Insights

Why the Earned Income Tax Credit Might Be the Most Important Policy Right Now to Address Economic Inequities, Provide Financial Stability

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What if a policy could dramatically reduce poverty, help families make ends meet, AND bolster local economic activity? That policy already exists: the Earned Income Tax Credit (EITC). First enacted in 1975, the EITC is one of the most successful public policy tools to keep working families out of poverty, with positive effects on recipients’ health, education, and employment outcomes.

What is the EITC?

The EITC is a tax credit designed to allow low- and moderate-income working families to keep more of their money. At tax time, eligible filers receive a refund based on their income and the number of children in the home. Annually, the EITC provides billions in cash refunds. In 2018, it kept 5.6 million people out of poverty, including three million children.

What makes the EITC so effective is not just the financial boost but the full autonomy for recipients to use the additional cash assistance however they see fit. Often, families use the extra funds for necessary expenses such as rent, utilities, and groceries and to pay down debt. Furthermore, the credit has been proven to bolster economic activity: for every $1.00 in benefits received, recipients spend $1.50-2.00 at local businesses.

How the EITC connects to our strategy

As part of our goal to close the racial and ethnic wealth gap, the Trust believes the EITC is a critical policy intervention to provide financial stability and grow household wealth for low- and moderate-income Black and Latinx individuals and families.  It is such an impactful policy that expanding its eligibility is at the top of our policy agenda.

Before COVID-19, Black and Latinx households lagged white households in annual income. The pandemic, however, has widened this gap and created additional financial instability. In Chicago, 69 percent of Black households and 63 percent of Latinx households reported serious financial problems last year, including losses in savings and the inability to pay necessary expenses. Additionally, Black and Latinx workers are overrepresented in essential jobs with low pay and at higher risk for job loss.

Against this backdrop, a policy like the EITC is more critical than ever. But how do we ensure it is helping as many families and individual workers as possible? In 2021, there is a genuine opportunity to expand EITC eligibility at the state and federal levels.

Opportunity for expansion

Historically, the EITC has mostly benefitted households with children, with the amount of the credit increasing depending on the number of children in the home, as reflected in the chart below.

The American Rescue Plan provides EITC eligibility to 17.4 million childless workers who can claim a refund of up to $1,500. Additionally, the Biden administration recently proposed keeping this expansion through 2025 under the American Families Plan.

There is currently a bill is making its way through the Illinois General Assembly (SB 2184/HB 2792) that would expand eligibility for the state’s Earned Income Credit (EIC) to workers ages 18-25 and over 65, taxpayers using Individual Taxpayer Identification Numbers (e.g., individuals who are not yet citizens but who earn income and pay taxes), and unpaid caregivers. If passed, it could potentially provide an economic boost for 500,000 households. Illinois would also become the third state to open eligibility to ITIN filers.

We fully support these enhancements to EITC eligibility at both the state and federal levels. The latest groundswell of support came as a result of the Building Resilient Families Task Force, on which our President and CEO Helene Gayle and my colleague Anna Lee served. Even before COVID-19, the Task Force recommended expanding the EITC as one of three solutions to address economic insecurity in Chicago.

The Trust also recently joined the Coalition to Make the EIC Work, which is leading the charge to expand Illinois’ EIC. The Coalition is led by Trust grant recipient Economic Security for Illinois and comprises 30 organizations advocating for more hardworking residents to benefit from this vital credit. Additionally, we are engaged in lobbying and advocating to ensure the federal EITC reaches more households.

When we think about equitable recovery from the pandemic and addressing longstanding economic disparities, we know there is a long road ahead. But we don’t have to look far for policies that work. An expanded EITC is one of them.