Center on Urban & Metropolitan Policy Rewarding Work: The Impact of the Earned Income Tax Credit in Greater Chicago Alan Berube and Benjamin Forman “...working Findings This year the federal Earned Income Tax Credit (EITC) will provide over $30 billion to families live 18.4 million low-income taxpayers across the U.S., making it the largest federal aid pro- gram for working poor families. An analysis of the spatial distribution of the EITC in the Chicago region shows that1: throughout ■ In 1998, the Chicago region bene- ■ The percentages of families earning fited from nearly three-quarters of a the EITC in the Chicago region and the Chicago billion dollars in federal EITC the city of Chicago were similar to refunds. Nearly 60 percent of the those for the ten largest metropoli- region’s $737 million in EITC tan areas and their central cities. The metropolitan refunds—$430 million—was earned by concentration of EITC dollars in the families living in the city of Chicago, city of Chicago was also comparable to much larger than the city’s share of the the median among cities in the ten area, and the region’s population (33 percent). largest metro areas.

■ Nearly half a million (470,000) low- ■ Transforming ’ state EITC EITC is an income working families in the into a refundable tax credit would Chicago region earned an EITC in contribute millions of dollars to the 1998. About one-quarter of all taxpay- budgets of low-income working important source ers living in the city of Chicago earned families in the Chicago region. A an EITC. Neighborhoods with the refundable Illinois state EITC set at highest rates of EITC receipt also had 20 percent of the federal credit could of income for high rates of electronically filed provide nearly $150 million to lower- returns, suggesting that many low- income neighborhoods throughout the income taxpayers may be turning to Chicago region, and relieve the burden these families high-priced tax preparers in order to of state income taxes on hundreds of receive their refunds quickly. thousands of poor Illinois families. and their I. Introduction jurisdictions.” espite a great deal of public and are working but not earning more than policy interest in working poor roughly 200 percent of the federal poverty families, particularly in the after- level. Therefore, this survey uses EITC math of welfare reform, there is receipt as a measure of the number and loca- Dlittle understanding of who the working poor tion of low-income working residents in a are and where they live. Families may claim metropolitan area. This survey of Greater an Earned Income Tax Credit (EITC) if they Chicago is an extension of our work looking

Cen November 2001 • The Brookings Institution • EITC Series 1 at the value of the EITC to the 100 largest metropolitan areas around the Figure 1: Earned Income Tax Credit country.2 Using IRS data, this Chicago Number of Families and Amount of Credit survey maps the geographic distribu- 1975 – 2001 tion of the EITC to help policymakers in the Chicago area better understand 35 where its working poor live. This sur- Number of Families (millions) vey confirms that low-income working 30 Total Amount of Credit (billions) families live throughout the Chicago 25 metropolitan area, and that the EITC is an important source of income for 20 these families and their jurisdictions. 15 II. What Is the EITC? 10 he EITC is a refundable income tax credit intended to 5 make work pay for low- income families. Congress 0 Tenacted the credit in 1975 in response 1975 1980 1985 1990 1995 2000 to high unemployment and the burden that social security taxes imposed on low-wage workers. Substantial increases in the EITC were approved by Congress several times during the Figure 2: Size of the EITC, By Earned Income and late 1980s and early 1990s. Between Number of Dependents, 2001 1984 and 1996, the amount of dollars transferred to working families $4,500 through the credit increased by more $4,008 than ten times (Figure 1). In 1998, $4,000 No Children over 19 million families claimed more $3,500 One Child than $30 billion in EITCs—an average $3,000 Two Children of $1,567 per family. The EITC is now $2,428 the largest federal aid program tar- $2,500 geted to the working poor.

Credit $2,000 A. How Does the EITC Work? $1,500 $1,000 Eligibility The EITC is available to families $500 $364 whose incomes range from below the $0 federal poverty line to roughly double $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 the poverty line (see Figure 2). Fami- lies with two children can earn up to Income $4,008 in EITC in 2001; families with one child are eligible for a credit of up to $2,428. Very low-income workers with no children are eligible for a ents) before declining with each addi- The data analyzed in this survey are small EITC. tional dollar of income (see Figure 2). for tax year 1998. In this year, the The size of the credit increases as For example, a household with two maximum credit available to families earnings increase, up to a point, and children and earnings between with two children was about $3,700, then remains constant at a maximum $10,020 and $13,090 is eligible for a and the maximum credit for families level (based on the number of depend- $4,008 refund for tax year 2001. with one child was about $2,250.

