Key Points The Earned Income Tax Credit (EITC) is a refundable tax credit that has lifted millions of poor working families out of poverty.

Research suggests the EITC improves health, with the most robust results for single mothers and children. Mothers experience health improvements through reduced stress. Among children there is a decreased incidence of low birthweight and improvements in the home environment, nutrition, and educational and economic attainment.

Even marginal expansions to EITC eligibility and credit amounts will likely improve health outcomes for women and children. Less is known about the EITC’s impact on men, and further research is needed. More work is also needed to understand broader questions about the EITC, such as whether there are long-term impacts on health and the underlying mechanisms behind its health effects.

Health professionals have an ongoing interest in the degree to which antipoverty programs can improve health. In this brief we investigate one such program, the Earned Income Tax Credit (EITC). The EITC has been widely successful at lifting poor families out of poverty, making it a medium for researching the connection between poverty and health. Recent evidence largely supports the hypothesis that health improves after receipt of the EITC, particularly for children and single mothers. However, there remain unanswered questions about why the EITC is effective and the degree to which expanding eligibility and credit amounts would improve health more broadly.

How The EITC Works

The EITC is a refundable tax credit for low-income workers. People do not have to owe taxes to receive it, but they must file an income tax return, have earned income, and meet income qualifications. The credit provides a subsidy as a percentage of income, effectively increasing the wages of the working poor. When a family’s income in a given tax year falls within a “phase-in” range, the credit equals a fixed percentage of income, up to a dollar maximum. (Families with higher incomes therefore receive a larger credit in this phase in-range.) For families with incomes above the phase-in range, the credit remains at the fixed dollar maximum during what could be called a “plateau range” of qualifying incomes. For families with incomes above the plateau range, credits gradually phase out to zero as income increases. The rate at which the credit is phased in, the maximum credit, and the rate at which the credit is phased out depend on the number of children in the family and the tax filer’s marital status. Income from the EITC is usually received as an annual lump sum in February.

The EITC began relatively modestly in 1975, in the administration of President Gerald Ford. As a result of expansions over the years by Republican and Democratic administrations, the number of tax filers claiming the EITC grew from 6.2 million in 1975 to 27.0 million in 2016, and annual benefits have increased from $5.6 billion to $65.6 billion (in 2016 dollars). Spending on the EITC now exceeds combined federal and state spending on what has traditionally been considered welfare. Twenty-eight states and the District of Columbia have their own EITC programs, which provide additional credits on top of the federal one. A twenty-ninth state, Washington, enacted an EITC but has never funded it. (From here on, we refer to both the federal and state versions of the program jointly as “the EITC.”) The average annual federal EITC has grown from $200 in 1975 to more than $2,400 in 2016. The EITC is now the largest needs-tested antipoverty cash assistance program in the US.

Who Are The Recipients?

EITC recipients are low-income workers and their families. While a small credit is available to taxpayers without a child, 97 percent of the benefits went to families with children in 2015. Many recipients have incomes at or near 100 percent of the federal poverty level. Because the EITC does not benefit people without income, it typically does not help the most impoverished of poor families. Of the 28.1 million tax filers who received the EITC in 2015, about 70 percent had an adjusted gross income of $25,000 or less. Of those in poverty and receiving the EITC, the greatest earnings increases occurred at the upper end of the income distribution, among families with incomes of 75–100 percent of poverty.

EITC recipients commonly work in low-wage industries such as transportation, construction, food service, and retail. In 2015, about 52 percent had a high school degree or less. Slightly less than 50 percent were white, while 24 percent were Hispanic, and 19 percent were black. Twenty-two percent of recipients lived in rural areas. Recipients tend to use the credit to pay bills, reduce debt, make large purchases such as cars, pay rent, or make a security deposit for a rental unit.

Economic And Educational Effects

Next, we review how the EITC has affected poverty, labor market, and educational outcomes, all of which are channels through which the EITC may affect health. In 2016, the EITC was estimated to lift 6.5 million people out of poverty, including 3.3 million children. The severity of poverty was reduced for an additional 21.2 million families, including 7.7 million children.

Throughout the phase-in range, the EITC incentivizes additional labor, as the worker’s effective after-subsidy wage increases. There is a consensus among researchers that the EITC has encouraged single mothers to enter the labor force. Some older studies provide evidence that the EITC has discouraged married women from working, though the effect is small. While in single-parent families the parent must work to be eligible for the credit, in two-parent households only one parent needs to have earned income—which gives the other parent the option (with respect to EITC eligibility) of not working.

Empirical studies have found that the EITC increased household income. Additionally, research on women suggests that increased employment resulting from the EITC may result in long-term growth in earnings and increased retirement benefits through Social Security. The Congressional Budget Office estimated that the EITC increased lifetime average earnings for less educated women by 17 percent. Finally, the EITC increases the likelihood that women will qualify for Social Security benefits on their own.

Increases in the generosity of the EITC also result in improved education outcomes for children. A $1,000 increase in the maximum EITC led to increases in test scores of 6–9 percent of a standard deviation. One unpublished paper found that a $1,000 increase in EITC benefits led to a 2.1-percentage-point increase in high school graduation rates. Similarly, a study found that EITC receipt led to increases in college enrollment and graduation, with subsequent impacts on employment and earnings. There is broader evidence that increased income during childhood is related to future earnings and hours worked.

The EITC And Health: Channels

There are four principal channels through which the EITC is likely to improve health: reductions in stress, increased access to medical care or health insurance, reduced risky behavior, and improved nutrition (exhibit 1).

EXHIBIT 1: Model Of Earned Income Tax Credit Effects On Health Outcomes