Minnesota’s Earned Income Credit Program

Utilization by Current andFormer Welfare Households andthe Impact of Policy Parameters

How Much Do Welfare Recipients Use Earned Income Credits and

When Do They Use It?

• Is the Credit Utilized? If so, by Whom? • Appropriate Measures of Utilization

Depends Upon The Policy Goals• Do We Look at All Current and Former

Recipients? Or, Just those Eligible?

Starting With The Conclusions

•Significant Differences Between Receipt & Participation

•May in Part Relate to the Timing of When Parents Exit Welfare And When They Find Work

•Parents May Respond to Changes In the Generosity of the Credit

Background On Why It Matters

• Many Dollars, Many People • Federal & State EICs May Have Had A

Role In Welfare Reform• State EICs Are An Increasingly Popular

Tool• It May Be Effective• Turbulent Times Ahead?

Why It Matters (a)Many Dollars, Many People

• U.S.: 6.3 Mill. Claimed in 2001– $2.7 Billion, $440/claimant*

• CALIFORNIA: 2.5 mill. families (12% of taxpayers) Claimed Federal EIC in 2008**

• MINNESOTA: .3 mill. claimants, (app. 11% of all filers) in 2007***– $523 mil. fed. EIC, and $163 Mill. state EIC,,

avg. State EIC=$565/claimant.

*U.S. Green Book (2004); **PPIC (2010), ***House Research, MN House of Rep. (2010)

• A Network of Support– Tax Assistance Centers & Paid Tax Preparers– Cross-Organization Groups to Assist in Take-

Up (e.g., Distribute Flyers in Foreign Languages & training of tax preparers)

– Non-Profit Advocates & Researchers– Federal, State and Local Government Staff,

Administrators, Commissioners & Legislators– Academic Researchers

Why It Matters (a)Many Dollars, Many People

Minnesota and U.S. AFDC/TANF Caseloads

20000

40000

60000

80000

100000

120000

1985 1990 1995 2000 2005

Minnesota United States

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Min

nesota

Un

ited S

tates

MFIP

PRWORA

Source: Minnesota Department of Human Services and United States Department of Health and Human Services

Why It Matters (b)Those Welfare Reform Years

•About 30,000 Recipients in 2010

Why It Matters (c)$1,500-$2,000; Provides Incentive to Work;

MN May Address Cliff In Income

0

2000

4000

6000

8000

10000

12000

0 10000 20000 30000 40000

Annaul Earnings ($)

Ann

aul A

mou

nts

of M

FIP

an

d E

arne

d In

com

e C

redi

ts

($)

MFIP Cash Grant MFIP Cash & Food EITC MWFC

• Higher Employment Probabilities For Single Mothers

• Lower Poverty Rates• Lower Chances of Reentering Welfare• Higher Chances of Exiting TANF (??)• 80-86 percent take-up rates

Why It Matters (d)It May Be Effective

Why It Matters (c)State EICs Are On The Map

Source: Center for Budget And Policy Priorities

Why It MattersIncreasing Number of States With EICs

05

10152025

1975 1980 1985 1990 1995 2000 2005 2010Year

Colorado’s EIC was suspended in 2002-2005 and in 2005, by ballot the State was authorized capture tax revenue above the Tabor Limit.

• Potential of More Budget Deficits Incurred By States– Historically Rising Medicaid Costs For Elderly– Rising Energy Costs– Slow Employment Growth

Why It Matters (e)Turbulent Times Ahead?

Background To MN’s EIC5 Segments

$0

$500

$1,000

$1,500

0 10,000 20,000 30,000

1998

1997

Amount ofcredit ($)

Income ($)

MAX2 MAX1+RATE2(w-WFCFLOR) MAX2-PHOUTRT*(w-PHOUTFL) MAX1 RATE1*w MAX2 RATE2*w MAX2-PHOUTRT(w-PHOUTFL) $ $ $ $

DATA

• Person-Year Data on AFDC or TANF/MFIP (1992-1999)– 1-or More Months Deemed as Received

AFDC/TANF

• Merged by SSN– State Income Tax Records (1992-1999)– Covered Earnings (1995-1999)

