Earned income tax credit: federal dollars waiting to be invested in local communities

State and local governments continuously look for ways to attract new investments into their communities, spending tens of billions of dollars annually on incentives and often engaging in

bidding wars with other jurisdictions for new factories, sports facilities and other kinds of development. Yet many states overlook a hidden-in-plain-sight opportunity to bring millions of

new dollars into their communities: encouraging more eligible residents to claim the federal earned income tax credit (EITC). Unlike bringing in new businesses, expanding EITC participation

does not require generous upfront incentives to attract new dollars to the state. This fact sheet focuses on the EITC as a community development tool and estimates its potential economic

impact for every state and the District of Columbia. WHAT IS THE EARNED INCOME TAX CREDIT? The EITC is an individual income tax credit that has grown into one of the largest federal support

programs for low-income workers, who must receive either wages or earnings from self-employment to qualify. In 2022, 31 million workers and families received about $64 billion from the EITC.

The credit amount varies by family composition and earned income, making it larger for families with children than for taxpayers without them. For example, in 2023, the maximum credit could

reach as high as $7,430 for a family with three children but only $600 for taxpayers without one.  As a taxpayer’s income grows, the credit phases in and then phases out to zero. Families

with two children lose eligibility at about $55,000 of income, whereas single taxpayers do so at around $15,000. In addition, taxpayers without children must be between ages 25 and 64 to

claim the EITC. HOW DOES THE EITC SUPPORT LOCAL ECONOMIES? Extensive research has documented the positive effects of the EITC across myriad dimensions, such as higher participation in the

labor force, reduction of child poverty, improved educational and labor market outcomes, and better health.  This positive impact has compelled policymakers across the political spectrum to

continue to expand the EITC since its inception in 1975. The EITC is effective in boosting local economies for two reasons: * It is countercyclical. By design, the credit injects stimulus

exactly when and where the economy slows because when incomes decline, more people become eligible. * It has a large multiplier effect (i.e., the amount of newly generated economic activity

exceeding the initial government expenditures). The EITC already benefits local economies, but its impact can be even greater if more eligible residents participated; according to the IRS,

only about 80 percent of eligible taxpayers claim the credit. In 2019*, the participation rate ranged from 70 percent in Alaska to 84 percent in Rhode Island. HOW MUCH COULD STATES BENEFIT

FROM GREATER EITC PARTICIPATION? How much are workers and their states missing out on from not claiming the EITC? The estimated direct loss adds up to about $8.5 billion annually across all

states, representing about 15 percent of the claimed credit. In some large states, like California or Texas, workers forgo roughly a billion dollars per year. Also losing out on those

billions are the two states’ economies. Accounting for the full economic effect, the total negative economic impact from failure to claim the EITC reaches nearly $10.5 billion annually

across all states. This fact sheet includes a table, ESTIMATED TOTAL UNCLAIMED EITC AND ITS ECONOMIC IMPACT BY STATE, 2019. _*The calculations in this analysis use 2019 data, both because of

the data availability and to eliminate singular effects of the COVID pandemic, including highly unusual economic circumstances of many low-income workers and __temporary legislative

changes__ to the EITC._