Earned Income Tax Credit Fiscal Impact Study

Economic Growth and the Path to Financial Stability

One of the most cost-effective antipoverty policies currently implemented in the United States is the Earned Income Tax Credit (EITC). The federal earned income tax credit, or EITC, lifts 6 million people (including 3 million children) over the poverty threshold each year. Earned Income Tax Credits reduce the tax burden of low- to moderate income working individuals and households, boost the resources of near-poor households who struggle to make ends meet, such as the ALICE (Asset Limited, Income Constrained, Employed) population, and reduce the depth of poverty for many more.

What is an Earned Income Tax Credit?

Earned Income Tax Credits offer an annual lump-sum tax credit to families with low income to reduce or eliminate tax liability, depending on the total sum of taxes owed. The federal credit, and some state credits, can also be disbursed in the form of a refund to families with no income tax liability. State Earned Income Tax Credits, often modeled from the federal EITC, provide an additional benefit to the federal credit for low-income taxpayers by reducing their state income tax liability.

United Way of Pennsylvania is currently leading a broad-based and growing EITC coalition to advocate for an elective, refundable state EITC program that may offer benefits of at least 10% and up to 25% of the federal credit. The annual economic benefits of a refundable state EITC of 10% of the federal EITC amount to at least $562 million per year. For a 25% credit, the likely benefits amount to at least $1.2 billion per year. United Way of Pennsylvania, in partnership with University of Texas’ Child and Family Partnership, found that for every $1 spent on a state Earned Income Tax Credit by the Commonwealth, Pennsylvania receives $4 back in economic growth and saves $3 dollars in social spending.