• Merged by County– ES-202 Data

Receipt Versus Participation

• Look At Literature Review Conclusions– Gap in Knowledge About How Many Current

& Former Welfare Recipients Receive Earned Income Credits

• Different Concepts of Utilization – Participation Includes Uniformed & Others

That Find It Too Costly To Claim The EIC– Receipt Includes the Unemployed

• Legislators May Want to Know

Receipt Versus Participation37.7% Receive, 64.6% Participate

RECEIPT OF MINNESOTA’S WFC BY YEAR ALL CURRENT AND FORMER WELFARE HOUSEHOLDS (N = 1,098,473)

Only Those Eligible All Current and Former Welfare Households for the WFC

Year

Did Not Receive the WFC

Received the WFC

Percent that Received the WFC

Did Not Receive the WFC

Received the WFC

Percent that Participate in the WFC

1992 57,157 25,969 31.2 1993 67,865 35,223 34.2 1994 76,401 43,945 36.5 1995 83,583 51,861 38.3 27,533 46,708 62.9 1996 90,439 57,992 39.1 28,837 52,291 64.5 1997 95,732 62,698 39.6 30,886 56,469 64.6 1998 101,770 67,866 40 32,830 61,094 65 1999 110,994 68,978 38.3 33,858 61,694 64.6

Total 683,941 414,532 37.7 153,944 278,256 64.4

Timing & Characteristics of Receiptor WGO?

Percentages Are Not Uniformly Low: Instead, Rise With Earnings

0%

20%

40%

60%

80%

100%

0 5 10 15 20 25 30 35

Real Annual Earnings ($000)

Per

cent

Par

tici

pati

on

No Children 1 Child 2 or More Children

Timing & Characteristics of Receiptor WGO?

Most Eventually Take-Up the EIC

0

0.25

0.5

0.75

0 2 4 6 8 10

Years

Surv

ival

Pro

babi

lity

Welfare WFC

• Cross-Tabs of Markov Process From 1998-1999 Suggest That Although Chaotic, Projections Over 5 Years, Some Converge to Earnings Above EIC Limits

• Examining Parents Observed on Welfare In 1992: 25% Had Earnings of $7,000 or Less

Timing & Characteristics of Receiptor WGO?

Most Do, But Some Take-Up More Slowly

• Non-Whites, Parents W/O A High School Diploma, and Teen Parents Tend to Have Lower or No Earnings

• American Indians Tend to Participate Less • From Kaplan-Meier Estimates: Non-

Whites and Persons W/O a High School Diploma Take Longer To Take-Up EIC

Timing & Characteristics of Receiptor WGO?

Most Do, But Some Take-Up More Slowly

( ) ( )

=>=

=otherwise

wMVwMVif

0

0,1,1 ***** πππ

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321

zs

PHOUTRTPHOUTFL

MAXRATE

WFCFLOORMAXRATE

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Regression Model

Regression ResultsParent’s Response to Parameters

? / / ?Phase-Out Rate ? / / ?Floor to Phase-Out ? / / ?2nd Tier Max. Credit ? / ? ? /2nd Tier Phase-In Rate ? / / ?Earnings Floor to 2nd Tier ? / / ?1st Tier Max. Credit / ? / ?1st Tier Phase-In Rate / /Maximum Credit OnlyTAKE-UPRECEIPTVARIABLE

Regression Results AddendumOut Migration May Affect Rates

North Dakota South Dakota ? Iowa ?Wisconsin

?Canada

TAKE-UPRECEIPTVARIABLEInteracted With Year Since Last on Welfare

Regression Results AddendumWho More Likely Receives Or Participates

Statewide Unemployment Percentage

Age of Household Head

Did Not Graduate HS

Native American

Hispanic

African American

Asian American

TAKE-UPRECEIPTVARIABLE

Why Are These Results Important?

• Much Money and Many People Are Involved In the Delivery of Federal and State Earned Income Credits: Are They Effective?

• Analysis of Take-up Should Consider the Goals of the Policy

• Fills a Gap in Information About Current and Former Welfare Recipients – Use at a lower Rate– Utilization Increases With Time and income– Those With Work Barriers May Utilize at Slower Rates