2 November 2001 • The Brookings Institution • EITC Series CENTER ON URBAN & METROPOLITAN POLICY Applying Workers must file a tax return and Table 1: Who Can Get the Credit? complete schedule EIC in order to claim the credit. Taxpayers whom the Occupation Avg. Annual Salary in the Chicago Region IRS believes are eligible for the EITC are sent notices if they do not com- Security Guards $19,250 plete schedule EIC. These taxpayers Janitors $20,200 may file amended returns, but low- Bus Drivers $21,440 income workers who are otherwise Butchers $24,270 exempt from filing will not receive any Locksmiths $26,840 notice unless they complete a tax Graphic Designers $24,190 return. Employers can also make the Source: Bureau of Labor Statistics Advance EITC available to their employees, allowing eligible workers to earn a portion of their credit with each Lifts Families Out of Poverty In Illinois, during the late 1990s, paycheck. Nearly all families, however, The EITC’s success in moving families the average before-tax income of a receive the credit in their tax refund out of poverty is largely attributable to family in the bottom fifth of the check at the end of the year. recent increases in the size of the income distribution was around credit and the number of working fam- $14,700. Adjusted for inflation, these B. Who Actually Claims the EITC? ilies eligible for the credit.6 In 1993, families were actually earning about In tax year 1998, half of all EITC dol- the EITC helped lift 2.1 million peo- 1 percent less than they were during lars went to families who earned less ple above the poverty line. By 1999, the late 1970s. At the same time, fami- than $12,000.3 The remainder went to that figure had more than doubled to lies in the top fifth of the distribution families earning up to $29,000. 4.7 million people. In just that one had average before-tax income of Larger percentages of eligible fami- year, the credit lifted 2.5 million chil- nearly $141,100, 26 percent more lies claim the EITC compared to dren out of poverty—more than any than during the late 1970s.10 Research traditional social welfare programs other federal aid program.7 suggests that the EITC, by supple- (TANF, Food Stamps, ). menting the wages of low-income Nevertheless, studies have found that Increases Work working families, has curbed growth in many eligible households, particularly By restricting eligibility to families national after-tax income inequality.11 families with very low incomes, former with earnings, the EITC promotes welfare recipients, and those with work. In 1984, prior to large increases Builds Wealth and Purchasing language barriers, and are not filing in the EITC and changes in other fed- Power for the EITC.4 Additional research eral transfer programs, 73 percent of EITC dollars represent additional also shows that many of those who single mothers with children worked at income coming into the community, are eligible have, at best, a vague some point during the year. By 1996, increasing families’ purchasing power understanding of how the EITC works. 81 percent of single mothers were and helping them build assets for the A recent study showed that minorities, working at some point during the year. future. The one study to investigate particularly low-income Hispanic One study found that three-fifths of how families use the EITC found that households, are less likely to know this increase in workforce participa- over half of recipients planned to about the EITC than low-income non- tion by single mothers was attributable spend their refunds on investments Hispanic parents of any race.5 to increases in the EITC.8 Researchers like paying for tuition or other educa- have also shown that the EITC tional expenses, increasing their C. Why Is the EITC Important? increases work for those who previ- access to jobs through car repairs and A series of recent studies have pro- ously received welfare.9 other transportation improvements, vided strong evidence that the EITC moving to a new neighborhood, or put- significantly reduces poverty and Supplements Wages ting money into a savings account. income inequality while encouraging The wages and salaries of the working The study also found that the EITC work and helping low-income families poor have not kept pace over the last 20 helped the lowest-income families build assets for the future. years with those earning larger incomes. meet immediate needs such as utilities Despite strong economic growth over and rent.12 the last decade, the income gap between rich and poor has widened.

CENTER ON URBAN & METROPOLITAN POLICY November 2001 • The Brookings Institution • EITC Series 3 Chicago PMSA: EITC Recipients as a Percentage of Total Tax Returns by Zip Code, 1998

Zion #

# McHENRY LAKE Waukegan Carpentersville

#

Elgin # COOK

KANE Melrose Park # DE KALB Aurora Maywood

DU PAGE # Chicago

Harvey

# KENDALL Country Club Hills #

#

# WILL Joliet Chicago Heights

GRUNDY

Percent Filing for EITC 1 to 5% 5.1 to 10% 10.1 to 15% 15.1 to 20% 0 40 Miles 20.1 to 25% > 25% No Data

