taxes/earned income tax credit

the facts

  • A recent report from the Institute of Taxation and Economic Policy (ITEP) showed that those making just $20,000-$30,000 a year pay nearly 10 percent of their income in DC taxes, the second highest rate of any group of residents.
  • DC families making $33,000-$57,000 a year pay the highest amount in taxes, nearly 11 percent of income.
  • The top 1 percent of income earners in DC, with incomes of more than $1.5 million, has a combined DC tax liability of just 8 percent. This source is the same as the one directly above.

    • THE PROBLEM

    Earned income tax is the single most important factor in lifting DC residents out of poverty.  The current tax system in the District is does not adequately address the needs of low income residents. Low income workers pay more of their income to taxes, thus making it hard for those low wage earners to bring home enough money to cover living expenses and prepare for the future.

    WHAT IS BEING DONE NOW

    The District created a state-level Earned Income Tax Credit (EITC) in 2000. The District’s EITC is part of a federal program created in 1975 to supplement low-wage work with additional income from the government. The EITC reduces the amount of taxes owed by those who qualify due to their status as low-income workers. If the tax filer’s EITC exceeds the amount of taxes owed, he/she gets the difference as a tax refund, even if the worker owes zero federal income tax. 

    

The EITC is highly impactful. A recent Results study reported that the EITC generates large decreases in poverty and substantial increases in employment, and decreases the number of single parents receiving cash welfare. The study also indicated that EITC lifted 6.25 million people out of poverty in 2010 alone– more than any other government or non-governmental program.
While the EITC provides excellent and needed support for District families with low-wage jobs, not all who live in poverty are aware of the program or have the needed information and resources to take advantage of the program. The IRS estimates that federally, only four out of five eligible taxpayers take advantage of the credit, making them ineligible to participate in the DC EITC. DC has funded EITC outreach efforts in recent years, but that support was eliminated in 2010.

    

The EITC has been updated in recent years under the 2009 federal stimulus bill.  The EITC has expanded in recent years to provide greater aid to families with three or more children, and allows low-income workers who get married while on the program to continue to receive benefits. These improvements have kept thousands of DC residents out of poverty– and they’re set to expire in 2013. Should they expire, millions of Americans, including many DC residents, would see a major reduction in their award or would lose their EITC entirely.

    DC has funded EITC outreach efforts in recent years, but that support was eliminated in 2010.

    It is estimated that between 7,000 and 11,000 residents fail to claim the federal EITC, which they must do in order to claim DC’s EITC.7

    LEARN MORE

    [7] Kerstetter, Katie, “Bridging the Gaps in DC: Strategies to Support Low-Income Working Families,” November 14, 2008, available at: http://dcfpi.org/?p=266

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