Working Family Credit Works


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Conservatives and progressives don’t agree on much—especially in the area of tax policy. However, one program that draws support from both ends of the political spectrum is Minnesota’s Working Family Credit. This tax credit helps families across the state meet basic needs while also encouraging work. At the same time, the credit helps to reduce the regressivity of Minnesota’s tax system.

Minnesota’s Working Family Credit (WFC) is patterned after the federal Earned Income Tax Credit (EITC).* The EITC was enacted in 1975; Minnesota followed with the WFC in 1991. Both programs provide a credit to households with relatively modest amounts of earned income. Each credit is equal to a percentage of earned income up to a maximum amount. Allowing the credit to increase as earned income increases provides an incentive for low income households to increase their earnings. Only after household income exceeds a specified amount as the credit gradually reduced; in this way, the credit is targeted to lower and modest income households that are in greatest need of tax relief.

The amount of the EITC and WFC varies depending on marital status and the number of children in the household. The chart below illustrates the amount of Minnesota’s WFC for married and unmarried claimants with zero, one, or two or more children at various earned income levels for tax year 2016. (The credit maximums and the phase-out income thresholds are adjusted each year for inflation.) The credit amounts for married and unmarried claimants with the same number of children are identical, except that the phase-out of the credit begins at a lower income level for unmarried claimants.

WFC graph

The chart above assumes that the claimant’s earned income is less than or equal to their adjusted gross income (AGI). If a claimant’s AGI exceeds their earned income, the amount of the WFC could be reduced in recognition of the additional income that the claimant has above and beyond their earned income.

The WFC can be claimed when filing the state income tax return by filling out the appropriate worksheet. The WFC (and the EITC) are “refundable” credits, meaning that if the credit exceeds the amount of income tax that the claimant owes, the balance is paid to the claimant in the form of a refund.

The WFC was claimed on 339,901 Minnesota returns (12.3 percent of all returns filed by Minnesota residents) in tax year 2013, according to a recent Minnesota House Research Department information brief. These returns claimed total Working Family Credits of $212 million; 63.6 percent of this amount went to claimants with 2 or more children, 33.3 percent went claimants with one child, and 3.1 percent went to claimants with no children. The average WFC payment was $623.

An August 2015 report from the Center on Budget and Policy Priorities (CBPP) examined the effects of the federal EITC and the state EITCs (including Minnesota’s WFC). The CBPP concludes that these credits:

  • Help working families make ends meet. Many low-wage jobs fail to provide sufficient income on which to live. Refundable EITCs provide low-income workers with a needed income boost that can help them meet basic needs and pay for the very things that allow them to work, like child care and transportation.
  • Keep families working. EITCs help working families get by on low wages, which helps them stay employed.  They are also structured to encourage the lowest-earning families to work more hours. That extra time and experience in the working world translates into better opportunities and higher pay over time. Three out of five filers who receive the credit use it just temporarily — one or two years at a time.
  • Reduce poverty, especially among children. Millions of children in working families live in poverty, and millions of families modestly above the poverty line have difficulty affording food, housing, and other necessities. The federal EITC is the nation’s most effective tool for reducing poverty among working families and children. It lifted 6.2 million people — over half of them children — out of poverty in 2013. State EITCs [including Minnesota’s WFC] build on that record, lifting more families out of poverty and helping near-poor families make ends meet.
  • Have a lasting effect. Low-income children in families that get additional income through programs like the EITC tend to do better and go farther in school. They also tend to work and earn more as adults. This helps communities and the economy because it means more people and families are on solid ground and fewer need help over the long haul.

Minnesota’s tax system is regressive, meaning that low and moderate income households pay a larger percentage of their income in state and local taxes than do high income households. Because Minnesota’s WFC is targeted to lower-income working households, it is an extremely powerful tool in reducing regressivity. A 2013 report from the Minnesota House Research Department found that 61 percent of the WFC was directed to households with incomes below $24,000, while 99 percent went to households with income below $41,000 (based on 2008 data). Dollar for dollar, the WFC is among the most efficient tools available to reduce tax regressivity in Minnesota.

In this era of partisan gridlock, it is refreshing to find examples of successful policy interventions that have been embraced by both progressives and conservatives. The Working Family Credit definitely belongs in this category. Proposals to expand the WFC are currently being considered by the Minnesota House and Senate and are part of Governor Dayton’s supplemental budget recommendations.

 

 

*In addition to Minnesota, 25 other states and the District of Columbia provide an earned income tax credit that supplements the federal EITC.