Changes to DC’s Income Tax Could Boost the Effectiveness of DC’s Earned Income Tax Credit

The District’s Earned Income Tax Credit (EITC) is a key tool to increase the take-home pay of low-income working residents. By boosting incomes and reducing tax liabilities, the EITC has become one of the most effective anti-poverty programs for low-income working families. The DC EITC, modeled after the federal EITC, is the second largest state level EITC in the nation, and can provide significant tax relief to residents with very low incomes. 

However, the DC EITC is less effective than other states’ EITCs at providing relief ‘ even though the vast majority of them are far lower that the District’s. Other than working families in extreme poverty, low-income families in DC end up owing more income tax — or getting smaller EITC refunds ‘ than similar households in other states with an EITC. This is because the basic income taxes the District levies ‘ before the EITC is factored ‘ are far higher for moderate-income households than in other states. Two things contribute to this: 

  • The District does not exclude as much income from tax as other states with state-level EITCs.  The combination of DC’s standard deduction and personal exemptions is far lower than the federal income tax and in the majority of states that have an income tax. This means more of DC residents’ income is taxable.  
  • The District’s marginal tax rate for moderate-income filers is high.  In the District, single households with taxable incomes above $10,000 and two-earner couples with incomes above $20,000 face a 6 percent marginal tax rate. This is significantly above the average of tax rates in other EITC states that have a refundable state-level credit.[1] 

 The District’s EITC could be more effective at providing tax relief and income support for working poor households. For example, raising the DC personal exemption and standard deduction to match the federal income tax would make the District’s EITC one of the most robust in the country ‘ providing the maximum refund to more residents and reducing liabilities of more moderate income households.


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[1] Source: 2011 Filing Forms and Instructions for DC and 41 states with income tax. Refundable EITC states include: CT, DC, IL, IN, IA, KS, LA, MD, MA, MI MN, NE, NJ, NM, NY, NC, OK, OR, RI, VT, and WI.

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