Flush with cash, more than two dozen states enacted tax breaks in 2021, including earned income tax credits, or EITCs, a boon for low to moderate earners.
Generally, working families with children earning roughly $42,000 to $57,000 qualify for state EITCs, depending on marital status and family size, according to the Center on Budget and Policy Priorities, with the largest benefit typically going to those making around $11,000 to $25,000.
“State EITCs cost a heck of a lot less than rate cuts because only so many people benefit from them,” said Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center.
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In 2021, Colorado, Connecticut, Delaware, the District of Columbia, Indiana, Maine, Maryland, Minnesota, Missouri, New Jersey, New Mexico, Oklahoma, Oregon and Washington, added or expanded EITCs, with some going into effect for future tax years, according to the Tax Policy Center.
While the federal EITC is refundable, meaning it reduces tax bills or provides a refund regardless of liability, some state-level EITCs are nonrefundable, covering only up to taxes owed.
“The earned income tax credit is a great tool for states to use to help lower-income workers because they get to piggyback off the work of the federal government,” Auxier said.
Workers may receive the federal EITC based on earnings, phasing out above certain income levels, and the state-level tax breaks are typically a percentage of the federal credit, following the same eligibility rules.
“They just copy and paste the federal rules, stick them in the state tax code, and then give a percentage of the amount of money that they got from the federal credit,” he said.
However, every state is different and the latest round of changes may vary, Auxier said.
For example, refundable credits may range from 3% in Montana to 50% in Maryland, according to the IRS. There’s also an earned income tax credit in New York City worth up to 5% of the federal credit.
Still, policy experts say these state-level changes may offer much-needed relief at tax time.
Overall, it’s a relatively well-targeted form of tax relief.Katherine LougheadSenior policy analyst at the Tax Foundation
Low-wage workers have been among the hardest hit during the pandemic, said Samantha Waxman, senior policy analyst at the Center on Budget and Policy Priorities.
“These folks have been more likely to lose their jobs and their income due to Covid-19,” she said. “Or if they work as front-line essential workers and have been able to keep their jobs, they tend to have higher infection risk.”
Retail, healthcare and food services are among the most common industries for EITC-eligible workers.
“Overall, it’s a relatively well-targeted form of tax relief,” said Katherine Loughead, senior policy analyst at the Tax Foundation. “It’s means-tested in a way that benefits those most in need, while also encouraging participation in the labor force.”
Federal EITC boost for 2021
The American Rescue Plan expanded the federal EITC through 2021, allowing more workers without children to qualify. The boost also lifted age limits, making the credit available to younger workers.
President Joe Biden called for making these changes permanent in the American Families Plan, which could provide $12.4 billion to families in 2022, affecting 19.5 million workers, according to research from the Institute on Taxation and Economic Policy. However, the status of this proposal is unclear.