Source: Internal Revenue Service

4 November 2001 • The Brookings Institution • EITC Series CENTER ON URBAN & METROPOLITAN POLICY of Cook County. Working families liv- Cook County: EITC Recipients as a Percentage ing in Lake County earned $33 of Total Tax Returns by Zip Code, 1998 million. Considerable amounts of EITC dollars were also earned by fam- ilies in the suburban counties of Kane ($29 million), DuPage ($28 million), and Will ($24 million). In 1998, families living within the city of Chicago earned over $430 mil- lion in EITC refunds. The EITC thus boosted consumer purchasing power by an average of $2 million per square CHICAGO mile throughout the city. In reality,

# even greater amounts of EITC refunds Melrose Park # flowed to some neighborhoods in Chicago. Zip codes in and around the Maywood Roseland, North and South Lawndale, and Auburn Park neighborhoods each received over $20 million in EITC refunds in 1998. The city of Chicago received a share of the region’s EITC dollars larger

# Harvey than its share of the region’s popula- tion. While one-third (33.2 percent) # of the metro area’s residents lived in

Country Club Hills # Chicago, the city received over 58 per- Chicago Heights cent of the region’s EITC refunds (see Appendix A). Still, EITC dollars were Percent Filing for EITC more dispersed than money redistrib- 1 to 10% (84) uted by other federal transfer 10.1 to 19% (44) programs that benefit residents of 19.1 to 27% (19) 0 10 20 Miles 27.1 to 36% (8) greater Chicago. For instance, in 36.1 to 45% (9) 1998, while families in Cook County 45.1 to 54% (5) No Data received around 82 percent of the region’s EITC dollars, they received Source: Internal Revenue Service 90 percent and 92 percent of the region’s TANF and Food Stamp pay- ments, respectively.14 III. Findings: The Value of the enue Service, reflect actual credits Cities neighboring Chicago also EITC to Greater Chicago claimed by taxpayers for tax year 1998 benefited substantially from the EITC. (see Appendix C for further informa- Cook County families in Des Plaines his study examines the spatial tion on the data).13 and Harvey earned $20 million and distribution of the EITC in $11 million, respectively; about $11 the Chicago region, which is A. In 1998, the Chicago region ben- million also flowed to low-income defined as the Chicago Pri- efited from nearly three-quarters of a workers in Waukegan (Lake County). Tmary Metropolitan Statistical Area billion dollars in federal EITC West of Chicago, in Kane County, (PMSA). This area is made up of refunds. working families in the city of Aurora roughly 8.3 million people living in EITC dollars were largely concen- earned nearly $13 million in EITC, nine Illinois counties: Cook, DeKalb, trated in the core of the Chicago and families in Elgin received nearly DuPage, Grundy, Kane, Kendall, Lake, metro area in 1998. Of the $737 mil- $9 million from the credit. McHenry and Will. The EITC data lion in credits earned by residents of The average EITC for families in used for this study, which are publicly the Chicago region, over $600 mil- the Chicago region in 1998 was available through the Internal Rev- lion—82 percent—flowed to residents $1,570. Families in the city of Chicago

CENTER ON URBAN & METROPOLITAN POLICY November 2001 • The Brookings Institution • EITC Series 5 claiming the EITC earned an average hood were working poor. Along the poor families. Communities in Cook credit of $1,640, while families in the South Shore, over one-third of fami- County with concentrated working suburbs earned an average EITC of lies received the credit. poverty could be found immediately $1,482. City neighborhoods that were home south and east of Chicago. Cities to large shares of working poor fami- including Harvey (36 percent), May- B. Nearly half a million (470,000) lies were also home to large numbers wood (28 percent), and Chicago low-income working families living of paid tax preparers. Chicago zip- Heights (22 percent) all had high in the Chicago region earned an codes in which more than 25 percent shares of families working for low EITC in 1998; these families were of the population earned the EITC in wages. Small cities in Lake County concentrated in the city of Chicago 1999 were typically home to 17 tax (Waukegan and Zion) and Kane and a few of the region’s smaller preparation services that file returns County (Aurora) had rates of EITC cities. electronically, compared to 11 in other receipt approaching 20 percent. In In 1998, one-quarter (24.3 percent) zip codes. In many cases, these serv- parts of Joliet (Will County), nearly of the city of Chicago’s taxpayers ices sell high-priced “refund one-third of all tax filers earned an earned an EITC (see Appendix A). anticipation loans” that, for $100 or EITC. There were a few neighborhoods in more, loan taxpayers their refund dol- north and northeast Chicago, such as lars only a few days before the IRS C. The percentages of families earn- Forest Park and Lakeview, where rela- could process a Direct Deposit refund. ing the EITC in the Chicago region tively low percentages of tax filers Chicago neighborhoods where more and the city of Chicago were similar earned the credit. However, most than a quarter of families earned the to those for the ten largest metropoli- neighborhoods in the city had signifi- EITC also had high rates of electronic tan areas and their central cities. cant concentrations of working poor filing—45 percent of all returns in In our report on the EITC in the families. Twenty-eight of the city’s 51 these zip codes were filed electroni- nation’s 100 largest metropolitan zip codes had 20 to 30 percent of fil- cally, versus only 20 percent in other areas, we calculated the share of fami- ers earn the credit; six had rates of 30 zip codes. While some of this disparity lies receiving the EITC, and the to 40 percent; and nine had rates of reflects the fact that certain forms and amount of EITC dollars received, in over 40 percent. The neighborhoods schedules filed by upper-income tax- central cities and suburbs. Appendix B with the largest concentrations of payers cannot be transmitted shows these calculations for Chicago working poor families were located electronically, it is clear that a large and the other nine largest metropoli- mostly in the western and southern share of lower-income families in tan areas in the country. Compared to portions of the city. On the far West Chicago may pay high fees to file very central cities located in these metro Side, in Garfield Park, 54 percent of simple forms. areas, the percentage of families in families earned the EITC. On the The city of Chicago was not the Chicago that received the EITC (24.3 near southside, about 50 percent of only place in the region that contained percent) was very close to the median families in the Englewood neighbor- a significant proportion of working (24.2 percent). Chicago’s rate of EITC

