Many states are providing more relief to their low- and middle-income residents by expanding a targeted tax credit, following a boost to the same federal credit by the Biden Administration.
Ten states have increased or enacted a state-level Earned Income Tax Credit (EITC) this year, while Delaware and the District of Columbia have pending legislation.
The expansion of those state credits could help over 1 million families, according to the Center on Budget and Policy Priorities, and comes after the federal EITC credit was expanded in March.
“You're seeing more tax policy changes this year, one because of pent-up demand, and two because we're now in a place of fiscal stability and states can make these changes,” Richard Auxier, a senior policy associate in the Urban-Brookings Tax Policy Center, told Yahoo Money.
Currently, 28 states and D.C. offer state-level EITCs that are typically calculated as a percentage of the federal EITC. Missouri — which enacted legislation in June — and Washington state — which this summer funded the previously frozen credit — will join the list of states offering this credit in 2023.
Others are making the EITC more valuable. For instance, Colorado increased the credit amount from 15% to 25% of the federal EITC, while Connecticut bumped its credit from 23% to 30.5% of the federal credit.
Additionally, Oklahoma, which cut the credit by nearly 70% in 2016, restored the credit’s full value this year by making it fully refundable — meaning that taxpayers receive a refund even if the credit exceeds their total tax bill.
Many of those states are using stimulus money from the American Rescue Plan to fund the boosts. That same legislation enacted in March also made the federal EITC fully refundable and extended the credit to workers without children at home. The Biden administration has proposed making those changes permanent.
“This goes directly to the population that was most harmed by the pandemic,” Auxier said. “The Earned Income Tax Credit is a proven poverty-fighting tool.”
‘Putting possibly thousands of dollars in the pockets of residents’
New Jersey and D.C. offer some of the most generous credits, both of which are fully refundable and match 40% of the federal EITC. Pending the mayor’s approval, D.C. will boost its credit to 100% of the federal credit starting in 2026 — the highest in the nation.
“This change is putting possibly thousands of dollars in the pockets of residents who are eligible for the federal EITC,” Auxier said. “It's a huge, huge change for filers.”
A tax filer with three children is currently eligible for up to $2,692 for the state credit in D.C. In 2026, that amount would jump two and half times to $6,728. Adding in the federal EITC, that filer would be eligible for $13,456 in tax credits in 2026. D.C. also proposed distributing the EITC payment monthly — similar to how the federal government is advancing the Child Tax Credit (CTC) this year.
Increasing EITC is also relatively affordable for many states, according to Auxier. For instance, a 10-percentage-point increase in the state EITC in Kansas, Michigan, Montana, and New York State would cost less than 1% of each state’s total tax revenue, the analysis found.
“It doesn't cost that much money,” Auxier said, noting that only filers making up to $50,000 qualify. “That both allows you to target the benefit, but also limits the cost to your state.”