Why are Pediatricians and Child Health Researchers Talking about Tax Policy?

Picture2Just over 50 years ago, President Lyndon B. Johnson declared an “unconditional war on poverty,” with the promise that “we shall not rest until that war is won.” Throughout the next several decades, numerous anti-poverty policies were added to those began during Johnson’s war on poverty, and many others were reformed – most recently with a focus on rewarding and encouraging work.

Firmly rooted in the legacy of the war on poverty, this year marks the 40th anniversary of the Earned Income Tax Credit (EITC). In a nutshell, the EITC subsidizes  low-wage workers’ incomes, and after the Supplemental Nutritional Assistance Program (SNAP), the EITC is the largest assistance program targeted at low-income families. Working families who are eligible for the EITC receive the fully refundable credit as part of their annual tax refund.

What is the EITC?

Today, the EITC provides a fixed percentage of an individual or family’s earnings up to a maximum amount, based on marital status and family size. For tax year 2014, the maximum credits were $496 for workers with no children, $3,305 for families with one child, $5,460 for families with two children, and $6,143 for families with three or more children. As earnings increase, the credit increases and then stays constant at the maximum until earnings increase to the phase-out range. As earnings increase into the phase-out range, the credit decreases with each additional dollar of earned income until it phases out entirely. The figure below shows how the credit is structured.


What we know about the EITC’s effectiveness

A large-and-growing body of economic research finds previous expansions to the EITC have increased participation in the workforce, and spurred economic mobility and opportunity. Beyond these economic benefits, researchers have also demonstrated the EITC’s effectiveness in addressing a number of other factors that reduce poverty. Previous EITC expansions are linked to improvements in children’s health – $1,000 of EITC income generated by the 1993 expansion reduced rates of low birth weight by 7 percent overall, and by 8.2 percent among African Americans.  The Federal Reserve Bank of Chicago found EITC recipients buy more healthy food items including fresh fruits and vegetables, meat and poultry, and dairy products during the months when most refunds are paid. EITC also improves educational outcomes for young children in low-income households – each $1,000 increase (in 2001 dollars) in annual income for two to five years improves children’ school performance on a number of measures, including test scores. Others have shown that after adding income from the EITC, the incidence of severe housing cost burden among EITC-eligible households in 1999 decreased by 15% overall, and by 31% among families with two children.

Expanding the success of the EITC

The EITC program has grown significantly over its 40-year history, and much of its success is bolstered by bipartisan support in Washington and many state legislatures. The 2009 Recovery Act and subsequent 2013 American Taxpayer Relief Act strengthened the EITC by adding a “third tier” for families with more than two children, and expanding marriage-penalty relief. Realizing the important role the federal EITC plays in providing working families with an economic boost, 25 states and the District of Columbia have enacted their own state-specific version of the EITC. Most of these states “piggyback” on the federal EITC by using the same eligibility requirements and set state-level credits at some percentage of the federal EITC ranging from 4 percent to 40 percent (average 16 percent). EITC recipients then receive both the federal credit and the state credit. Currently, Washington D.C. has the highest refundable EITC at 40 percent (Maryland has a non-refundable EITC up to 50% of the federal credit). In 2015, a number of states are proposing increases to their EITCs, while others are proposing to introduce state EITCs.

MassachusettsThe Massachusetts EITC is currently 15 percent of the Federal EITC amount. The largest Massachusetts EITC returns (up to $921) go to joint filers earning approximately $10,000 to $23,000 a year, with three or more children. State Senator Jamie Eldridge and state Representative Marjorie Decker have each introduced legislation to increase the EITC from 15 percent of the federal credit to 50 percent of the federal credit, which would make it the highest refundable state EITC in the nation. Coupled with scheduled increases in the state’s minimum wage to $11/hr. by 2017 (on-track to become the highest in the nation), Massachusetts has the potential to fill much of the wage gap of the working poor.

ArkansasUnlike its more liberal counterpart, Arkansas does not currently have a state EITC. But soon, that may all change. According to Arkansas Advocates for Children and Families, in the 2013 legislative session, lawmakers passed a series of expensive tax cuts to the personal income tax, capital gains tax exemptions, and industry specific sales and use tax cuts. These three tax cuts alone cost the state enough money to fund 85 percent of a state EITC (at the 16 percent level). Given the high prevalence (51%) of Arkansas children under age four in families experiencing housing insecurity, a state EITC is needed more than ever.

Next steps: How the EITC can continue to reduce poverty and improve children’s health

As the EITC celebrates its 40th birthday in 2015, it serves as a rare example of social policy lauded by the likes of both Presidents Reagan and Obama. In the face of seemingly intractable income inequality, discouraging health disparities, and partisan gridlock, policy makers, advocates, and leaders across the country are eager to leverage the success of the EITC to provide a hand up for hard-working families. By making the recent improvements to the federal EITC under the American Taxpayer Relief Act permanent (currently set to phase out in 2017), and supporting states’ legislation to increase state-specific EITCs, the health and wellbeing of children and families will be improved for years to come.