Table 2. Tax Year 1998—Metropolitan Areas in Illinois: Percent of Taxpayers Filing for EITC, Number of EITCs Claimed, and Total EITC Dollars Claimed

% of Taxpayers Number of Total EITC Region Filing for EITC EITCs Claimed Dollars ($M)

Champaign-Urbana, MSA 12.6 9,646 14.3 Davenport-Moline-Rock Island, IA-IL MSA 12.7 21,749 33.7 Decatur, MSA 15.3 8,125 13.0 Kankakee, PMSA 16.1 7,286 11.6 Peoria-Pekin, MSA 12.5 20,233 31.4 Rockford, MSA 12.6 21,365 32.1 Springfield, MSA 12.5 12,434 19.1

Source: Internal Revenue Service

6 November 2001 • The Brookings Institution • EITC Series CENTER ON URBAN & METROPOLITAN POLICY receipt was very similar to that of credit. The small size of this EITC, early part of 2002, when families cities such as Los Angeles, Philadel- coupled with the fact that it is nonre- receive their refunds. phia, Houston and Dallas. With 12.9 fundable, means that many Illinois Under the leadership of Mayor percent of all filers earning the EITC, families with below-poverty earnings Richard Daley, the city of Chicago the Chicago region had a rate of EITC still pay state income tax. Meanwhile, conducts the nation’s leading munici- receipt slightly lower than the median 26 of 42 states that levy an income tax pal outreach program to make families for the ten largest metropolitan areas exempt poor families from the tax.15 aware of the EITC, and to provide (14.4 percent), comparable to the Ten states now offer refundable tax them with access to free tax prepara- share of families earning the credit in credits that build on the federal EITC, tion services that preserve the value of greater Philadelphia (12.2 percent). and help to make work pay for their the credit. Additionally, for many years In the 100-metro report, we also low-income families. Refundable state the Illinois Department of Human used the EITC dollar amounts flowing EITCs can provide the urban working Services has conducted outreach to cities and suburbs to calculate a poor with an especially crucial income statewide to inform low-income fami- “concentration index,” which meas- boost, as the federal EITC is not lies about the federal EITC. State and ured the share of EITC dollars flowing designed to adjust for regional differ- local leaders can expand on these to the central city, relative to its share ences in cost-of-living. Many of the efforts in a number of important ways of the region’s population. Focusing states that have enacted refundable to make work pay for low-income Illi- again on the top ten metropolitan EITCs are home to large urban nois families, to assist families in areas, the typical concentration index regions like Chicago in which families claiming new refundable federal tax in 1998 was 1.62, indicating that cen- can benefit significantly from the credits, and to help more low-income tral cities received a share of their credit.16 If Illinois were to transform its individuals to enter the financial serv- regions’ EITC dollars that, on average, small nonrefundable EITC into a ices mainstream. was 1.62 times greater than their refundable credit equal to 20 percent share of their regions’ population. of the federal EITC, the Chicago 1. Relieve the state tax burden on Chicago was quite typical in this region could see $150 million flow to low-income Chicago families with a aspect, too—the region’s concentra- its local economy. Low-income fami- refundable state EITC tion index in 1998 was 1.64—and lies and neighborhoods in the city of In a declining economy, Illinois and similar to the Dallas region. Chicago alone could receive an annual other states will face difficult choices The Chicago region saw about the $86 million income boost from a 20 on taxes and spending as they attempt same share of its families earn the percent refundable credit. to reduce fiscal shortfalls. State legis- EITC in 1998 as many other metro lators should take steps to avoid areas in the state of Illinois. Table 2 IV. What Chicago Can Do To balancing their budgets on the backs shows that the Champaign-Urbana, Leverage the EITC Locally of those who will suffer most in a Rock Island, Peoria-Pekin, Rockford recession—low-income working fami- and Springfield regions all had about his study confirms that the lies. Illinois already has one of the the same rates of EITC receipt as the Earned Income Tax Credit is a most regressive state tax systems in the Chicago region (12.9 percent). significant federal support for nation; the state’s low-income families Decatur (15.3 percent) and Kankakee working poor residents of the pay a much larger share of their (16.1 percent) had even larger shares TChicago region. In the current eco- incomes in state taxes than middle- of working poor families throughout nomic environment, knowing where and upper-income families.17 The their metro areas. working poor families live, and helping enactment of the current nonrefund- them access the EITC in their com- able state EITC helped reduce the D. Transforming Illinois’ state EITC munities, is more crucial than ever. state income tax burden on poor Illi- into a refundable tax credit would With unemployment on the rise, more nois families, but they still pay high contribute millions of dollars to families will likely have low earnings sales and property taxes. Expanding— the budgets of low-income working that qualify them for the EITC. Ensur- and making refundable—the Illinois families in the Chicago region. ing that these families obtain the full state EITC would be a productive step The state of Illinois recently enacted tax benefits for which they are eligible toward protecting low-income families an earned income credit equal to will help them provide for their fami- in the Chicago region, and throughout 5 percent of the federal EITC. The lies during this difficult period. EITC the state, from further tax increases Illinois state EITC is nonrefundable— dollars will also provide a much- that could exacerbate the problem. that is, if the credit reduces a family’s needed economic stimulus for the By transforming its nonrefundable tax liability below zero, the family does neighborhood, city and metropolitan EITC into a refundable EITC at 20 not benefit from the full value of the economies of greater Chicago in the percent of the federal credit, Illinois

