The Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a federal tax credit for working individuals and families whose incomes range from significantly below the poverty line to approximately double the poverty line. It is intended to reduce the tax burden on low-income workers, supplement their wages, and assist in the welfare-to-work transition. Larger percentages of eligible families claim the EITC than traditional social welfare programs such as TANF, Food Stamps, and Medicaid.

Enacted by Congress in 1975 as a refundable tax offset for low-income workers, the structure of the EITC was attractive to both sides of the political spectrum because it was both an anti-poverty and an anti-welfare instrument that offered an attractive, work-oriented alternative to existing welfare programs. The credit also addresed national concerns in the mid 1970's over unemployment rates, welfare caseloads, and the working poor.

Over time, the EITC has become a significant source of income for working families. In 2002, for example, families with one child and an income level of $7,000 to $13,000 received the maximum amount of $2,506. Families with two or more children with an income level of $10,000 to $13,000 qualified for the maximum amount of $4,140. For a hypothetical family with two children and an income level of $10,700, the credit of $4,140 is roughly equivalent to an additional $2 per hour of full-time work. The available credit drops as income rises; for families with two or more children, it begins decreasing near $13,500, and reaches zero at $33,200.

People who know they will qualify for the credit at the end of the year may request that their employer pay them an Advanced Earned Income Tax Credit (AEITC), which allows them to receive the credit over equal installments in each regular paycheck. However, the vast majority of EITC recipients (99 percent) receive their funds in the form of a lump-sum payment. Numerous studies have shown that due to the "lumpy" nature of most EITC payments, recipients use the opportunity to improve family well being (moveto a safer neighborhood, imporve transportation, etc.) or to make large purchases.

Today, the EITC is the largest federal aid program targeting the working poor. Nevertheless, numerous studies have found that a significant number of eligible families fail to claim the credit. A primary purpose of this report is to demonstrate that public awareness campaigns to promote full access by these families is not merely justified as socially responsible, but actually could more than pay for itself when considering the economic impact to the community and the fiscal impact to the City of San Antonio. Particular attention is paid to the effect on San Antonio's West Side population.

The importance of the Credit for working families in reducing poverty and income inequality reviewed in the next section, followed by a discussion of factors that erode the credit's benefit (such as tax preparation costs and refund loan fees). An evaluation of the potential economic and fiscal impacts associated with increased utilization forms the core of the report, with a brief review of selected cities across the nation that have established programs to help families claim the EITC forming the report's final section.

In spite of its already substantial impact on San Antonio and the West Side, it is clear that the community is "leaving money on the table." Every year, a significant number of families who qualify do not collect the EITC, for a variety of reasons-failure to file a tax return, ignorance of their eligibility, etc. It is for this reason that we joined the San Antonio Coalition for Family Economic Progress in an effort to do targeted outreach and education in San Antonio, to families who are eligible for the EITC but do not claim it.

During tax-preparation season, seven West Side VITA sites in the Making Connections San Antonio area assist in tax return preparation and enroll qualified families to receive EARNED INCOME TAX CREDIT. The sites are housed in community based organizations and The Center for Work and Family offers technical assistance and coordinations efforts.

To learn more about the earned income tax credit, please click here.