Illinois Should Enhance its Earned Income Tax Credit and Create a Child Tax Credit
February 2, 2022
The Earned Income Tax Credit, or “EITC,” rewards work and reduces poverty by targeting tax relief to low-income families with children. The EITC has become one of the more effective anti-poverty programs in the United States. The reason the federal EITC is so effective is because it is designed as a “refundable” tax credit. When a tax credit is “refundable,” the taxpayer who qualifies to receive it gets the full dollar value of the credit, even if that dollar value exceeds the income tax liability said taxpayer owes. The EITC effectively boosts the earnings of workers who qualify to receive it, thereby increasing their purchasing power and alleviating poverty. And because lower wage workers tend to spend, rather than save any increase in income they receive—including income enhancements from tax credits—that additional spending creates the concomitant benefit of stimulating private sector economic growth. Even more, since the EITC is refundable, a lower wage worker who qualifies to receive this credit gets the full dollar value they qualify for, even if that dollar value exceeds her or his income tax liability. This excess monetary benefit effectively makes tax policy more progressive, because it helps offset the impact of many of the taxes, like sales, property and excise, low- and lower-middle-income workers' pay in addition to the income tax. That in turn makes their overall tax burden less regressive and hence fairer.
The Child Tax Credit (“CTC”) initially provided qualified taxpayers with a $400 per child nonrefundable credit and was intended to provide tax relief to middle-income families. In 2001, the CTC was made refundable, on a limited basis, with a maximum refundable benefit of $600. Its refundability feature also makes the CTC effective at making tax policy fairer, because like the EITC, the CTC functions to offset taxes other than income taxes—like sales, excise and property taxes—which place a disproportionate burden on lower income earners. Illinois currently does not have a CTC at the state level. In addition to alleviating poverty and stimulating the economy, the refundability feature of the EITC also creates a very effective, as well as administratively facile way to make tax burden fairer.
Under HB 4920/SB 3774 as introduced by Representative Carol Ammons and Senator Omar Aquino (the “Tax Equity Initiative”), eligibility to claim the Illinois state EITC would be expanded to include individuals over the age of 65 without children, childless taxpayers between the ages of 18-24, and taxpayers using a tax identification number (“ITIN”). The Tax Equity Initiative also creates an eligible dependent tax credit that is similar to, but not the same as the federal CTC. For instance, while the definition of a child ‘dependent’ contained in the Tax Equity Initiative is based on IRS criteria for federal tax purposes, the benefit a new state-level CTC would create is not contingent on the number of dependents a family has. Instead, the new state-level child tax credit would be made available at a flat rate to each qualified household with at least one child. The Tax Equity Initiative also provides that at a minimum, an unpaid caregiver of children ages 17 and under who is eligible to claim benefits under the state’s expanded EITC and new dependent child credit, shall receive a combined benefit worth at least $600 in any year. Additionally, unpaid caregivers of children who currently have no income—and thereby are ineligible for the EITC—will receive a fully refundable $600 credit if they have at least one dependent child ages 17 and under.
Read this report for more information about the economic impact of the proposed Tax Equity Initiative in Illinois as proposed in the 102nd General Assembly.