How Well Have Rural and Small Metropolitan Labor Markets Absorbed Welfare Recipients?. EITC

04/01/2001

The federal EITC, which was created in 1975, reduces taxes and supplements wages for working low  income taxpayers. The Omnibus Budget Reconciliation Act (OBRA) of 1992 increased the EITC by over 50 percent, phased in over three years, effective in 1994.(13) Previously, the OBRA of 1990 expanded the EITC (beginning in 1991) and also excluded the EITC in determining eligibility or benefit amounts for most federal means-tested programs (AFDC, Medicaid, Supplemental Security Income, food stamps, and low-income housing). In 1993, about 15 million taxpayers claimed the federal tax credit; by 1998, just under 19 million did so.(14)

In addition, 14 states(15) and the District of Columbia offer state EITCs that supplement the federal credit. These states use the federal eligibility rules, and offer an additional state credit that is a percentage of the federal credit. New Jersey limits the credit to families with incomes below $20,000.(16)

We believe the expansion primarily affected labor markets in the 1993 to 1996 period. A recent study separated the effect of EITC expansions from the effect of welfare policies and local labor market conditions, and found that EITC expansions have a large positive effect on employment of adults from welfare families.(17)