CENTER ON URBAN & METROPOLITAN POLICY November 2001 • The Brookings Institution • EITC Series 7 would join ten other states that have families will need to file a separate 45 percent use a check cashing service made work pay for low-income fami- form, in addition to Schedule EIC, to to cash their refund checks.20 Many of lies with fully refundable state EITCs. claim refundable child credits. The these businesses actually charge a pre- At a minimum, the state of Illinois definition of “child” for purposes of mium rate for cashing tax refund should renew its existing credit, which the child credit is different than the checks. is set to expire in 2003. The Chicago definition for purposes of the EITC. Recognizing this, Chicago’s Shore- region, and the city of Chicago in par- Low-income families with three or Bank has worked with the Center for ticular, would benefit significantly more children may need to file a dif- Law and Human Services to help from the annual economic stimulus ferent refundable child credit form many low-income “unbanked” families that a refundable EITC would provide than other families. That form will turn their federal tax refunds into ini- to low-income families and neighbor- likely include complicated compar- tial deposits into new bank accounts. hoods. In addition to reducing the isons between payroll taxes paid and ShoreBank made these accounts avail- overall burden of state taxes on low- the EITC.18 able to filers using the Center’s free income workers, a 20 percent Without information and guidance tax preparation services. The electroni- refundable state EITC would finally for low-income taxpayers on the new cally-based transaction accounts have exempt Illinois families with below- refundable child credit, the city of features—including payment of inter- poverty incomes from paying state Chicago and its region could leave est—that are attractive to income tax. millions of federal dollars on the table lower-income people, and that reduce when its families need them most. costs and risk of overdraft for the 2. Expand outreach and support Expanded outreach around the new bank. Many individuals decided to for free tax preparation services to credit, and expanded support for free open an account because they felt that help families claim new refundable tax preparation services, would help their tax refund gave them the credits the hundreds of thousands of low- resources to hold an account, and In Chicago, the Center for Law and income families in the Chicago region because they felt that the account Human Service’s Tax Counseling Pro- who will qualify for these credits to would make it easier for them to save. ject and the Tax Assistance Project understand them and claim them, both Despite having average income of only provide free tax preparation services this year and in future years (when the $9,000 a year, more than 40 percent for thousands of low-income filers credits become even larger). Free tax of account enrollees in 2000 reported each year, helping them to access the preparation could also help to stem that they were able to save at least tax credits they have earned. Their the demand for high-priced tax serv- some of their EITC refund.21 efforts, together with the city of ices that reduce the value of the EITC Research has shown that once low- Chicago’s EITC outreach campaign, in many lower-income communities. income people have accounts, they have made low-income families aware can be viable customers for a wider of the EITC, and have helped families 3. Help families use the EITC as range of bank products like auto loans, claim millions of dollars in credits in a gateway to financial services credit cards and certificates of recent years. Still, the demand for free and savings deposit.22 The estimated 100,000 tax preparation services is high, as According to the Federal Reserve, unbanked EITC recipients in the thousands of inner-city families still 22 percent of families with less than Chicago region represent a significant pay exorbitant fees to file their taxes $25,000 in income (the majority of the untapped market for financial services. through paid preparers and obtain EITC-eligible population) lack a bank The high rates of electronic filing in “rapid refund” loans. account of any kind.19 By not having low-income neighborhoods indicate With recent tax law changes, free this most basic access to mainstream that many of these individuals would tax preparation for low-income filers is financial services, these families must exhibit a significant demand to receive now an even more vital service. In tax often rely on high-cost check cashing their refund within days from the IRS year 2001, many low-income families or other alternative financial services via Direct Deposit, at no charge. with children will be eligible for the that consume large portions of their Other financial institutions in the newly refundable federal child credit. small incomes, and make it even more Chicago area can replicate the Shore- This credit will increase refunds for difficult for them to put aside small Bank model, bringing new customers most families that receive the EITC. amounts of savings for the future. In and millions of dollars into local However, determining whether one’s fact, one study found that only 60 per- banks, while saving low-income fami- family qualifies for the credit—and cent of Chicago taxpayers who use lies precious dollars and helping them what amount the family is eligible free tax preparation services own a to build assets for the future.23 for—will be complicated. Low-income bank account or credit card, and that

