The Earned Income Tax Credit: Current Issues and Benefit Amounts

The Earned Income Tax Credit: Current Issues and Benefit Amounts

Order Code RS20470
Updated September 1, 2000
CRS Report for Congress
Received through the CRS Web
The Earned Income Tax Credit:
Current Issues and Benefit Amounts
Melinda T. Gish
Analyst in Social Legislation
Domestic Social Policy Division
Summary
The earned income tax credit (EITC), established in the tax code in 1975, offers
cash aid to working parents with relatively low incomes who care for dependent children.
(Smaller credits began in 1994 for low-income workers with no children.) The EITC is
the only federal cash aid available to all working poor families with children. For eligible
filers with income tax liability, the EITC reduces their taxes. However, most of the
credits go to those who owe either no taxes or amounts smaller than their credits. These
people receive lump-sum credits in the form of U.S. Treasury checks at the end of the
tax year. A small minority (less than 5%) of EITC claimants receive advance credits with
their paychecks. To be eligible for the advance EITC, the employee must have a
qualifying child. In January, 2000, President Clinton announced a proposal to expand
the EITC. In its FY2001 budget, the Administration estimates the cost of that proposal
to be $11.5 billion over 5 years. Most recently, the President vetoed marriage penalty
legislation (H.R. 4810), which included provisions to modify the EITC. This short report
is updated periodically as legislative activity and new program data require.
Recent Developments
On August 5, 2000, President Clinton vetoed the Marriage Tax Relief
Reconciliation Act of 2000 (H.R. 4810). The Senate had approved the conference report
on July 21, 2000, one day after the House approved the measure. The bill would have
increased the EITC phase-out limit for married couples filing joint returns by $2,000, in
an effort to prevent low-income couples who marry and file jointly from seeing a
reduction in their EITC benefits. This provision would have become effective in tax year
2001 and would have sunset on December 31, 2004.
Earlier, on June 28, 2000, the Senate Committee on Finance approved a version of
the Marriage Tax Relief Reconciliation Act of 2000 that would have increased the EITC
income phase-out limit for married couples filing joint returns by $2,500, rather than the
$2,000 amount agreed to in conference and included in the bill vetoed by the President.
With the exception of the sunset date, the provision as reported out of committee mirrored
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that which was included in an earlier bill (S. 2346, the Marriage Tax Relief Act of 2000)
which was reported by the Senate Committee on Finance on April 4, 2000 (S.Rept. 106-
253), but received no final action.
Senator Rockefeller introduced legislation (S. 2825) on June 29, 2000, which would
expand the EITC by creating a third-tier of EITC benefits (like that outlined in the
Administration’s proposal described below) for families with three or more children. The
bill (S. 2825) would also simplify the credit by modifying the definition of earned income
and simplifying the definition of dependent child for the purposes of claiming the EITC.
Under current law, the definition of dependent child for the purposes of claiming the
EITC is similar, but not identical to, the definition used for the purposes of claiming the
dependency exemption. Broader tax legislation (S. 2642, The Tax Ease and
Modernization Act) introduced by Senator Hatch on May 25, 2000, also contains these
provisions.
Administration Proposal
On January 12, 2000, President Clinton announced a proposal to expand the EITC.
The Administration’s estimated cost of the proposal, included in its FY2001 budget
request released February 7, 2000, is $11.5 billion over 5 years. The proposal includes
four major provisions. One, it would establish a third level of benefits, this for families
with three or more children, by increasing the credit rate for these families to 45% (from
the current 40% for families with two or more children). Two, it would increase the
amount which a married couple can earn (by an additional $1,450 above current law)
before their EITC benefit begins to phase out. Three, it would decrease the phase-out rate
for families with two or more children, meaning that their EITC benefit is reduced by only
19 cents (rather than the current 21 cents) for each dollar they earn above the maximum
creditable earnings amount. Also, it would eliminate 401(k) contributions and other forms
of nontaxable earned income from the calculation of the EITC.
Legislation in the 104th and 105th Congresses
Proposals in the 104th Congress focused on reducing the EITC’s cost as part of the
effort to balance the federal budget by FY2002. Concern over a high incidence of
fraudulent EITC claims also led to legislative initiatives in both the 104th and 105th
Congresses.
The welfare reform law, enacted August 22, 1996 (P.L. 104-193) changed the
processing of tax returns to deter undocumented aliens from claiming the EITC. It also
broadened the income definition used to phase out the credit by disregarding certain
investment losses. In March 1995, P.L. 104-7 had disqualified from the EITC any filer
with investment income above $2,350. That law denied the EITC to filers with excess
income from interest, dividends, rents, and royalties. P.L. 104-193 reduced the limit to
$2,200, provided for its automatic adjustment for inflation (the 1999 limit is $2,350), and
broadened the income to which it applies to include capital gains and passive investment
income. P.L. 104-193 will save $3.2 billion in EITC costs over FY1996-FY2002.
The substantial rise in the EITC’s cost led Congress to seek other savings from the
credit in the Balanced Budget Act of 1995 (H.R. 2491). However, President Clinton

