Iowa’s Earned Income Tax Credit

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Presentation transcript:

Iowa’s Earned Income Tax Credit A presentation to the Senate Ways & Means Committee, Iowa General Assembly Charles Bruner, Executive Director Child and Family Policy Center February 2, 2012

Iowa Earned Income Tax Credit Established in 1989 (third state in nation to adopt) Based upon the federal Earned Income Tax Credit (EITC) Only applies to tax filers with earned income (and little or no other income) Maximum amounts for full-time lower-wage employment Benefited 252,397 Iowa working adults (13.7% of 18-64 year-olds) and their 266,557 Iowa children (37.3% of all Iowa children)

Value and Cost of Iowa EITC 7% of the federal credit (Iowa income taxes approximately 30% of federal income taxes overall) Maximum benefit of federal/Iowa EITC to tax filer in 2011 (income where EITC phased out) Married couple with three children: $5,666 federal, $379 Iowa ($43,352) Single adult: $457 federal, $32 Iowa ($13,450) 2009 state value to tax filers -- $28.5 million, 94.5% to families with children

Rationale for the EITC Rewards work Helps reduce/alleviate poverty for those working at entry-level jobs/starting out Enables married couples with young children to get by on one income, with one parent at home Recognizes the cost of raising a family in the income tax code Refundability offsets some of the other taxes (payroll, sales, property, gasoline) working people pay

Iowa’s EITC and Iowa’s Tax Treatment of Children Recognized tax principle: income tax should be based upon household size and provide deductions/credits to account for dependents EITC in Iowa is virtually the only recognition of the costs of raising children in Iowa’s income tax code As a result, Iowa imposes an income taxes on most working Iowans with children with incomes between $20,000 and $40,000 in income (between 100% and 200% of poverty), while the federal government does not

Iowa’s Recognition of the Cost of Raising a Family Compared with the Federal Government Personal Exemption $ 0 $ 3,700 Child Tax Credit $ 40 $ 1,000 Standard Deduction, married/joint $ 4,310 $11,600 Maximum EITC $ 397 $ 5,666

Consequent Iowa Thresholds for Paying Iowa and Federal Income Taxes Married couple, two children $19,500- $22,400 $45,400 Single parent, one child $14,900 $31,500 Retired individuals (SS & pension income) $41,100* $31,000 Retired couple $60,000* $49,900 * Will be higher when Social Security exemption fully phased in.

A First-Step Remedy for Lower-Income Working Iowa Families: Raise the Iowa EITC from 7% to 20% of the Federal EITC Current Iowa Tax (7% EITC) Tax with 20% EITC Change Single parent, one child, $25,000 income $436 $135 -$301 (-69%) Two parents, two children, one $20,000 and one $15,000 income $830* $394 -$436 (-54%) * A couple with one $35,000 income would pay $1,197.

Charles Bruner cbruner@cfpciowa.org 505 5th Avenue, Suite 404 Des Moines, IA 50309 www.cfpciowa.org 515-280-9027