Untapped Potential
State Earned Income Credits and Child Poverty Reduction

This is an excerpt from the full brief.

NCCP is publishing this research brief at a time when a large and growing share of children in poverty have working parents. A strong national economy and welfare reform have contributed to a significant increase in the proportion of poor families with at least one parent in the workforce over the past several years. In this context, a key challenge for policymakers and others who are concerned about the well-being of children and families is how to develop and improve policies that reward work and help low-income working families to increase their earnings. One of the most promising policies in this regard is the earned income credit (EIC). (Note: The EIC is also commonly referred to as the EITC or earned income tax credit.) Research by NCCP has documented the powerful anti-poverty effects of the federal EIC, which benefits nearly 20 million working families each year. The federal EIC increases the after-tax income of these families by an average of about $1,500 per family at a total cost of just over $30 billion.2 This research brief examines the current and potential impact of state EICs as a means of building on the positive effects of the federal EIC at the state level.

This is the third research brief in a series published by the National Center for Children in Poverty focusing on poverty dynamics in the 50 states and the District of Columbia. (Visit www.nccp.org for information on the first two research briefs in this series.)

There are two major objectives to this research brief:

• To examine the role that state EIC programs have played in the level of children’s economic well-being in the District of Columbia and the 15 states that had such programs in tax year 2000.
• To analyze how many children would be raised out of poverty if state EIC programs universally existed.

The major lesson to be drawn from this research brief is that the extent to which a state EIC benefits working poor families is critically dependent upon two factors:

• The size of the credit in terms of its percentage of the federal EIC, and
• Whether the credit is refundable or nonrefundable (the latter being of virtually no value to working poor families,regardless of the percentage of the federal EIC at which it is pegged).

Further, it is clear that some state EIC programs have had substantial impact on the incomes of working poor families. Such programs must be expanded in two ways—improved in their generosity and extended to additional states—for their benefits to be felt even more significantly at the national level. The potential impact of state EICs should also be considered in light of recent evaluations of the New Hope program4 and the Minnesota Family Investment Project. This research suggests that when states provide the right type of fiscal incentives to parents for low wage work, not only do welfare rolls fall, but family incomes rise, poverty rates fall, and young children’s academic achievement and social-behavioral development improve.