Double the IL Earned Income Tax Credit: Lift Working Families, Boost Local Economies, & Increase Tax Fairness

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1 Issue Brief May 2014 Double the IL Earned Income Tax Credit: Lift Working Families, Boost Local Economies, & Increase Tax Fairness By Lisa Christensen Gee Hundreds of thousands of families across Illinois struggle to make ends meet despite working hard. These families often spend every dollar that they earn to pay for the basics and support their children. In addition to living on low wages, low- and moderate-income workers pay a much larger percentage of their income in state and local taxes, including the sales tax, than the wealthiest Illinoisans. It doesn t have to be this way. Lawmakers can do something crucial this legislative session to help relieve financial stressors working families face and to improve tax fairness in Illinois double the state Earned Income Tax Credit (EITC). Raising the state EITC to 20 percent of the federal EITC will help lift working families above poverty, boost local businesses and economies, improve kids chances of success as adults, and make Illinois taxes fairer. What is the Earned Income Tax Credit (EITC)? The federal Earned Income Tax Credit (EITC) is a targeted tax credit that only goes to families and individuals who work. It lets low- and moderate-income working families keep more of what they earn to help pay for necessities that help them keep their jobs. The credit offers working families a step up and a way out of poverty, allowing them to get a toehold in the workforce. It also helps those who experience temporary job losses, reduced hours, or reduced pay stay on their feet. The value of the federal EITC depends on income, marital status, and the number of eligible children in the household. For families with very low wages, the credit increases with each dollar earned to reward additional hours worked, and phases out after recipients reach a modest income level (Exhibit 1). Illinois is one of 25 states with its own version of the federal credit and builds on its success. Most state credits are based on some percentage of the federal EITC. Illinois EITC 1

2 is currently 10 percent of the federal EITC, trailing 14 states, including Iowa (14%), Kansas (17%), and Vermont (32%). 1 As with the federal credit, families with children get the biggest benefits from Illinois EITC 97 percent of the state s investment in the EITC goes to families with kids. In 2012, the average state EITC for Illinois families with children was $ Why is the EITC Important? The federal EITC reduces poverty, helps the economy, and improves kids chances of success as adults. As a supplement to the federal credit, Illinois EITC builds on these benefits while also making Illinois taxes fairer. 1) The EITC reduces poverty. In 2012, the federal EITC kept 6.5 million people, including 3.3 million children, out of poverty. This includes 294,000 Illinoisans, half of whom were children. 3 The EITC is the single most effective policy tool for reducing poverty among children. It is effective because it helps families that work for low or modest wages keep more of what they earn. That income boost helps to pay for things that help them work, like child care and transportation, and can also help families cover rent, bills, or groceries. Illinois EITC works with the federal credit to further reduce poverty among working families and children. In 2012, for example, the average family recipient of the state EITC was able to retain $300 of earnings. If doubled, the average family would keep $600, equivalent to one month s child care or transportation expenses for a singleparent household in Illinois. 4 Doubling Illinois EITC helps ensure that people who work are able to make ends meet. 1 IRS, States and Local Governments with Earned Income Tax Credits, available online at 2 FPC analysis of Tax Year 2012 IRS data from the following sources: Brookings Tax Year 2012 EITC Interactive; and EITC Table from IRS Compliance Data Warehouse, Tax Year Brookings Institution, State Estimates of People and Children Lifted out of Poverty by EITC and CTC per Year, (analysis of Supplemental Poverty Measure Public Use Data), available online at able.pdf. 4 Amy K. Glasmeier, Living Wage Calculator, online at 2

