The Impact of State Earned Income Tax Credit Expansions on Material and Medical Hardships

Background: The federal Earned Income Tax Credit (EITC) is one of the most effective cash assistance programs targeting low- and moderate-income (LMI) workers. Empirical literature demonstrates that the federal EITC helps reduce poverty and encourage employment (Tax Policy Center, 2016). Building on the success of the federal program, many U.S. states have designed their own EITCs to supplement the federal tax credit, with varying levels of generosity. The receipt of state EITCs has been shown to increase household employment and college enrollment, and contribute to poverty reduction (Leigh, 2010; Michelmore, 2013; Lim 2009; Gundersen and Ziliak, 2004). Yet, less is known about its impacts on household budget management and material hardships. Addressing this limitation, this research investigates the effects of state EITC expansions on LMI households’ ability to cover basic material and medical needs.

Data and Method: The paper uses administrative income and tax records from Turbo Tax Freedom Edition (TTFE)—a free tax filing platform for LMI tax filers—and survey data collected on TTFE tax filers between 2013 and 2017. These administrative data are uniquely suited to assess the impact of the EITC because they contain precise measures of income, dependents, and federal EITC credits of LMI tax filers, all of which allow us to precisely estimate state EITC amounts. The survey data come from a longitudinal survey of TTFE tax filers conducted in two waves: immediately after tax filing and six months after tax filing.

We combine the two datasets to analyze the impact of state EITCs on material and medical hardships by focusing on the expansion and enactment of state EITCs in multiple states between 2013 and 2016. Policy variations in multiple states across several years enable us to use a difference-in-differences (DD) approach as an identification strategy. At the same time, the baseline differences in demographic and financial characteristics of households eligible and not eligible for state EITCs motivate using matching estimators to adjust for underlying dissimilarities between households. Therefore, we combine a DD estimation with Coarsened Exact Matching to compare the outcomes of households receiving state EITCs to the outcomes of otherwise similar households that do not receive state EITC benefits. The outcomes are measured in terms of self-reported material and medical hardships.

Preliminary Findings: Preliminary findings demonstrate that the changes in state EITC laws reduce the likelihood of experiencing food hardship, and skipping rent and mortgage and bill payments after the expansion of state EITCs. Greater reductions in the incidence of hardships are observed in states with the largest policy changes. At the same time, we find no differences in the self-reported likelihood to skip prescription drugs or medical visits.

Significance: We use recent data and a unique sample of LMI households to study the impact of state EITCs on material and medical hardships among LMI households. Given greater risks of financial volatility among EITC recipients, this research provides timely evidence on the importance of state EITCs in helping LMI households manage their consumption needs and avoid hardship.