The Recession and the Earned Income Tax Credit

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Abstract

This brief, part of the Urban Institute's "Recession and Recover" series, assesses the extent to which the Earned Income Tax Credit can help families hit by job losses and falling incomes during a recession.

Introduction

No cash assistance program for low-income working families is as widely received as the earned income tax credit (EITC).1 In 2006 (the last year for which data are available), 23 million households received a total of $44.4 billion in reduced taxes and payments. The share of eligible families receiving EITC benefits is far higher than for public assistance programs like Temporary Assistance for Needy Families and food stamps (now called the Supplemental Nutrition Assistance Program), presumably because EITC is provided through the tax system and does not require application through a separate agency.2 But the EITC is an unreliable safety net for low-income families during a recession, particularly as unemployment rates climb.

How It Works

The EITC rises by a fixed percentage of earnings from the first dollar of earnings until the credit reaches a maximum. The credit then stays flat until earnings hit a phaseout range. From that point, the credit falls with each additional dollar of income until it disappears entirely.

The EITC varies by a taxpayer’s filing status and number of children. Families with two or more children may receive a credit of up to $5,028 in 2009. The maximum credit is $3,043 for families with one child and just $457 for childless workers. The credit is fully refundable: any excess beyond a family’s income tax liability becomes a payment.

The real value of the maximum federal credit tripled between 1975 and 1995 but stabilized after Congress indexed it in 1996 (figure 1). Twenty-four states also had their own EITCs in 2008; most were set as a percentage of the federal credit, effectively indexing the state credits for inflation, too (Levitis and Koulish 2008).

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