8 November 2001 • The Brookings Institution • EITC Series CENTER ON URBAN & METROPOLITAN POLICY Appendix A: Profile of the EITC in Metropolitan Chicago, Tax Year 1998

% of Taxpayers Number of Total EITC Share of Share of AREA Filing for EITC EITCs Claimed Dollars ($M) Metro EITC Metro Pop'n

CHICAGO 24.3% 262,477 $430 58.4% 33.2%

SUBURBS 8.1 207,052 307 41.6% 66.8%

Cook (excluding Chicago) 9.4 116,277 173 23.5% 31.6% DeKalb 9.0 3,479 5 0.7% 1.1% DuPage 4.8 20,886 28 3.9% 11.1% Grundy 7.5 1,441 2 0.3% 0.5% Kane 10.6 18,536 29 4.0% 5.1% Kendall 5.9 1,498 2 0.3% 0.7% Lake 7.4 22,165 33 4.5% 8.1% McHenry 5.7 6,684 9 1.3% 3.1% Will 8.0 16,086 24 3.3% 5.5%

REGION 12.9% 469,529 $737 100.0% 100.0%

Source: Internal Revenue Service

Appendix B: EITC Estimates for the Ten Largest Metro Areas in the U.S., Tax Year 1998 Region Central Cities % of Total % of Total City City Taxpayers EITC Taxpayers EITC Share Share Concen- Filing for Dollars Filing for Dollars of Metro of Metro tration Rank Region EITC ($M) EITC ($M) EITC Pop'n Index

1 Los Angeles—Long Beach, CA PMSA 21.2 1,293 24.2 595 46.0% 39.8% 1.16 2 , NY PMSA 19.7 1,170 21.9 1,090 93.2% 79.9% 1.17 3 Chicago, IL PMSA 12.9 737 24.3 430 58.4% 35.6% 1.64 4 Philadelphia, PA—NJ PMSA 12.2 429 24.1 228 53.2% 27.8% 1.91 5 Washington, DC—MD—VA—WV PMSA 10.8 371 18.9 79 21.3% 10.4% 2.04 6 Detroit, MI PMSA 11.8 370 32.3 175 47.5% 21.5% 2.21 7 Houston, TX PMSA 19.5 570 24.8 343 60.2% 46.0% 1.31 8 Atlanta, GA MSA 15.8 443 25.4 70 15.7% 9.0% 1.76 9 Dallas, TX PMSA 16.6 408 24.4 201 49.1% 30.8% 1.59 10 Boston, MA—NH PMSA 8.9 338 15.1 57 16.9% 16.3% 1.04

