820 First Street NE, Suite 510 Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056 center@cbpp.org www.cbpp.org Updated February 8, 2017 How Much Would a State Earned Income Tax Cost in Fiscal Year? By Erica Williams Twenty-six states and the District of Columbia have enacted earned income tax credits (EITCs) to supplement the federal EITC, one of the nation s most effective tools for boosting the incomes of low-paid working families. Federal and state EITCs help workers meet basic needs and pay for things that allow them to keep working, such as child care and transportation. This support helps millions of people with low incomes stay on their feet and work toward economic stability. The federal EITC kept 6.5 million people more than half of them children out of poverty in 2015, the latest year for which these data are available. The EITC also has lasting benefits for children. Because the additional resources help parents better meet their needs, young children in low income families getting an income boost like that from the EITC tend to do better and go further in school, and the greater skills they attain as a result tend to increase their earnings in adulthood. 1 State EITCs are a common-sense way to amplify the positive impact of the federal credit. They help working families keep more of what they earn by reducing the substantial state and local taxes they pay, leaving them with more to cover basic expenses and give their children a better start in life. Policymakers considering a state-level EITC can estimate its cost using the simple three-step process outlined below. Data Sources CBPP s methodology for estimating the cost of a state EITC employs two data sources. First, we use Internal Revenue Service (IRS) statistics on the value of all federal EITC claims filed by 1 See Chuck Marr et al., EITC and Child Tax Promote Work, Reduce Poverty, and Support Children s Development, Research Finds, CBPP, updated October 1, 2015, http://www.cbpp.org/research/federal-tax/eitc-andchild-tax-credit-promote-work-reduce-poverty-and-support-childrens. 1
residents of each state to determine the state s share of total U.S. EITC claims. The most recent full-year data, shown in the second column of Table 1, are for claims made for the 2014 tax year. 2 Second, projections by the congressional Joint Committee on Taxation (JCT) of the future cost of the federal EITC provide a base for estimating the cost of a state EITC. For fiscal year, the JCT estimates that the federal EITC will cost over $74 billion. 3 The federal EITC is refundable, meaning that workers get the full value of the credit they earned, even if it exceeds their federal income tax liability; EITC refunds help offset other taxes that lowincome workers pay, like Social Security and Medicare payroll taxes and the federal gas tax. Most state EITCs are refundable as well, so they both reduce or eliminate state and local income taxes and help offset low-income workers sales taxes, property taxes, and other state and local taxes and fees. Three Steps to Estimating the Cost of a State EITC Step 1: Estimate the total value of federal EITC claims in a given state for a future fiscal year. To estimate the total value of the federal EITC in a state in a future fiscal year, we first use the IRS data on EITC claims to divide the value of EITC claims in a given state by the value of all U.S. EITC claims. This percentage is the share of the federal EITC cost attributable to that state in the base year (2014). Then, to estimate the cost of the federal EITC in the state for a future year, we apply that percentage to JCT s projected total cost of the federal EITC for the chosen year. For example, for tax year 2014, Alabama EITC claims were $1.44 billion, or 2.13 percent of the nationwide total. Assuming that Alabama s share of federal EITC claims remains constant, Alabama s federal EITC claims in fiscal year would be 2.13 percent of $74.4 billion, or $1.587 billion, as the fourth column of Table 1 shows. Step 2: Multiply the expected value of the state s federal EITC claims by the percentage of the federal credit at which the state credit will be set. Most states EITCs provide benefits as a set percentage of the federal credit. This percentage ranges from 3.5 percent to 40 percent, depending on the state. To estimate the cost of a state EITC, multiply the federal EITC cost for the state, as determined in Step 1, by the percentage at which the state EITC is to be set. This calculation yields an estimate of what the state credit would cost in a given fiscal year if everyone who received the federal credit also received the state credit. Step 3: Adjust the estimate for the fact that not all federal EITC claimants will claim the state credit. In practice, a substantial portion of those who receive the federal EITC fail to claim state EITCs. This is especially true in the first few years after a state enacts a credit, when awareness 2 All but a tiny fraction of federal EITCs for a given year are claimed and paid when taxes are filed in January through April of the following year. As a result, nearly all of the federal costs for tax year 2014 EITCs were incurred in federal fiscal year 2015, which ended September 30, 2015. Similarly, in most states the cost of tax year 2017 claims will fall in the state fiscal year that ends in. 3 Estimates of the future cost of the federal EITC come from JCT s Estimates of Federal Tax Expenditures for Fiscal Years 2016-2020. The JCT estimate of the federal EITC s cost includes both the tax expenditure (non-refundable) and outlay (refundable) portions. 2