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vetoed the bill, opposing EITC changes such as the elimination of the credit for childless
adults, as well as other provisions in the bill unrelated to the EITC. The EITC measures
included in the bill would have saved another $25.2 billion over FY1996-FY2002.
However, the loss of EITC dollars would have been offset for many EITC eligibles by two
other measures in H.R. 2491: a $500-per-child tax credit; and a provision to mitigate the
extra tax burden some married couples face compared to two single individuals.
The Taxpayer Relief Act of 1997 (P.L. 105-34) included several EITC provisions.
Concern over high error rates associated with EITC claims and the increasing cost of the
credit prompted initiatives to improve EITC compliance procedures and modify the rules
for calculating adjusted gross income (AGI) for the purpose of the EITC. The child tax
credit established with this legislation is calculated independent of the EITC computation.
Legislative History1
The EITC was conceived in 1971 as a “work bonus” alternative to President Nixon’s
proposal to provide cash welfare to poor two-parent families. While EITC bills were
considered in 1972, 1973, and 1974, none was enacted until the Tax Reduction Act of
1975 (P.L. 94-12). The EITC was then seen as a way to lighten the burden of Social
Security taxes on low-income workers. The temporary EITC created in 1975 was
extended through 1978 by P.L. 94-164, P.L. 94-455, and P.L. 95-30 and finally made
permanent by the Revenue Act of 1978 (P.L. 95-600). The credit amount was increased
by the Deficit Reduction Act of 1984 (P.L. 98-369), and increased again and indexed for
inflation by the Tax Reform Act of 1986 (P.L. 99-514). Additional benefits were
approved in the Omnibus Budget Reconciliation Act (OBRA) of 1990 (P.L. 101-508).
Credits were further increased over the years 1994-1996 by OBRA of 1993 (P.L. 103-66).
That law also established a small EITC for childless workers and eliminated supplemental
credits available in 1993 to families with infants and/or health insurance costs. Coverage
was extended to military families stationed abroad by P.L. 103-465.
Program Costs and Benefit Amounts
The EITC was claimed by an estimated 19.4 million tax filing units for tax year 1998.
The projected cost for 1998 is $29.4 billion; all but $4.1 billion of that is in the form of
cash payments in excess of tax liability. The average credit is estimated at $1,797 for filers
with children and $179 for childless adults. Recent cost increases were driven largely by
a legislated credit rate increase for families with two or more children.
Credit amounts depend on earned income, adjusted gross income (AGI), and number
of children. As shown in Table 1, the basic credit in 2000 is 34.0% of the first $6,920 of
annual earnings (40.0% of the first $9,720 for families with 2+ children, 7.65% of the first
$4,610 for childless adults). Thus, the maximum EITC amounts in 2000 are $2,353 for
a one-child family, $3,888 for a larger family, and $353 for a childless adult age 25-64.
For those with AGI above $12,690 ($5,770 for childless adults), the credit phases out at
a rate of 15.98 cents per dollar in excess of $12,690 (21.06% for families with more than
one child, 7.65% for childless adults). The credit disappears at an AGI of $27,413
1 For more detail on the EITC’s history, see: CRS Report 95-542, The Earned Income Tax Credit:
A Growing Form of Aid to Low-Income Workers, by James R. Storey.

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($31,152 for families with more than one child due to the 21.06% rate, $10,380 for
childless adults).
Table 1. Factor Used to Determine 2000 EITC Amount by Type of Filing
Unit (figures apply to filing unit’s tax year)
Filing unit with:
Two or more
EITC factor
No children
One child
children
Credit percentage
7.65%
34.00%
40.00%
Max. creditable earnings
$4,610
$6,920
$9,720
Max. EITC amount
$353
$2,353
$3,888
Phase-out rate
7.65%
15.98%
21.06%
Income above which phase-out occurs
$5,770
$12,690
$12,690
Income above which EITC disappears
$10,380
$27,413
$31,152
Table 2 and Table 3 show EITC benefit amounts for eligible childless adults and
families with children, respectively. In using Table 2 and Table 3, please note that the
actual tax tables developed by the Internal Revenue Service may differ slightly from the
amounts shown. It should also be noted that these examples assume that a filing unit’s
income is entirely from earnings. Benefit schedules by income level are different for
filers who have other types of income such as investment income in addition to their
earnings. In particular, filing units with 2000 investment income greater than $2,400 are
excluded from EITC eligibility.
Table 2. 2000 EITC Annual Amounts for Childless Adults
Filing unit’s
EITC
Filing unit’s
EITC
earnings
amount
earnings
amount
$0
$0
$5,770
$353
1,000
77
6,000
335
2,000
153
7,000
259
3,000
230
8,000
182
4,000
306
9,000
106
4,610
353
10,380
0
Note: The maximum credit amount of $353 applies for earnings between $4,610 and $5,770.

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Table 3. 2000 EITC Annual Amounts for Families with Children
EITC
EITC
EITC
EITC
Filing
amount
amount
Filing
amount
amount
unit’s
with one
with two
unit’s
with one
with two
earnings
child
children
earnings
child
children
$0
$0
$0
$11,000
2,353
3,888
1,000
340
400
12,000
2,353
3,888
2,000
680
800
12,690
2,353
3,888
3,000
1,020
1,200
13,000
2,303
3,823
4,000
1,360
1,600
14,000
2,143
3,612
5,000
1,700
2,000
15,000
1,984
3,402
6,000
2,040
2,400
18,000
1,504
2,770
6,920
2,353
2,768
20,000
1,185
2,349
7,000
2,353
2,800
22,000
865
1,927
8,000
2,353
3,200
25,000
386
1,296
9,000
2,353
3,600
27,413
0
787
9,720
2,353
3,888
30,000
0
243
10,000
2,353
3,888
31,152
0
0
Note: The maximum credit amount of $2,353 for a family with one child applies when earnings are
between $6,920 and $12,690. The maximum credit amount of $3,888 for a larger family applies when
earnings are between $9,720 and $12,690.