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Joint Center for Poverty Research
Northwestern University/University of Chicago
The Illinois Earned Income Tax Credit
JCPR Legislative Research Briefing, Feb 2, 2001
A fundamental problem in today’s post– the credits are a flat percentage of the federal
welfare-reform era is one of poverty while credit and share the same eligibility rules.
working. Fourth-fifths of poor families in Illinois The EITC is considered one of the most
are working. Earnings of full-time, minimum important antipoverty programs in the nation
wage workers in Illinois now fall $3,000 below because its supplement to wages can lift working
the federal poverty line for a family of three. 1 families out of poverty. A worker earning
These low wages are one reason state $13,500 (full-time at $7 per hour) with three
policymakers have become interested in the children would qualify for a federal EITC of
Earned Income Tax Credit (EITC) as a $3,486, bringing the family income close to the
supplement to low-income workers. poverty line. Adding a state EITC set at 20% of
The Joint Center for Poverty Research hosted the federal credit, would bring the family an
a one-day legislative research briefing February additional $697.2 In 1998, the EITC lifted 4.3
2, 2001, on progress among states, and especially million people out of poverty, half of whom
Illinois, in implementing state EITCs. Therese were children.
McGuire, professor in the College of Urban
Planning and Public Affairs at the University of Effects of the Federal EITC
Illinois at Chicago, reviewed Illinois’s income on Work and Marriage
tax system. Bruce Meyer, professor in the In the past 15 years, work by single mothers
Department of Economics at Northwestern has increased sharply. Bruce Meyer noted that
University, presented research on the effects of the EITC has increased employment among
the federal EITC on work and marriage among single mothers by 4–7 percentage points. The
low-income mothers. Nick Johnson, senior increase due to the EITC was even larger for
policy analyst at the Center on Budget and single mothers with young children (two-thirds
Policy Priorities, provided an overview of of recipients of the federal EITC are single
various state EITC plans. parents) and for single mothers with low
education levels. Overall, Meyer finds that the
The Earned Income Tax Credit: An Overview EITC is responsible for more than 60% of the
The federal EITC is a refundable income tax increase in work among single mothers between
credit to low- and moderate-income working 1984 and 1996.3
families. The credit rises with earnings until Researchers have determined the EITC’s
earnings reach roughly $10,000 per year for a effects on employment of single mothers by
family with two children. Such a family could looking at how their employment has increased
receive the maximum credit of over $4,000. as the EITC expanded in the 1980s and 1990s.
With higher earnings, the credit is generally Further evidence of the EITC’s effect on
reduced. For a family with one child, the credit employment can be seen in studies that take
amounts are somewhat lower, and the maximum advantage of recent policy changes that have led
credit is roughly $2,500. to different EITCs for different size families.
In 2000, in addition to the federal EITC, Prior to 1994, all families, regardless of size,
15 states, including Illinois, offered their own received a similar tax rebate under the EITC.
state EITC to working families, more than After 1994, families with two or more children
double the number of states in 1994. Today, as
Nick Johnson reported, 20% of federal recipients 2
Center on Budget and Policy Priorities. 2000. A Hand Up:
of the EITC are now eligible for state EITCs.
How State Earned Income Tax Credits Help Working
Many states “piggyback” on the federal EITC; Families Escape Poverty in 2000: An Overview. Washington,
DC: CBPP. Available online at http://www.cbpp.org/11-2-
00sfp.htm
3
Bruce Meyer and Dan T. Rosenbaum. Forthcoming 2001.
1
Center on Budget and Policy Priorities analysis of Current “Welfare, the Earned Income Tax Credit, and the Labor
Population Survey, 1998-2000. Supply of Single Mothers.” Quarterly Journal of Economics.
were given increasingly greater refunds each more pronounced in the former Aid to Families
year through 1996. Several researchers have with Dependent Children (AFDC) program.7
surmised that, given these policy changes, the Congress has recently debated the supposed
work efforts between one-child families and “marriage disincentive”’ in the EITC and is
those with two or more children should diverge. considering expanding the phase-out range for
In fact, they do find a distinct difference. married couples. Johnson reported that a
Changes in employment have mirrored statutory proposal to eliminate this disincentive may
changes in the EITC.4 surface in tax cut legislation.
