(The Center Square) – A majority of states offer an earned income tax credit, and a recent bill may add Pennsylvania to the list.
The EITC is a subsidy for low-income working families, although workers without children can sometimes benefit as well.
“Generally, research shows that the EITC encourages single people and the primary breadwinners of married couples to work,” analyzes the Tax Policy Center. Noted. It works in three phases: as a worker’s income increases, each dollar is credited, reducing their marginal tax rate. Then the credit peaks and plateaus, before more income reduces the credit a worker earns, like Robert Bellafiore of the Tax Foundation Explain.
Senator Mario Scavello, R-Scotrun, presented SB 1082 create a refundable EITC in Pennsylvania for workers with dependent children that would apply in 2023 with a 10% phase-in and reach 25% by 2031.
“For low-income working families…a Commonwealth Earned Income Tax Credit will provide much-needed help to pay for childcare, food, transport, clothing and other household expenses,” wrote Scavello in a legislative note.
The District of Columbia and 28 states have an EITC on the books, according to the Urban Institute. Most are refundable, meaning low-income families receive a payment from the state if their tax credit is more than their state tax payable. Since relatively few low-income families have little or no tax debt, the EITC functions as an anti-poverty grant.
State EITCs tend to be a percentage of the federal EITC and wide range; nearby Ohio has a 30% non-refundable EITC and New Jersey has a 40% refundable EITC.
“Had the EITC been treated as income, it would have been the most effective poverty alleviation program for people of working age, lifting an estimated 5.6 million people out of poverty in 2018,” noted the Tax Policy Center.
The effectiveness of an EITC comes from the fact that it is well targeted to benefit low-income workers, in both rural and urban areas, while encouraging labor market participation.
However, this can be complicated for taxpayers to understand and for tax officials to manage. Irregular payments, mostly due to workers misreporting children, keep the error rate high at the federal level. Some employees could also face a “marriage penalty” and increase their tax burden compared to remaining single. Workers without children also benefit significantly less than similar workers with children.