Refundable EITC

The Federal Earned Income Tax Credit (EITC)

The earned income tax credit (EITC) is designed to provide financial assistance to low- to moderate-income working people. The federal tax credit was enacted in 1975 and made permanent in 1978. The American Taxpayer Relief Act of 2012 extended the federal EITC for five years.

The EITC has become one of the nation’s most important anti-poverty programs. The IRS estimates that more than 28 million citizens received over $66 billion in earned income tax credits in tax year 2013.

The federal EITC for low- to moderate-income working people reduces the amount of taxes owed, and refunds the difference, if the credit is larger than the amount owed. The credit changes every year and is based on earnings, number of qualifying children and marital status.

The EITC is supported by bipartisan elected officials and a wide range of economists as one of the best ways to help people climb out of poverty.  This well focused anti-poverty program provides stimulative economic benefit for local communities.  EITC revenues are dependably spent for necessities in the local area, providing further jobs and positive economic activity.

State EITCs

Twenty-six states and the District of Columbia have earned income tax credits. All states except Minnesota set their credits based on the federal credit; however, the percentages used vary greatly from 5% to 40%. The Delaware credit is 20% of the federal credit.

In 22 of the states and the District of Columbia, EITCs are fully refundable if the amount is greater than the taxes owed. People below the income limits receive “negative income tax” refunds if the credit is greater than their tax.  However, in four states, including Delaware, the EITC can only reduce a worker’s tax liability, not provide a refund.

EITC Legislation for Delaware

In the last session of the General Assembly, H.B. 253 was introduced to make the Delaware credit refundable. The sponsors plan to re-introduce the bill in 2017. The total cost of the Delaware EITC is $10 million.  The proposed bill targets the same amount, but re-allocates it to offer a refundable credit which would benefit the lowest income people.

In 2018, Delaware’s EITC match percentage of the federal EITC would be reduced from 20% to 6%, but the program would continue to utilize the $10 million cost, because the EITC would help a larger number of workers, through the refundability. The total amount of the restructured EITC would grow by 1 percent a year until it reaches 15 percent in tax year 2026.