That the EITC encourages work among
single mothers is fairly clear. For married Illinois Tax System and Its EITC
couples, a different scenario emerges. Couples, Illinois adopted its EITC in 2000. The credit
compared with single people, are more likely to is set at 5% of the federal credit (the average
have combined earnings that place them in the state credit is 20%). Estimated costs in Illinois
phase-out range of the EITC. More than 70% of are $35 million per year. The state EITC is not
couples who receive the EITC fall in the phase- yet a permanent fixture. The credit is in force for
out range. only three years, through 2002. Only one other
The credit seems to encourage one spouse state (Colorado) does not have a permanent
(typically the wife) to cut back work hours while EITC. The Illinois EITC is also nonrefundable;
encouraging the second earner to increase work the only way to receive an EITC is to owe state
hours. The net effect is a modest negative one; income taxes. If a family has no state income tax
that is, the EITC appears to lower hours work liability, they do not benefit from the credit.
among married couples.5 Lowered work hours Only five states—Illinois, Iowa, Maine, Rhode
among married couples with children may not be Island, and Oregon—have nonrefundable EITCs.
a “negative” effect in terms of child In many respects, the overall Illinois tax
development, however. Evidence is emerging system is not as progressive as other states. Most
that part-time work has more beneficial effects states do not tax families who earn below the
on child development among low-income poverty threshold. Illinois has the third lowest
children than working full-time or not working at tax threshold of the 50 states—two-parent
all and receiving welfare. Lindsay Chase- families of four earning more than $8,000 face
Lansdale and colleagues, in a three-city study of an income tax. The two other states with lower
welfare reform, find that low-income children’s tax thresholds are Alabama and Kentucky.8 A
test scores improved and behavior problems flat tax and high sales taxes in Illinois are further
declined when their mothers worked part-time.6 burdens to low-income families. The EITC can
The EITC clearly encourages work among compensate somewhat for this regressivity.
single mothers. Does it, however, have the same Most states first instituted a small EITC that
positive effect on incentives to marry? For was often nonrefundable, and eventually raised
some, such as nonworking mothers, the EITC the credit and made it refundable. Illinois will
provides an incentive to marry. For others, such likely debate making the EITC permanent as
as many working mothers, the EITC provides a well as adjusting its rate in 2003. Making the
disincentive to marry. Overall, researchers have credit refundable, however, may meet more
found that the EITC leads to small reductions in resistance. However, Johnson argued, by making
marriage. However, marriage disincentives were the tax credit refundable, it better serves those it
is intended to help: very low-income families.
4
Bruce D. Meyer and Dan T. Rosenbaum. 2000. “Making
Single Mothers Work: Recent Tax and Welfare Policy and its
Effects.” National Tax Journal 53 (December): 1027–1062;
V. Joseph Hotz, Charles Mullen, and John Karl Scholz. 2000.
7
“The Earned Income Tax Credit and Labor Market Nada Eissa and Hilary Williamson Hoynes. 1999. “Good
Participation of Families on Welfare.” Working paper. News for Low-Income Families? Tax-Transfer Schemes, and
Chicago: Joint Center for Poverty Research. Marriage.” Unpublished manuscript; David T. Ellwood.
5
Nada Eissa and Hilary Williamson Hoynes. December 2000. “The Impact of the Earned Income Tax Credit and
1998. “The Earned Income Tax Credit and Labor Supply: Social Policy Reforms on Work, Marriage and Living
Married Couples,” NBER working paper no. 6856. Arrangements,” National Tax Journal 53 (December): 1063–
6
Greg Duncan and P. Lindsay Chase-Lansdale, eds. 1106.
8
Forthcoming 2001. For Better and For Worse: Welfare Center on Budget and Policy Priorities. 2000. State Income
Reform and the Well-Being of Children. New York: Russell Tax Burdens on Low-Income Families in 1999. Washington,
Sage. DC: CBPP.
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