February 1, 2001
STATE EARNED INCOME TAX CREDITS (EITC) AND TEMPORARY ASSISTANCE FOR NEEDY FAMILIES (TANF) FUNDS
By: Robin Cohen, Principal Analyst
You asked if any of the 15 states that operate an EITC program pay for it with TANF funds.
According to Ed Lazere of the Washington-based Center on Budget and Policy Priorities, a think tank that monitors EITC programs, two states, Minnesota and Wisconsin, use TANF funds to pay for their EITC programs. Massachusetts, New York, and Vermont use state funds to pay for their programs and claim them as TANF “maintenance of effort (MOE)” expenditures. (States must maintain a certain level of funding for supporting low-income families as a condition of receiving their TANF block grants.)
Federal TANF regulations provide the circumstances under which federal funds can be used to pay for local tax credit programs. First, the program must be designed to accomplish one of the four purposes of the TANF law. These include providing assistance to needy families so that children can remain in their home or a relative's home and ending parental dependence on government assistance. In addition, the regulations allow the use of TANF funds for only the refundable portion of the tax credit. In other words, only the portion of a state EITC that a state refunds a family that is above and beyond any tax liability would be TANF-fundable (45 CFR § 260.33).
Since 2000, Minnesota has used TANF funds both as a base resource for the state's Working Family Credit program, as well as a means to use up the TANF block grant surplus. (Unlike Connecticut, many states have surplus TANF funds.) Although the credit program is available to both families with children and childless couples, only the credit to families with children is funded by TANF.
The state's Department of Revenue administers the credit program, which is incorporated into the personal income tax program. The state's TANF agency, the Department of Human Services (DHS), works closely with the tax department to ensure proper reporting to the federal government. DHS transfers the TANF funds to the tax agency.
Wisconsin's FY 99-01 budget includes approximately $100 million for TANF funding of the state's EITC. The state's Department of Revenue administers the credit, 80% of which is financed with federal TANF funds.
Vermont expects to claim about $2.2 million in TANF MOE in the current state fiscal year for its earned income credit program, which recently increased from 25% to 32% of the federal EITC. The state's annual MOE requirement is $27.3 million.