Iowa’s Earned Income Tax CreditA presentation to the Senate Ways & Means Committee, Iowa General Assembly

Charles Bruner, Executive Director

Child and Family Policy CenterFebruary 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

Iowa FederalPersonal Exemption $ 0 $ 3,700Child Tax Credit $ 40 $ 1,000Standard Deduction, married/joint $ 4,310 $11,600

Maximum EITC $ 397 $ 5,666

Consequent Iowa Thresholdsfor Paying Iowa and Federal Income Taxes

Iowa Federal

Married couple, two children

$19,500- $22,400

$45,400

Single parent, one child $14,900 $31,500Retired individuals (SS & pension income) $41,100* $31,000

Retired couple (SS & pension income) $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.

505 5th Avenue, Suite 404Des Moines, IA 50309www.cfpciowa.org515-280-9027

Charles Brunercbruner@cfpciowa.org