Earned Income Tax Credit

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Another myth destroyed: No growth boost in states without income taxes.

See Bloomberg News report.

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The Iowa Picture: Earned Income Tax Credit
EITC Benefits 1 in 6 Households in Iowa, Bringing $412 Million to State Economy
Updated May 14, 2013
One out of every six Iowa households benefits from the federal EITC, bringing $412 million into the state economy in 2010 alone. In all but nine Iowa House districts, more than 10 percent of federal tax filers claim the EITC. Statewide, the figure is over 15 percent. The greener the areas on the map, the greater the use of the credit. Read IFP backgrounder with district-by-district impacts. 5/14/13
How much working families need a boost from the Earned Income Tax Credit (EITC) can be seen in light of the actual costs of raising a family in Iowa. Read IFP backgrounder. 4/5/13
The Iowa Fiscal Partnership has produced several resources about the Earned Income Tax Credit. Here are several of our previous reports: Raising the Iowa Earned Income Tax Credit from 7 percent of the federal EITC to 20 percent not only would raise the threshold at which Iowa families start to owe state income taxes, but would boost local economies throughout Iowa. Read IFP policy brief (4-pg PDF). 3/29/12 The Senate-passed improvement in the Earned Income Tax Credit would provide a significant boost to low- and moderate-income working families in Iowa. Read backgrounder 2-page PDF 2/17/12 While expanding the state Earned Income Tax Credit alone cannot provide full equity for working Iowa families with children, it can begin to correct some of the most egregious impacts upon Iowa families working to raise their children well. Read Charles Bruner's policy brief or download 2-page PDF 2/2/12 The 2012 legislative session offers lawmakers a timely opportunity to review and expand Iowa’s Earned Income Tax Credit. Read Charles Bruner's policy brief or download 3-page PDF 12/29/11 A national report puts a spotlight on Iowa’s poor treatment of low-income working families. Read news release or download 2-page PDF 11/15/11 A family of four making $30,000 in Iowa would have received a state income tax reduction of about $97 through enactment of the EITC increase, if Governor Branstad had not vetoed the measure. It makes a difference for working families trying to raise their children at only a little above the poverty level. Read statement 7/28/11
*What is the Earned Income Tax Credit?* The federal Earned Income Tax Credit (EITC) was established in 1975 and expanded dramatically in 1986 through bipartisan efforts. A refundable credit, the EITC provides assistance to lower-income working people, with over 90 percent of the benefit going to working families with children. Because of the federal EITC and Child Tax Credit, families who earn $40,000 in income generally have no federal income tax liability; those earning below that amount receive refunds that help them meet basic family needs. The same is not true in Iowa, however. Even with a separate state EITC, Iowa is one of few states that taxes many families with children before their income exceeds the poverty level. Iowa families who are eligible for the federal EITC also qualify for the state EITC. The figure at right shows how the state's current EITC — 7 percent of the federal credit — is designed to help lower-income families and to encourage work. As a family earns more income, they become eligible for a larger EITC. As a family’s income approaches self-sufficiency, the EITC gradually decreases in value. The value of the EITC is predicated on family earnings, tax filing status (married filing jointly, single filers, or individuals filing as heads of households) and the number of dependents claimed. In Iowa, the EITC benefits families with children and low or moderate levels of income. More than 548,000 Iowans benefited from the EITC in tax year 2009, including more than 282,000 children. That year, households with at least one dependent accounted for over 94 percent of all EITC claims, and nearly 60 percent of households claiming the EITC had Iowa adjusted gross income under $20,000. Moreover, Iowa’s EITC lessens the overall regressivity of the current state tax structure. Iowa already imposes income tax on families with children below the federal poverty level; the EITC permits low-income Iowans to earn more before owing state taxes. As the Iowa Fiscal Partnership has noted before, an important principle for tax policy is to shield from income tax any income required to meet basic needs; an increased state EITC would make overall Iowa taxes less regressive. A number of studies have confirmed that the EITC lifts families out of poverty. In 2009, at the height of the Great Recession, the EITC lifted about 6 million Americans out of poverty. The Iowa Department of Revenue has found that the federal and state EITC lifts out of poverty more than 62 percent of taxpayers whose income falls between $15,000 and $24,999.