Median for the Ten Largest Regions: 14.4% $436 24.2% $214 48.3% 29.3% 1.62

Source: Internal Revenue Service

CENTER ON URBAN & METROPOLITAN POLICY November 2001 • The Brookings Institution • EITC Series 9 Appendix C: Methodology Endnotes lifted 300,000 less people out of poverty in 1999 than it did in 1993. Food stamps he data for this study were 1 The ‘EITC’ referenced throughout this helped about 700,000 less people in 1999 derived from IRS zip code- survey is the federal Earned Income Tax than in 1993. And means-tested cash bene- level data for 1998, the most Credit. All references to EITCs claimed or fits, mainly TANF, lifted 600,000 less. See recent year for which these the value of EITCs claimed are for the tax “Poverty and Income Trends: 1999,” Cen- Tdata are available. The data file con- year to which we refer. ter on Budget and Policy Priorities. tains information by zip code on the total number of individual income tax 2 See Alan Berube and Benjamin Forman, 8 For increase in labor market participation filers, the number of filers with certain “A Local Ladder for the Working Poor: see Nada Eissa and Jefferey Liebman tax items (salaries and wages, interest, The Impact of the Earned Income Tax (1996). “Labor Supply Response to the Schedule C, Schedule F) and total Credit in U.S. Metropolitan Areas.” Brook- Earned Income Credit.” Quarterly Journal amounts for those items for tax year ings Institution Center on Urban and of Economics, CXI, 605–647. Another set 1998 returns. Among these are the Metropolitan Policy, October 2001. of estimates by Bruce Meyer and Dan number of filers who claimed the Rosenbaum suggest that more than 60 per- Earned Income Tax Credit, and the 3 David Campbell, Michael Parisi, and cent of the increase in annual employment total amount of Earned Income Tax Brian Balkovic (2000). “Individual Income of single mothers was due to increases in Credit claimed. We used these data to Tax Returns, 1998.” Statistics of Income the EITC. Welfare waivers contributed calculate the amount of EITC that Bulletin, Fall 2000. US Department of one-sixth and AFDC benefit cuts about flowed into each county in 1998, the the Treasury. one-eighth. Changes in Medicaid, employ- average EITC amount per county, and ment training, and child care programs the share of filers in certain jurisdic- 4 See John Karl Scholz (1994). “The Earned played a smaller role. tions (zip code, city, county, metro Income Tax Credit: Participation, Compli- http://dsl.nber.org/papers/w7363.pdf area) that receive the credit. The ance, and Antipoverty Effectiveness.” data are available online at National Tax Journal 48: 64–85. Scholz 9 V. Joseph Hotz, Charles H. Mullin, and http://www.irs.gov/tax_stats/soi/ found that between 80 and 86 percent of John K. Scholz (2000). “The Earned zip-codes.html. those eligible actually claim the credit. His Income Tax Credit and Labor Market Par- Although the raw data are reported study was based on 1990 data. Significant ticipation of Families on Welfare.” at the zip code level, most of the data increases in the value of the EITC have Joint Center on Poverty Research. in the study are characterized at the probably altered actual participation rates. http://www.jcpr.org/wpfiles/hotz_mullin_ county or city level. To calculate the Also see Carolyn J. Hill, V. Joseph Hotz, scholz_final.pdf county totals we simply aggregated zip Charles H. Mullin, John Karl Scholz codes based on the county names pro- (1999). “EITC Eligibility, Participation, 10 The income distributions by state are from vided in the IRS file. Estimating and Compliance Rates for AFDC House- the Current Population Survey. The data accurate totals for smaller levels of holds: Evidence from the California was pooled for larger sample sizes. The geography, i.e. cities, was more diffi- Caseload.” http://www.jcpr.org/ years analyzed were 1978–1980 and cult. Because zip codes are determined wpfiles/hotz_eitc.pdf 1996–1998. See Jared Bernstein, Elizabeth by the United States Postal Service C. McNichol, Lawerence Mishel, and and are designed to facilitate the deliv- 5 Katherin Ross Phillips, “Who Knows About Robert Zahradnik (2000). “State-by-State ery of mail, their borders very often do the Earned Income Tax Credit?” Urban Analysis of Income Trends.” Center on not coincide with municipal bound- Institute, 2001. http://newfederalism. Budget and Policy Priorities and Economic aries. In some cities—including urban.org/html/series_b/b27/b27.html Policy Institute. http://www.cbpp.org/ Chicago—zip codes more or less 1-18-00sfp.htm. match the actual jurisdictional lines; 6 Between 1993 and 1999, the number of in others, zip codes that cover large families receiving the EITC increased by 11 Jeffrey B. Liebman (1998). “The Impact of parts of a city extend well into neigh- 29 percent. The number of people lifted the Earned Income Credit on Incentives boring cities and towns. We used GIS out of poverty by the EITC increased by and Income Distribution.” From Tax Policy (Geographic Interface System) to 124 percent over the same time period. and the Economy, Volume 12, (James determine which zip codes fit well Poterba, Editor), MIT Press. enough within a city’s boundaries to 7 The increasing contribution of the EITC to http://www.ksg.harvard.edu/ associate with that city. If a zip code’s the safety net contrasts sharply with trends jeffreyliebman/tpaeeitc.pdf center was inside the city’s boundaries, in other federal aid programs in the 1990s. then the zipcode was included. Social security insurance, for example,

