May 15, 2014

Improving Tax Fairness with a State Earned Income Tax Credit


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Virtually every state’s tax system is fundamentally unfair, requiring a much greater share of income from middle- and low-income families than from wealthy families. Nationwide, low-income Americans (those making less than $18,000 a year, putting them in the bottom 20% of the nationwide income distribution) pay an average effective state and local tax rate roughly double (11.1%) that paid by the top one percent (5.6%). This means that state tax systems push the poor even further into poverty and exacerbate income inequality.

The simplest, most effective, and most targeted way to begin to counteract regressive state tax codes is a refundable state Earned Income Tax Credit (EITC). Twenty-five states and the District of Columbia already have some version of a state EITC. Each one is modeled on the federal credit, making it easy for taxpayers to claim and simple for state tax officials to administer. This report explains how all states – even those who already have some form of the credit – can use the state EITC as a tool for improving the fairness of their state tax code.

Read the Full Report (PDF)