Expanding Maryland’s Earned Income Tax Credit Will Benefit Families and the Economy

February 17, 2016 by MDCEP in 2016 Session, Blog, Budget and Tax, Economic Opportunity

The Earned Income Tax Credit is a common-sense tax break that helps working people who struggle to get by on low wages and also boosts the economy. This year, legislators have the chance to expand the credit in Maryland, enabling more low-wage workers to keep more of what they earn – money they will likely spend at local businesses, helping the community economy,

Tax refund

Photo via 401kcalculator.org.

Maryland’s current EITC offers an essential hand up for thousands of families that work hard for low pay. But it leaves out thousands of other low-wage workers. Young people just getting started in the workforce, workers without children and those who don’t claim a child as a dependent get little or no benefit from the current credit, even if they have very low incomes. In fact, many people who work for very low wages go deeper into poverty because they don’t qualify for a meaningful tax break.

Expanding the credit would help change that for more than 355,000 Marylanders who are now struggling to get by on low wages, most of whom do not currently receive the tax credit. They would receive an average annual tax credit of about $300 and as high as $503. The lowest-income Marylanders now pay about 9.7 percent of their income in state and local taxes – a much greater share of their income than the wealthiest Marylanders. Expanding the EITC would help correct this imbalance.

The tax credit would also benefit Maryland businesses, as the lower tax bills mean that recipients have more to spend on necessities like groceries and car repairs. Researchers estimate that, in many cases, the federal credit creates local economic impacts equivalent to at least twice the amount of EITC dollars received. A 2004 study of Maryland’s EITC estimated that the state credit added $16 million to the economy in Baltimore City alone, creating 167 jobs and generating $4.9 million in wages.

In addition, extensive research on the federal EITC found it to be highly successful in the 1990s at helping more single mothers start working and continue to work. Many researchers believe that expanding the credit would have a similar effect for young men and women with lower levels of education, a segment of the population seeing lower levels of employment. That’s because the credit increases with each dollar people with very low incomes earn, up to a point, and then phases out when a worker reaches a modest income level.

The General Assembly is considering several bills this year that would strengthen Maryland’s EITC, as the idea of expanding the state EITC has received bipartisan support from Governor Hogan and the Maryland Economic Development and Business Climate Commission, among others. Of these measures, only Senate Bill 294 would help the younger workers and other low-wage workers who don’t currently receive the tax credit.

This bill would:

  • Allow people between ages 18 and 24 to claim the state EITC
  • Increase to $23,540 the income limit for someone filing taxes as single to claim the state EITC
  • Allow workers not claiming dependents to receive a state tax credit equal to 100 percent of the federal EITC, which was up to $503 for 2015.
  • For families with children, increase the portion of the state EITC that can be added to a tax refund, not just deducted as a credit, to 28 percent of the federal EITC.

Under current law, an adult working full time at the minimum wage, earning $14,500, and not claiming any dependents would pay $1,506 in federal taxes after receiving an EITC of just $23. Under the proposed law, the same worker could qualify for a state EITC of 100 percent of the federal credit, a maximum EITC of $503.

Other proposals would provide a small increase in the amount of the credit for current recipients, which would provide valuable support to those families and their communities. But they would do nothing to boost economic security for workers who are taxed deeper into poverty because they either receive a very small benefit or no benefit at all.

The General Assembly should pass legislation that provides the additional benefits to current recipients, as the governor has advocated, and also correct the glaring deficiency in the current state EITC that leaves younger workers behind.