10 November 2001 • The Brookings Institution • EITC Series CENTER ON URBAN & METROPOLITAN POLICY 12 Timothy M. Smeeding, Katherin Ross 19 Arthur B. Kennickell, Martha Starr- Phillips, and Michael O’Connor (2000). McCluer, and Brian Surette. “Recent “The EITC: Expectation, Knowledge, Use, Changes in U.S. Family Finances: Results and Economic and Social Mobility.” Center from the 1998 Survey of the Consumer for Policy Research, Working Paper Series Finances.” Federal Reserve Bulletin, No. 13. http://www-cpr.maxwell.syr.edu/ January 2000. cprwps/pdf/wp13.pdf 20 Smeeding, Phillips and O'Connor (2000). 13 The IRS data on the EITC, and the data presented in this survey, reflect credits 21 Sondra Beverly et al (2001). “Linking Tax claimed, and not necessarily dollars Refunds and Low-Cost Bank Accounts to refunded. Some EITC offsets tax owed, Reach the Unbanked.” Paper presented and does not result directly in a refund. at the 23rd Annual APPAM Research The overwhelming majority of the credit Conference, 1–3 November 2001, Wash- amounts claimed are, however, refunded to ington DC. taxpayers—in 1998, over 80 percent of all EITC amounts were refunded. 22 See, e.g., Jeanne M. Hogarth and Kevin A. O’Donnell (2000). “If You Build It, Will 14 “Table CA35,” Regional Economic Infor- They Come? A Simulation of Financial mation System. Bureau of Economic Product Holdings Among Low- to Moder- Analysis. June 2000. ate-Income Households.” Journal of Consumer Policy 23(4): 409-44. 15 Family of three, filer plus two dependents. See Zahradnik et al., “State Income Tax 23 A new brochure from ShoreBank and the Burdens on Low-Income Families in 2000: Center for Law and Human Services, Assessing the Burden and Opportunities “Money in the Bank: The Extra Credit Sav- for Relief.” Center on Budget and Policy ings Program,” describes how other Priorities, March 2001. financial institutions can implement simi- lar programs. Contact Jennifer Tescher at 16 The ten states are: , , ShoreBank ([email protected]) , , , New for a copy of the brochure. Jersey, New York, , , and the District of Columbia.

17 See “Who Pays? A Distributional Analysis of Tax Systems in All 50 States.” Citizens for Tax Justice, 1996. Since that report was published, Illinois has reduced income taxes on low-income families by expanding personal exemptions and enacting a nonre- fundable EITC. However, Illinois’ high sales and property taxes account for the overwhelming majority of the state tax bur- Note den on these families, so the tax system as This survey is available on the a whole likely remains highly regressive. Brookings Institution’s website at www.brookings.edu/urban. Also 18 For an explanation of how the new refund- available are similar surveys for able child credit works, see Robert 28 other metropolitan regions, as Greenstein, “The Changes the New Tax well as a survey on the EITC in Law Makes in Refundable Tax Credits for the nation’s 100 largest metropol- Low-Income Working Families.” Center on itan areas. Budget and Policy Priorities, June 2001.

CENTER ON URBAN & METROPOLITAN POLICY November 2001 • The Brookings Institution • EITC Series 11 Acknowledgements The Brookings Center on Urban and Metropolitan Policy would like to thank the Annie E. Casey Foundation, the John D. and Catherine T. MacArthur Founda- tion, the Fannie Mae Foundation and the Joyce Foundation for their generous support of our work on working family investments and policies. The authors also wish to thank David Marzahl for his comments on an earlier draft.

For More Information:

Alan Berube Senior Research Analyst Brookings Center on Urban and Metropolitan Policy Phone: (202) 797-6075 [email protected]

Benjamin Forman Research Assistant Brookings Center on Urban and Metropolitan Policy Phone: (202) 797-6409 [email protected]

Brookings Institution Center on Urban and Metropolitan Policy 202-797-6139 www.brookings.edu/urban

The Brookings Institution

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