of it may be limited. 4 In addition, some eligible families have the IRS compute their federal credit and may not receive a state EITC if the state does not compute the state credit amount for them. For these and other reasons, the cost of a refundable state EITC in its initial years will likely be lower than the full cost of the federal credit multiplied by the state percentage. To account for this, the cost estimate should be reduced by at least 10 percent. The Results The last three columns of Table 1 show the estimated fiscal year costs to states of implementing a refundable EITC for tax year 2016 set at 5, 10, or 20 percent of the federal credit. Other percentages may be calculated based on those numbers; for instance, a 15 percent credit would cost one-and-a-half times as much as a 10 percent credit. The methodology outlined above may be used for other years using the projections of federal costs presented in Table 1. None of these figures includes the costs of changing tax forms to include a space to claim an EITC or the costs of processing and administering EITC claims; these would likely raise the overall cost of the credit by less than 1 percent. The estimates presented here apply only to credits that are refundable and are set at a flat percentage of the federal EITC. 4 Compared to the cost if every family claiming the federal credit also claimed the state credit, the actual cost of a newly enacted state EITC in its first year of availability was about 81 percent in Vermont, 83 percent in New York, 85 percent in Wisconsin, 88 percent in Oklahoma, 90 percent in Kansas and Minnesota, and 97 percent in Massachusetts. In the EITC s second year of availability, the cost (relative to the full-participation cost) rose to 85 percent in Vermont, 90 percent in New York, and 93 percent in Minnesota. 3
TABLE 1 Estimated Cost of Refundable State Earned Income Tax s, Fiscal Year (FY) State Claims in Tax Year 2014 ($ in thousands) Percent of Total U.S. EITC Claims, Tax Year 2014 Estimated Claims in FY Estimated Cost of State EITC in FY * Set at 5% of Federal Set at 10% of Federal Set at 20% of Federal States Without Refundable EITCs Alabama 1,444,910 2.13% 1,587 71 143 286 Alaska 98,599 0.15% 108 5 10 19 Arizona 1,522,532 2.25% 1,673 75 151 301 Arkansas 794,507 1.17% 873 39 79 157 Delaware** 178,189 0.26% 196 9 18 35 Florida 5,404,377 7.98% 5,937 267 534 1,069 Georgia 3,063,653 4.52% 3,366 151 303 606 Hawaii 246,619 0.36% 271 12 24 49 Idaho 317,425 0.47% 349 16 31 63 Kentucky 986,209 1.46% 1,083 49 97 195 Mississippi 1,128,094 1.67% 1,239 56 112 223 Missouri 1,266,203 1.87% 1,391 63 125 250 Montana 172,795 0.26% 190 9 17 34 Nevada 622,817 0.92% 684 31 62 123 New 157,544 0.23% 173 8 16 31 Hampshire North Carolina 2,382,346 3.52% 2,617 118 236 471 North Dakota 91,023 0.13% 100 5 9 18 Ohio** 2,339,276 3.45% 2,570 116 231 463 Oklahoma** 853,551 1.26% 938 42 84 169 Pennsylvania 2,134,260 3.15% 2,345 106 211 422 South Carolina 1,282,656 1.89% 1,409 63 127 254 South Dakota 140,406 0.21% 154 7 14 28 Tennessee 1,683,788 2.49% 1,850 83 167 333 Texas 7,188,558 10.62% 7,898 355 711 1,422 Utah 471,171 0.70% 518 23 47 93 Virginia** 1,457,910 2.15% 1,602 72 144 288 West Virginia 357,972 0.53% 393 18 35 71 Wyoming 77,435 0.11% 85 4 8 15 Other Jurisdictions 52,651 0.08% 58 3 5 10 States With Refundable EITCs California 7,748,313 11.44% 8,513 Colorado 810,024 1.20% 890 Connecticut 497,420 0.73% 546 District of 129,888 0.19% 143 Columbia Illinois 2,582,429 3.81% 2,837 Indiana 1,348,571 1.99% 1,482 Iowa 476,999 0.70% 524 4
TABLE 1 Estimated Cost of Refundable State Earned Income Tax s, Fiscal Year (FY) State Claims in Tax Year 2014 ($ in thousands) Percent of Total U.S. EITC Claims, Tax Year 2014 Estimated Claims in FY Kansas 511,361 0.76% 562 Louisiana 1,461,088 2.16% 1,605 Maine 217,211 0.32% 239 Maryland 1,017,496 1.50% 1,118 Massachusetts 873,980 1.29% 960 Michigan 2,031,147 3.00% 2,231 Minnesota 761,404 1.12% 837 Nebraska 319,361 0.47% 351 New Jersey 1,444,010 2.13% 1,586 New Mexico 529,254 0.78% 581 New York 4,273,027 6.31% 4,695 Oregon 616,801 0.91% 678 Rhode Island 197,398 0.29% 217 Vermont 87,885 0.13% 97 Washington 994,273 1.47% 1,092 Wisconsin 873,359 1.29% 960 Total 67,720,175 100% 74,401 Estimated Cost of State EITC in FY * Set at 5% of Federal Set at 10% of Federal * Estimates assume that the cost of a state EITC will be 90% of the cost of the federal EITC in each state. Set at 20% of Federal ** For Delaware, Ohio, Oklahoma, and Virginia, cost shown is the total cost of a refundable credit; since those states already offer nonrefundable credits, the added cost of making the credit refundable would be substantially less than the amount shown. Source: State claims data from Historic Table 2 State Data Tax Year 2014. FY cost calculated based on Joint Committee on Taxation estimates using Congressional Budget Office macroeconomic forecasts. 5