The Refundable EITC – Making the Working Families Tax Credit Work for More Missouri Families

It is undeniable that poverty is a problem in our state. Thirteen percent of Missourians live below the federal poverty line. In real numbers, that’s 772,922 of our neighbors who are deeply struggling to make ends meet every single day. Poverty causes physical and mental health problems. It tears apart families and increases the likelihood of substance abuse. It impacts quality of life and literally reduces life spans. To improve these numbers and their devastating effects on our community, we need substantive policy change.

Ending poverty in Missouri will take investment in evidence based policy solutions like a refundable Earned Income Tax Credit (EITC). The EITC is a federal tax credit that effectively boosts the incomes of working people with low to moderate incomes. Thirty states, plus the District of Columbia and Puerto Rico, have established their own EITCs to supplement the federal credit. In Missouri it’s called the Missouri Working Families Tax credit, passed in 2016. These pro-work tax credits provide a little money back to households that struggle to meet their basic needs despite working. The Working Families credit benefits about 250,000 Missouri filers, most of them families with kids. However, its non-refundable nature leaves many families unable to take advantage of the benefit. 

Benefits of the Working Families Tax Credit

There is a pervasive myth that low income households are wasteful when they receive infusions of cash, like with larger tax refunds. The data repeatedly shows however, that households use that money in ways that support their growth. Households spend more on children, especially on important items like books and toys. They also tend to spend money on transportation and housing, which is why our Affordable Housing Coalition advocated for the Missouri Working Families Tax Credit to begin with. Struggling to make ends meet is really expensive, and many studies show that the largest place low income households use their tax refund is to pay down debt that has accumulated during the year. After all, kids’ feet grow all year, not just in April. 

The EITC is a non-punitive, progressive way to support low and moderate wage earners. It can help offset taxes these families pay in other places, especially property or sales taxes. Low wage earning households often use their tax refunds to purchase necessities like clothing, school shoes, to stock their pantries, and more. In fact a report from NCSL says every $1 of EITC generates $1.50-$2.00 in local spending.

Why a Refundable Credit?

The federal EITC or EIC (Earned Income Credit) is refundable, meaning that if the value of the credit exceeds the amount of federal income tax the filer owes, they receive the difference in the form of a refund. This ensures that the lowest income earners receive the highest benefit. Low wage earners, despite what they paid in, are able to claim the maximum credit.

Unfortunately, Missouri’s Working Families Tax Credit is non-refundable. This means the lowest wage earners are only eligible to receive a credit correlating to how much income they earned. As a result, the lowest wage earners in our state receive a lower tax credit than moderate wage earners and families who earn too little to pay income taxes receive no credit at all.

Our partners at the Missouri Budget Project estimate that making the Missouri Working Families tax credit refundable would reach nearly twice as many households – benefiting 492,430 families. In addition, it would raise the average credit payout for all recipients, with the highest impact for the lowest income families. Currently, the average Working Families credit for a family earning under $22,000 is just $4. Moving to a refundable credit would raise that payment to $186. For households earning so little, that is a significant amount of money – equating to approximately an additional half a week’s pay that could help pay for food, health needs or other necessary expenses. Even higher wage earning households would receive more. For households earning $40,000-66,000, the average credit would go from $124 currently, up to $325 with a refundable credit.

Next week we’ll be hosting our September Friday Forum, when we’ll be joined by Gina Aitch from Missouri Budget Project for a deeper dive into this important topic. To learn more about EITC programs and how Missouri would benefit from a refundable credit, join us next Friday, September 8th at 12:00 PM on Zoom. Register at www.empowermissouri.org/events/sept23-friday-forum-refundable-eitc to join us.