EITC provisions in ARRA reward work, help economy

Our analysis of Census Bureau data show that more than 36,180 Iowa families could benefit from the EITC improvements made by ARRA in 2009.

Andrew Cannon, research associate
Andrew Cannon

By acting this summer to extend selected provisions of the American Recovery and Reinvestment Act (ARRA), Congress would preserve critical work supports for low- and moderate-income working families — and help the economy.

One of those provisions is the Earned Income Tax Credit (EITC), a bipartisan measure that keeps millions out of poverty, offsets payroll taxes and augments low wages, particularly for families with children.

The concept is simple: As low- and moderate-income adults work and increase their wages, they are eligible for a credit that rises, plateaus and then phases out as they reach closer to the range of middle-income earners. The credit is fully refundable, meaning that a family receives a check for the difference if their credit is larger than their income-tax liability.

In 2003, the EITC helped 4.4 million Americans escape poverty, including 2.4 million children. More children in the United States are lifted out of policy by the EITC than by any other social program.

Besides deterring poverty, the EITC encourages low-wage workers to work, because as their earnings rise at low wages, their EITC also grows.

ARRA — the federal recovery act passed in 2009 — offered the latest improvement to the EITC. ARRA created a new credit tier for families with three or more children. Families with two children can receive a maximum EITC of $5,028, while families with three or more children can receive a maximum EITC of $5,657 in 2009. ARRA further improved the EITC by expanding the amount of qualifying earnings for married couples filing their taxes jointly. The EITC will, without further action by Congress, revert to the pre-ARRA eligibility rules in 2011.

Thousands of Iowans claim the EITC each year. In 2006, the last year for which data is available, 177,329 Iowans claimed the EITC. The ARRA improvements will allow Iowans with three or more children to claim a slightly larger credit on their 2009 and 2010 tax returns. Married Iowans filing their taxes jointly will have a larger window in which to qualify for the maximum credit of $5,657.

Our analysis of Census Bureau data show that more than 36,180 Iowa families could benefit from the EITC improvements made by ARRA in 2009.

Extending ARRA improvements to the EITC would make those families better able to meet their household budgets, and because they can be expected to spend the money, those families could contribute more to their local economy.

Posted by Andrew Cannon, Research Associate

Author: iowapolicypoints

The Iowa Policy Project is a nonprofit, nonpartisan organization that provides research and analysis to engage Iowans in state policy decisions. We focus on tax and busget issues, the Iowa economy, and energy and environmental policy. By providing a foundation of fact-based, objective research and engaging the public in an informed discussion of policy alternatives, IPP advances effective, accountable and fair government.

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