The Earned Income Tax Credit (EITC) has lifted millions of American out of poverty since 1975. The EITC was created by Congress to supplement low wages while reducing tax liabilities for working families and individuals. To be eligible to receive the EITC, a person must be working, have income from a job, and pay federal taxes. Depending on marital status and number of children, working parents can make up to $53,000 per year while childless workers can make up to $20,000 per year. The EITC has been shown to boost employment and wages, specifically among single mothers. A primary facet of the EITC that has historically garnered bipartisan support is the incentive to work. Put simply, the more a person works the greater the EITC benefit they receive (up to a certain income level).
The EITC received some press this past December as Congress moved to make certain provisions permanent. The federal EITC benefit was strengthened for married couples and larger families specifically by making key provisions permanent that were set to expire in 2017 related to an earnings threshold of $10,000 per year. The threshold shut out many working-poor families who did not make over $10,000 per year and thus did not qualify for the credit or only received a partial credit. Bipartisan support of the tax deal in 2015 permanently set the earnings threshold at $3,000 per year, which will allow more working families to continue to benefit from the EITC.
Julia Cramer of the Montana Budget & Policy Center provided the example of a single mother with two children who works full-time for minimum wage. The single mother would earn $16,744 per year, well below the $20,090 federal poverty level (FPL) for a family of three. With an EITC of $5,548, her earnings jump to $22,292 and place her family above the federal poverty threshold. When accounting for federal income taxes owed totaling $2,000, the family still receives $3,548 from the refundable EITC.
Research shows that refunds are often used to pay for basic needs including catching up on rent, paying bills, and completing necessary car repairs. Most people receive the EITC for 1 to 2 years, which categorizes the credit as a temporary safety net. Beyond allowing families to catch up bills or purchase necessary goods, like school supplies, children whose parents received the EITC are more likely to perform better in school, graduate from high school, and attend college.
The federal EITC effectively lifts millions of people out of poverty each year. According to the US Census, the EITC was just as effective as SNAP at lifting people out of poverty in 2012 with each program lifting the income of 10.3 million Americans above 100% of the federal poverty level. In the United States in 2013, 27 million Americans received the EITC. Of that 27 million, 80,000 Montanans received the federal EITC that same year. This included 55,000 families living in rural areas and 12,000 veteran and military families.
The benefits of the federal EITC are numerous. These benefits could be expanded with the implementation of a state EITC. A state EITC brings more money to local economies, which strengthens local communities. A state EITC would also lessen the impact of state taxes on low-income families, as Montana is one of only five states that taxes families living in sever poverty, meaning families whose earnings are less than three-quarters of the poverty line. For a family of four this equals about $17,264 in earnings per year. If Montana were to join the 26 other states and the District of Columbia that have already implemented a state EITC, Montana would benefit from an additional $17 million injected into Montana communities. Together, a federal and state EITC would raise the wage of the single mother with two children mentioned earlier by $2.93 per hour. That additional income could supply more healthy food for growing children, purchase school supplies, and ease the burden of medical expenses, all of which help to create strong, healthy Montana families.
If you are interested in learning more about how the amount of an EITC is determined, there is a tool available on the Center on Budget & Policy Priorities website.
Thank you to Julia Cramer, Policy Analyst at the Montana Budget and Policy Center, for sharing this information on Earned Income Tax Credits during March’s Food for Thought presentation.
To learn more about the issues Missoulians in poverty face, join us for Food for Thought on Thursday, April 21st at 4 PM at Missoula Public Library. Missoula Food Bank staff will be discussing childhood hunger. This will be the first presentation in a series of discussions on families and food insecurity.
- www.census.gov (2012 Current Population Survey)