CRS REPORT OUTLINES EXPANSION OF EIC, PROJECTS FUTURE COST.

THE EARNED INCOME TAX CREDIT: A FACT SHEET

James R. Storey Specialist in Social Legislation Education and Public Welfare Division

BACKGROUND ¹

The earned income tax credit (EITC), enacted into law in 1975, offers cash aid to working parents who have relatively low incomes and who care for dependent children. It is the only Federal cash assistance available to all working poor families with children and the only Federal tax credit payable to filers with no income tax liability. For those with tax liability, the EITC reduces income tax payments. However, most of the credits go to those who owe no taxes (or whose tax liabilities are smaller than their credits) and are received as direct payments, usually by check from the U.S. Treasury. A small number receive augmented paychecks from their employers through "negative tax withholding."

The basic credit in 1993 is 18.5 percent of the first $7,750 of annual earnings (19.5 percent for families with more than one child). For those with adjusted gross income (AGI) above $12,200, the credit is phased out at a rate of 13.21 cents per dollar in excess of $12,200 (13.93 cents for families with more than one child), disappearing entirely at an AGI of $23,050. Some families are also eligible for supplementary credits; 5 percentage points are added to the credit rate for families with a child under 1 year of age, and 6 points are added to the credit rate for families that pay health insurance premiums for their children. However, these supplemental credits will be eliminated in 1994, and the basic credits will rise. Smaller credits will be available for the first time to low-income workers with no children.

LEGISLATIVE HISTORY

The EITC was conceived in 1971 as an alternative to President Nixon's proposal to provide cash welfare to poor two-parent families. While legislation was considered in 1972, 1973, and 1974, the credit was not enacted until the Tax Reduction Act of 1975 (P.L. 94-12). That act created a temporary EITC, which was extended through 1978 by three laws (P.L. 94-164, P.L. 94-455, and P.L. 95-30). The EITC finally became permanent law with the Revenue Act of 1978 (P.L. 95- 600). The credit amount was increased by the Deficit Reduction Act of 1984 (P.L. 98-369), and increased again and indexed for inflation by the Tax Reform Act of 1986 (P.L. 99-514). Additional benefits were approved in the Omnibus Budget Reconciliation Act (OBRA) of 1990 (P.L. 101-508). Credits were further increased (to take effect in 1994-1996) and a small EITC was adopted for childless workers by the OBRA of 1993 (P.L. 103-66).

WHAT THE EITC IS WORTH

Credit amounts in 1993 depend on earned income, AGI, number of children, and eligibility for the two supplemental credits. The 1993 maximum ranges from $1,434 for a one-child family to $2,364 for a larger family eligible for both supplements (figure 1). The average EITC benefit was $804 in 1992. The maximum credit will rise to $2,038 in 1994 ($2,528 for families with more than one child), and the income phaseout level will rise to $25,300 for families with more than one child. The maximum credit for a childless worker will be $306. Further credit increases are slated in 1995 and 1996 for families with children.

EITC CREDIT AMOUNTS, 1993 FIGURE 1 [OMITTED]

EITC TRENDS

Measured in constant-value dollars, the 1994 maximum credit amounts will be the highest in the program's history (figure 2). The original maximum credit amount of $400 was worth $1,084 in 1993 dollars. The real value of the EITC declined because of inflation and did not reach that level again until 1987. Subsequent declines were reversed in 1991, followed by real increases, which will continue through 1996. The maximums will rise at the inflation rate thereafter.

The cost of the EITC totalled an estimated $10.7 billion in 1992, all but $1.1 billion of which were in the form of cash payments (figure 3). This cost more than quintupled the 1986 cost. The number of recipient families rose from 6.3 million in 1986 to 13.3 million in 1992 (37 percent of all families with children). The changes effective in 1994 will boost program cost by 25 percent compared to the projected cost under prior law.

MAXIMUM EITC AMOUNTS, 1975-1995 (in constant 1993 dollars) FIGURE 2 [OMITTED]

EITC COSTS AND BENEFICIARIES, 1975-1993 FIGURE 3 [OMITTED]