Federal EITC Kept 2 Percent of the Population Out of Poverty

Greatest Poverty Reductions in Texas, North Carolina, and Arizona
November 17, 2015
 

Download the Brief

Endnotes are available in the pdf version. Download

Key Findings

icon of 1/8
The proportion of people who are poor in the United States as measured by the SPM would increase by one-eighth, from 15.9 percent to 17.9 percent, without federal EITC dollars.
icon of children
Children are especially at risk of becoming poor without EITC benefits, as 4.3 percent more children nationwide, or 1 out of every 25, would become poor without the EITC. The impact of the EITC is particularly strong in the South, where rates of child poverty would increase by nearly a third, from 18.0 percent to 23.1 percent, absent EITC dollars.
3 percent icon
In the states of Texas, North Carolina, and Arizona, at least 3 percent more of the overall population would become poor under the SPM absent federal EITC benefits. This contrasts considerably with the states of Minnesota, New Hampshire, and North Dakota, where 1.0 percent or less of the population would change poverty status.
icon of 6.0 percent
Differences among states are even more dramatic when looking at how children would fare without the federal EITC. Four states— Arizona, Kentucky, North Carolina, and Texas— would see at least a 6.0 percentage point increase in child poverty rates. The change in poverty rates in these states would be nearly three times those in Minnesota, New Hampshire, North Dakota, and South Dakota, where the child poverty rate would increase 2.3 percentage points or less.
icon of a group of three people
On average, the EITC keeps a similar share of people out of poverty in metropolitan and non-metropolitan places.

Summary

View Infographic

This brief documents the proportion of Americans who would have been poor absent the Earned Income Tax Credit (EITC), all else being equal, across 2010–2014. We examine Supplemental Poverty Measure (SPM) rates as well as hypothetical increases in the rates of SPM poverty in the absence of federal EITC benefits. It is important to note that we do not model behavioral changes that might result from the removal of EITC benefits, so the analyses presented here are a simplified representation of such a hypothetical scenario. The SPM is an obvious choice for this analysis because unlike the Official Poverty Measure (OPM), which only accounts for before-tax cash income, the SPM also considers in-kind benefits, tax credits, and out-of-pocket work and medical expenses when estimating resources. We present SPM rates for all individuals (Table 1) as well as for children only (Table 2), analyzing trends across regions, metropolitan status, and by state. Importantly, geographic differences in the cost of housing are accounted for in the SPM rates, and consequently the analyses presented here give a more accurate sense of the poverty reducing impact of EITC benefits.1

 Data

This brief consists of a pooled sample using the Current Population Survey (CPS) Annual Social and Economic Supplement (ASEC) between the years of 2011–2015. The CPS ASEC is sponsored by the Bureau of Labor Statistics (BLS), Census Bureau, and the Department of Health and Human Services (HHS), providing annual income, migration, benefits, and insurance information for a nationally representative sample of Americans. The CPS uses a tax model calculator to simulate tax income instead of collecting tax information directly from respondents. Payroll taxes for individuals with earned income are simulated first, and then tax-filing units are estimated based on marital status and household relationship structure.

Once the potential tax-filing units have been determined, state and federal taxes and credits are simulated for each unit (for more information, see https://www.census.gov/hhes/www/income/publications/oharataxmodel.pdf). Because tax credits are simulated, it is possible that some families who receive the EITC may not be included and others who are not eligible for EITC benefits (for example, undocumented immigrants) may be assigned a value due to errors in the tax model. 

To view Table 1 and 2 please download the PDF.

The ASEC data are asked every March and questions about income refer to the previous calendar year, so results can be interpreted as the average over the 2010–2014 time period. Roughly 200,000 individuals are included each year, resulting in a final sample of 1,007,595 observations analyzed in this brief. The 2014 CPS ASEC utilized a probability split panel design to test a new set of income questions. Approximately 3/8 of the sample were randomly assigned to be eligible to receive the redesigned income questions, and the remaining 5/8 of the sample were eligible to receive the set of ASEC income questions that had been in use since 1994. We combined these two subsets to create a single, harmonized 2014 data set. The redesigned income questions were then used for the entire 2015 CPS ASEC sample.5 All differences discussed in text are statistically significant (p<0.05)

Box 1: The Federal EITC

The federal Earned Income Tax Credit (EITC) supplements the wages of the nation’s low and moderate earners, with nearly one in ten Americans receiving this credit.2 The amount of EITC benefits vary by earnings and the number of dependent children in a family.3  Beginning with the first dollar earned, the credit increases as a percentage of total earnings until it plateaus at a threshold that is based on the number of dependent children. With additional earnings above the plateau level, the credit decreases until, eventually, it reaches zero.  If the value of the credit is greater than the tax liability, the excess is paid out to the recipient. The EITC is considerably more generous towards families with children: in 2014 the maximum federal EITC subsidy for a family with three children was $6,242 compared to only $503 for a childless couple, and 97 percent of all EITC funds went to families with children.4 Ultimately, EITC benefits represent a very considerable proportion of resources for low-income families with children; for a married couple with three children and earnings of less than $14,000, the credit can be almost a third of family income. 

Acknowledgements

This work was supported by the Annie E. Casey Foundation and anonymous donors. The authors thank Michael Ettlinger at the Carsey School of Public Policy for his feedback on earlier drafts of this brief, and Laurel Lloyd and Bianca Nicolosi for their layout assistance.

Download the Brief

Endnotes are available in the pdf version. Download

About the Author(s)

Douglas Gagnon
Doug Gagnon joined the Carsey School of Public Policy as a Research Associate in 2015 after serving as a Research Assistant since 2012.  Doug’s research has focused primarily on education policy as it relates to the equality of opportunity, teacher quality and school staffing, and trends in stude Read More...
Beth Mattingly
Beth Mattingly is director of research on vulnerable families at the Carsey School of Public Policy. She manages all of Carsey’s policy relevant work relating to family well-being. Topics covered by the vulnerable families research team range from refundable tax credits, Supplemental Nutrition Assistance Program (SNAP) and other federal programs, as well as policies that help families balance the domains of work and family like access to affordable child care and paid sick leave. Her interests center on women, children, and family well-being. Read More...
Andrew Schaefer
Andrew Schaefer is a Vulnerable Families Research Scientist at the Carsey School of Public Policy. Andrew joined Carsey in May 2010 as a research assistant on the Vulnerable Families research team. Much of his work at Carsey focuses on poverty, the social safety net, and women and work, including policies and programs that support low-income and other working families. Andrew is currently working on projects exploring counties with high child poverty and the economic conditions of immigrants in rural places. Read More...