The District government took innovative steps in recent years to put over $8 million back in the pockets of hardworking residents trying to make ends meet on very low wages. It’s helping thousands of households keep up with DC’s high cost of living.
How? The DC Council expanded the DC Earned Income Tax Credit (EITC), a tax benefit for low-income working families and individuals, in 2014. Now the numbers are in, showing that an extra 10,300 working families and individuals claimed the EITC in 2015. EITC expansion was an important step to make sure that DC’s growing prosperity is more widely shared.
What Is the Credit and How Does It Work?
The District’s Earned Income Tax Credit, based on the federal EITC, assists residents who work but have low earnings. The credit amount grows with each additional dollar of earnings for those with very low earnings, reaches the maximum credit and levels off, and then decreases slowly to zero as earnings reach the income limit. The DC EITC is refundable, meaning that if the value of the credit exceeds the amount of income tax owed, the balance is received as a tax refund.
The DC and federal EITCs make a big difference in the finances of working households who struggle to survive on low wages. For example, a single parent with two children working full-time for $15 an hour (annual income $32,000) gets a $1,650 tax refund thanks to the DC and federal EITCs. Without those credits, they would owe $2,070 in DC and federal income taxes.
That kind of income boost helps low-income working families make ends meet. Workers tend to use their EITC mostly for necessities like groceries, transportation, child expenses, and paying down past-due bills and debt. Some are able to use the EITC to get ahead – to go back to school or get new training.
We know this creates brighter futures for children in low-wage working families. Children whose families receive the federal EITC are healthier, research shows, and do better in school than their peers. The income boost has been linked to higher earnings and employment rates when the children grow up, meaning the EITC has a great return on investment.
Expansion Helped 10,000 More Filers
The DC Council acted in 2014, following recommendations from the Tax Revision Commission, to address a limitation in the federal EITC. While the federal EITC provides substantial help for households with children, it does very little for adults without children in the home. The maximum federal EITC for a single person without children is only $500, and they can benefit only if they earn less than $15,000.
The expanded DC EITC provides a special supplement for workers without children in two ways. First, it has a maximum credit of $500, compared with $200 under the prior rules. Second, while the federal EITC ends for this group of workers when income exceeds $15,000, DC residents earning up to $24,000 can receive some level of tax credit. As a result, more workers without children can receive some amount of the DC credit.
Not surprisingly, these changes made the DC EITC accessible to many more workers. Following the expansion, 10,300 more workers claimed the DC credit, and the total amount received grew by $8.3 million. In contrast, the number of tax filers claiming the federal credit – which did not change – didn’t increase at all that year, according to a DC Fiscal Policy Institute analysis of tax return data. This suggests that the increase in claims for the DC credit happened thanks to the expansions for workers without children.
These figures confirm that expanding the District’s EITC has been a huge help to thousands of workers struggling on low wages. Boosting the incomes of low-income workers is an important step to make sure that DC’s growing prosperity is more widely shared.
Even with this good news, more work needs to be done to ensure that all eligible residents know about and claim the EITC and other tax credits they’ve earned. According to Capital Area Asset Builders (CAAB), as many as 20,000 DC residents who have low wages are still not claiming the federal EITC, and thus are not receiving over $40 million in federal tax credits. This suggests that with increased awareness and free tax preparation, even more workers would benefit from the DC EITC expansion.
Claire Zippel is a policy analyst at the DC Fiscal Policy Institute (www.dcfpi.org). DCFPI promotes budget and policy solutions to reduce poverty and inequality in the District of Columbia, and to increase opportunities for residents to build a better future.