Virginia, along with 28 other states and the District of Columbia, builds on the federal EITC’s time-tested success with its own state-level version of the tax credit.
These state credits piggyback on the federal version, typically providing a percentage of the federal credit they earned. Unfortunately, Virginia’s tight limits around the value of the credit prevent many families from receiving the full value of their state EITC. Instead of receiving a percentage of the federal credit they earned, Virginia’s credit is cut off at the value of a worker’s income tax liability. But workers with low incomes in Virginia don’t owe much in income taxes because their incomes are low. Instead they pay a high share of their incomes in sales taxes, gas taxes, and fees, as well as property taxes (as passed through to renters). Most states recognize this fact and let workers claim the full percentage of the federal credit that they are due based on their earnings. Virginia doesn’t.
Getting the full value boosts families and the economy
Virginia can build on the time-tested success of the EITC by improving the Virginia Work Credit to give workers what they’re due and pave the way to a stronger middle class. Ensuring that all 600,000 families receiving the EITC in Virginia get the full credit they’ve worked for by making the credit refundable would:
Strengthen Virginia’s workforce
- The EITC is available only to tax filers who have income earned from working and helps them keep working as they’re better able to afford things like child care and transportation
- The credit helps working families keep more of what they’ve earned by reducing their full tax bill (including sales, property, and other taxes)
- The credit ramps up as a person earns more before leveling off and then phasing down, rewarding more work hours that research has shown to pay off in higher earnings over time.
- There is no “cliff effect”. The credit phases in and phases out eliminating any abrupt change in the value of the credit when income increases.
Make taxes fairer
- Ensuring workers get the full value of their credit helps to make up for the fact that under Virginia’s state and local tax system workers with low incomes pay a greater share of their income in taxes than those with the highest incomes.
Boost the economy
- Families with low incomes spend much of what they earn on the basics, and they do it locally. That means a stronger state EITC would lead to more local spending and would pump millions of dollars into communities throughout Virginia.
Provide more opportunities for children
- Studies show working family tax credits have significant benefits – from reduced maternal smoking rates to improved test scores to increased college enrollment.
- Children in low-income families who receive the EITC earn higher incomes in adulthood compared to similar children whose families did not receive the credit.
Who would benefit from a refundable EITC?
The benefits of the EITC extend well beyond the adult workers who claim it on their tax returns. Research has documented the downstream and multiplier effects of this additional spending. Additional consumer spending associated with the EITC may spur additional business spending as well as other changes in income and spending patterns.
In addition, over time, an improved EITC could help communities address long-standing economic challenges by providing more opportunities for families and the next generation. Studies show the working family tax credits have a range of benefits — from improved infant health to increased college enrollment. Children whose families receive the EITC are shown to earn higher incomes in adulthood compared to similar children whose families did not receive the credit.
Workers earning low wages should be able to make ends meet and support their families. Refundable state EITCs are targeted policies that reward work and strengthen businesses and local economies. Refundability is a key improvement to provide families and communities with a hand up.