3 2) The EITC boosts local businesses and economies. Studies of the economic impact of the federal EITC have found that for every dollar it lets a family keep, it generates more than a dollar in local economic activity around the communities where these families live. 5 Small increases in spending lead to much larger increases in economic activity because new dollars generate new spending not just in the initial transaction, but also as the new dollars flow from one person to another. Similarly, local businesses and economies get an additional boost from the state EITC as families go out and spend these dollars to buy groceries, pay for car repairs, or put their children in child care. 6 By putting an additional $215 million 7 back in the hands of hard working individuals and families to spend in their communities, doubling the state EITC could yield an estimated $322 million in additional local economic activity across the state. 8 For a breakdown of increased economic activity by Illinois House Legislative District, visit EITCWorks.org. The EITC is also good for local businesses because workers who can afford reliable transportation and child care are more reliable employees. Doubling Illinois EITC is good for local businesses and has the support of the business community. 5 Estimates of the multiplier effect of the federal EITC within various metropolitan areas range from $1.07 to $2.08. See Federal Reserve Bank of Atlanta, EITC Boosts Local Economies 16 Partners in Community and Economic Development 3 (2006); Caroline M. Sallee, Economic Benefits of Earned Income Tax Credit in Michigan (Anderson Economic Group, 2009); Texas Perspectives, Inc., Increased Participation in the EITC in San Antonio (Austin, 2003); and Jacob France Institute, The Importance of the Earned Income Tax Credit and Its Economic Effects in Baltimore City (2004). 6 See Jacob France Institute, The Importance of the Earned Income Tax Credit and Its Economic Effects in Baltimore City (2004). 7 It would cost $215 million a year to double the state EITC without a phase in period. A proposal to double the EITC over a period of five years by phasing in the increase by 2 percentage points each year would cost approximately $46 million in its first year of implementation. 8 FPC analysis of Tax Year 2012 IRS data from the following sources: Brookings Tax Year 2012 EITC Interactive; and EITC Table from IRS Compliance Data Warehouse, Tax Year Assumes 90% participation rate for the state EITC and assumes a multiplier effect of $

4 3) The EITC improves kids chances of success as adults. New research indicates that young children in low-income families getting an income boost through programs like the EITC do better in school, are more likely to attend college, and are also likely to earn more as adults (Exhibit 2). 9 By bolstering the incomes of working families, the state EITC works with the federal credit to help families meet their basic needs and put kids on a better path. Doubling Illinois EITC boosts the work efforts and earnings not only of current recipients, but also of their children. 4) The EITC improves tax fairness. Illinois taxes are upside down. 10 The higher a household s income is in Illinois, the lower its overall state and local tax bill, as a share of income. In fact, low- and middle-income workers pay, on average, two to three times the percentage of their income in state and local taxes that the wealthiest Illinoisans pay (Exhibit 3). The state EITC helps right this wrong by offsetting the income, sales, and property taxes of working households who already pay more than their fair share. Doubling Illinois s EITC is an important step towards addressing upside-down Illinois taxes. 9 Chuck Marr et al., Earned Income Tax Credit Promotes Work, Encourages Children s Success at School, Research Finds (Center on Budget and Policy Priorities, 2014). 10 See Lisa Christensen Gee, Improving Tax Fairness Through Income Tax Reform (Fiscal Policy Center, 2014), online at Fairness-Through-Income-Tax-Reform.pdf. 4

5 Create a Stronger EITC in Illinois For fifteen years, Illinois lawmakers on both sides of the aisle have recognized that the state EITC is smart policy: past efforts to enact, strengthen, and expand the EITC have been marked by bipartisan support. Building on those efforts to lift working families and boost local economies, lawmakers should double Illinois EITC to 20 percent of the federal credit. By doing so, people who work for low or modest wages will be better able to make ends meet; local businesses will see more economic activity; children of EITC recipients will have improved chances of success as adults; and Illinois taxes will be fairer. Doubling the state EITC is smart policy, and it s the right thing to do. ABOUT THE FISCAL POLICY CENTER The Fiscal Policy Center at Voices for Illinois Children provides timely, credible, and accessible information and analysis on fiscal issues that affect children, families, and communities in Illinois. The FPC is a member of the State Fiscal Analysis Initiative (SFAI), a network of nonprofit organizations in more than 40 states. SFAI is coordinated by the Center on Budget and Policy Priorities, a Washington, D.C.-based research organization and strategic policy institute that works on a range of federal and state issues. The Fiscal Policy Center is funded by the Annie E. Casey Foundation, the Center on Budget and Policy Priorities, the Chicago Community Trust, and the Ford Foundation. We thank our funders for their support but acknowledge that the findings and conclusions presented in this report do not necessarily reflect the views of these organizations. For additional information, please contact David Lloyd at dlloyd@voices4kids.org or S. LaSalle St., Suite 1490 Chicago, IL info@voices4kids.org B U I L D I N G B E T T E R L I VES 5