.54%

Michigan

14.53%

Utah

14.35%

Oregon

14.35%

Virginia

14.33%

Maine

14.08%

Wyoming

13.94%

Nebraska

13.82%

Pennsylvania

13.47%

Maryland

13.26%

Rhode Island

13.26%

North Dakota

13.13%

Iowa

12.97%

Colorado

12.80%

Washington

12.71%

Vermont

12.56%

New Jersey

12.10%

Alaska

11.77%

Wisconsin

11.42%

Minnesota

10.95%

Massachusetts

10.25%

Connecticut

10.21%

New Hampshire

9.85%

Source: Internal Revenue Service

TABLE 1: STATES WITH EARNED INCOME TAX CREDITS

(NA = Information not available)

State

% of Federal

EITC

Refundable

Year Passed

Governor

& Party

When Enacted

Passed as

Separate Bill

or Part of

Omnibus Bill

Changes Since Enactment

Citation

COLORADO

10%

Yes

1989

Romer (D)

Separate bill

Colorado's EITC was funded by a state surplus under the Taxpayer Bill of Rights (TABOR). It was suspended in 2002 when surplus funds ran out. TABOR was suspended by a voter referendum and the EITC was effectively repealed as of 1/1/05.

CRS 39-22-124

DELAWARE

20%

No

2005

Minner (D)

Separate bill

None

30 Del. Code Ch 11, 1117 as amd by SB 230 (2005)

ILLINOIS

5%

Yes (subject to availability of funds from the federal Temporary Assistance for Needy Families (TANF) block grant and the state's ability to meet its required maintenance of effort.)

2000

Ryan (R)

Included in a tax bill with two other topics

As originally enacted, the state EITC was to expire after two years, on June 1, 2003. In 2003, the legislature made the credit permanent and also made it refundable, subject to federal funds availability.

35 ILCS

5/212

INDIANA

6%

Yes

1999

O'Bannon (D)

NA

Indiana's first state EITC, passed in 1999, was not based on the federal EITC. The state switched to a credit based on the federal EITC in January 2003.

Indiana Code 6-3.1-21

IOWA

6.5%

No

1989

Branstad (R)

NA

None

Iowa Code

422.12B

KANSAS

15%

Yes

1998

Graves (R)

NA

In 2002, the Kansas legislature increased the credit to 15% of the federal EITC from 10%. The cost was partially offset by federal money through the EITC's designation as maintenance of effort for TANF purposes.

KSA 79-32, 205

MAINE

5%

No

1999 law effective in 2000 tax year

King (I)

Part of budget bill

Credit reduced to 4.92% for the 2003, 2004, and 2005 tax years.

36 MSA / 5219-S

MARYLAND

20% or 50%

20% credit is refundable,

50% credit is not.

1987 (refundable portion passed in 1998)

Schaefer (D)

Separate bill

1998 & 1999 – 10%

2000 – 12.5%

2001 – 15%

2002 – 18%

2004 – 20%

Md. Code

10-704

MASSACHUSETTS

15%

Yes

1997

Weld (R)

NA

Credit increased from 10% to 15% in 1999, effective with tax years starting on or after 1/1/01.

62 Mass G.L. 6(h)

MICHIGAN

10% through 2008, 20% in 2009 & after

Yes

2006

Granholm (D)

Separate bill

None

Act 372, Public Acts of 2006 (Enrolled SB 453)

MINNESOTA

Varies depending on income.

Families with children may claim from 25% to 45% of federal credit. Taxpayers without children get 25%. Average credit is 33%.

Yes

1992 (restructured in 1997/98)

Carlson (Independent Republican/Re-publican)

NA

Increases were passed in 2002. Another increase is scheduled for 2008. Credits are also adjusted annually for inflation.

Minn. Stats 290.0671

NEBRASKA

8%

Yes

2006

Heineman (R)

Part of omnibus tax bill

None

LB 968, effective April 6, 2006

NEW JERSEY

State EITC applies if income is below $20,000 and person files as head of household, surviving spouse, or married filing jointly.

Yes

2000

Whitman (R)

Separate bill

When passed in 2000, the law required the following phased increase in the credit percentage:

10% in 2000

15% in 2001

17.5% in 2002

20% in 2003 and after

NJSA

54A:4-6

NEW YORK

30%

Yes

1994

Cuomo (D)

NA

Original 1994 credit was 7.5% of federal credit. The credit increased to 10% on 1995. Later in 1995, the legislature increased the percentage to 20% starting with the 1996 tax year. Legislation enacted in 1999 increased the EITC to 22.5% in tax year 2000, and to 25% in tax years beginning after 2000. The rate reverts to 20% if the federal government reduces New York's allocation of TANF grant, or does not permit spending on the EITC to apply toward the TANF maintenance of effort requirement. Legislation enacted in 2000 further increased the EITC to 27.5% in 2002 and to 30% after 2002. 2006 legislation created an enhanced state EITC for certain non-custodial parents in lieu of the existing state EITC. To qualify, claimants must be residents, age 18 and over, and have a minor child with whom they do not reside. They must also have a child support order in effect requiring support payments through a support collection unit established pursuant to 111-h of the Social Services Law, for at least half of the tax year, and must have made the required support payments. The enhanced credit is equal to the greater of (1) 20% of the federal EITC the taxpayer would otherwise be able to claim for one qualifying child as a custodial parent or (2) 2.5 times the federal EITC for taxpayers without qualifying children. The enhanced credit is refundable and is available for the 2006 through 2012 tax years.

McKinney's Ann. Laws of NY, Tax Law, Ch. 60, 606 (d-1)

OKLAHOMA

5%

Yes

2001

Effective January 1, 2002

Keating (R)

NA

None

Okla. Stats. 68-2357.43

OREGON

5%

6% in 2008 & after

Yes, starting with 2006

1997

Kitzhaber (D)

NA

Credit made refundable in 2005, effective January 1, 2006

ORS 315.266

RHODE ISLAND

25%

15% refundable

1986

Di Prete (R)

NA

Credit reduced from 27% to 25% as a result of federal tax changes (RI income tax is piggybacked on federal taxable income.)

RI Gen Laws Ann.

44-30-2.6

VERMONT

32%

Yes

Passed in 1987, effective June 16, 1988

Kunin (D)

1999 change part of omnibus tax bill

25% increased to 32% in 1999

32 Vt. Stats. Ann. 5828b

VIRGINIA

20%

No

2004

Warner (D)

Part of larger tax bill

From 2000 to 2005, Va. offered a low-income tax credit of $300 each for the taxpayer, spouse, and dependent, if the taxpayer's Va. AGI is no more than 100% of poverty. A 2004 omnibus tax reform law gave taxpayers a choice of the low-income tax credit or a credit equal to 20% of federal EITC, starting in the 2006 tax year.

Va. Code

58.1-339.8

WISCONSIN

4% for 1 child,

14% for 2 children,

43% for three or more children

Yes

1989

Thompson (R)

NA

Yes, see below

Wis. Stats.

71.07(9e)

Sources: Center on Budget and Policy Priorities, National Conference of State Legislatures, National Governor's Association, State EITC Online Resource Center, state statutes.

WISCONSIN EITC RATE CHANGES SINCE ENACTMENT

(Note: After 1994, Wisconsin law also gives a taxpayer a percentage of the maximum federal credit income. The percentage varies according to income and is in addition to the percentages shown below.)

Years

PERCENT OF FEDERAL CREDIT

One Child

Two Children

Three or More Children

1989-1994

5%

25%

75%

1995

4%

16%

50%

1996-Present

4%

14%

43%

Source: Wis. Stats. 71.07(9(e)

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