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Keller Anne Ruble, Associate for Policy Research, and Bryan Boroughs, Director, Palmetto Initiative
This week, the South Carolina General Assembly enacted a nonrefundable state Earned Income Tax Credit (EITC), benefiting working families. This credit passed through inclusion in H 3516, the South Carolina Infrastructure and Economic Development Reform Act, informally known as the Roads Bill.
At the federal level, the EITC has been available to working families since the 1970s. The total credit amount is based on income earned throughout the year, family structure (married or single), and number of children, with a maximum amount of $3,373 for one child up to $6,269 for three or more kids. The credit
uses a phase-in and phase-out range based on income level to determine the credit amount; thus, only families below a certain level of income are eligible for the credit each year. It is historically the most powerful anti-poverty tool in our economic toolkit. Many states have enacted a state EITC to “piggyback” off the federal credit, each with its own structure and amount.
In South Carolina, this nonrefundable credit is based on the federal EITC and will phase in starting in tax year 2017, increasing to 125% of the federal credit over six-years.
While we haven’t crunched the numbers in South Carolina yet, here’s an example of how the EITC math works: If a family receives a $500 federal EITC, this new state EITC reduces the amount of state income tax they owe by $625. Many families will have already paid that $625, because most employers withhold taxes each pay period. That leads to a larger (and very helpful) refund at the end of the year. Others will have to send in a smaller check on tax day.
The word “refundable,” though, is often used in a confusing way when discussing the EITC. We’ll try to clear that up:
Assume that same family only owed $400 in income tax before subtracting the EITC, and that an employer withheld that $400 during the year. After subtracting 125% of their federal EITC (here est. $625), then the family would owe less than zero. That’s where refund ability comes in:
- If the EITC is “non-refundable,” then the family will still receive their $400 tax refund. The Earned Income credit eliminates the family’s owed taxes. Like normal tax refunds, families would get a check for the $400 in taxes that were overpaid.
- If the EITC is “refundable,” then the family will receive a larger refund on tax day. The $400 in overpaid funds would be returned, and the government provides an extra $225 (the “refundable” portion).
So, when we say that this credit is non-refundable, it means that the government will only refund money that the taxpayer has overpaid on their federal income tax. (Apologies: we didn’t create this term. It can be difficult for families to determine whether they are eligible for the EITC, which is why free tax preparation programs for low-income families, like VITA, are so important).
The federal Earned Income Tax Credit’s credit is a strong work incentive linked to increased family economic self-sufficiency. Vast research highlights the EITC’s impact on improved health, economic, and social outcomes for families, and it is shown to be more impactful the younger a child is when his or her family receives the credit., as we have written before.
In September 2015, the Institute for Child Success released a paper by Dr. Michelle Maxfield titled: The Effects of the Earned Income Tax Credit on Child Achievement and Long-Term Educational Attainment. This new research found that EITC expansions improve both immediate and long-term educational outcomes for children, indicating the importance of the EITC as a policy tool for early childhood advocates.
- An increase in the maximum EITC of $1,000 (2008 dollars) in a given year significantly increases math achievement by about 0.072 nationally normed standard deviations.
- This change in EITC generosity during childhood also increases the probability of graduating high school or receiving a GED at age 19 by about 2.1 percentage points and increases the probability of completing one or more years of college by age 19 by about 1.4 percentage points.
- Estimated effects are larger for boys and minority children; there is evidence that an expansion in the EITC is more effective at improving educational outcomes for children who are younger during the expansion.
The recently published Self Sufficiency Standard for South Carolina 2016 found that, on average, South Carolina families must earn roughly double the Federal Poverty Level to be self-sufficient and financially stable. The newly passed credit will allow working families to better meet their needs, fostering safer and more secure environments in which to raise their children.
The Institute for Child Success is grateful to the General Assembly for the passage of this meaningful legislation and to our Early Childhood Common Agenda (ECCA) coalition partners, including The United Way Association of South Carolina and The South Carolina Children’s Trust for their advocacy on behalf of South Carolina’s working families and youngest citizens.