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Tax Provisions for Poverty Relief: An Analysis of the Federal and State Earned Income Tax Credit and the Pennsylvania Special Tax Forgiveness Program
Authorization: 2007 House Bill 377

This study by the Joint State Government Commission is presented pursuant to

Federal EITC.

(EITC) has enjoyed bipartisan support because it is viewed as simultaneously helping to

alleviate poverty and encouraging low-income individuals to join or remain in the work

force. As a result, EITC has become the largest federal program to assist low-income

working families. But critics of the federal EITC complain of its complex eligibility

formula, which causes many recipients to use expensive paid preparers, and perceived

rates of overpayment. The increased marginal tax rate that accompanies EITC phaseout

may discourage workers from advancing beyond low-paying positions (especially when

combined with the phaseout of other federal and state assistance programs at similar

income levels). About 15 to 20 percent of individuals and families who are eligible for

EITC do not apply for it. To improve participation rates, the IRS and state governments

have launched a variety of outreach campaigns that provide information and tax form

preparation services. The effectiveness of these efforts has been enhanced by

cooperation among government officials, national and local advocacy groups, and

organizations representing private industry.

Since its inception in 1975, the federal Earned Income Tax Credit

Special Provisions (Tax Forgiveness).


The Pennsylvania Constitution lays down

a general rule that taxes be “uniform upon the same class of subjects” (Art. VIII, § 1), but

this rule is subject to several exemptions and special provisions listed in Art. VIII, § 2,

including an authorization for “special provisions” in favor of those found to be in need

of tax relief due to “age, disability, infirmity, or poverty” (§ 2(b)(ii)). This authorization

is currently implemented by TRC § 304, which provides for a nonrefundable credit based

on “poverty income” and number of dependent children, a provision variously termed

special provision (SP) or “tax forgiveness.” The SP formula gives a nonrefundable credit

against taxable income of $6,500 per adult and $9,500 per dependent, thus establishing an

income floor for the personal income tax (PIT). More than one-fifth of all Pennsylvania

tax filers are afforded tax reductions by SP. Because the formula counts additional

dependents heavily and excludes pension and retirement benefits from poverty income,

some tax filers who receive the tax reduction under SP earn income above the federal

poverty level. Qualified tax filers with higher incomes get larger average reductions than

qualified filers with lower incomes. However, SP is not refundable and phases out

completely over an income range of only $2,250.

State EITC.

through the state personal income tax. Among the most prevalent is a state EITC

modeled on the federal provision, commonly referred to as

state EITC. In a

piggyback state EITC, the amount of the credit is determined simply by a multiplying the

federal EITC amount by a uniform credit percentage. In most EITC states, the credit is

refundable, which means that the tax filer receives a check for the difference between the

full amount of the state EITC and state income taxes otherwise owed. A state EITC is

currently operative in 22 states. Fourteen of these states and the District of Columbia use

a refundable piggyback formula, with the credit percentage ranging from 5 to 50 percent

of the federal EITC; eight other states have EITCs that depart in various ways from this

basic structure. In contrast, no other state has adopted a formula similar to SP.

Other states have adopted a variety of measures to alleviate povertypiggyback

Adoption of a state EITC based on federal eligibility criteria could exclude a

number of current SP beneficiaries. Some senior citizens who receive tax forgiveness

under SP are not eligible for the federal EITC and would likewise be ineligible for a

piggyback state EITC. Families do not receive additional EITC benefits if they have

more than three dependent children, whereas SP does not limit the number of qualifying


The broad issue of the adoption of a state EITC raises a number of narrower

policy issues:

states have adopted alternatives in order to provide for a gentler

phaseout or a greater benefit to families with more than one child. The

wide adoption of the piggyback model is testimony to the appeal of its


While the majority of EITC states piggyback the federal EITC, two

completely refundable. In three states the EITC is nonrefundable, and

in two states, partially refundable. A nonrefundable EITC is less

expensive, but is of limited benefit to tax filers.

Seventeen states that have a state EITC have chosen to make it

  • Since the SP is already in place, it must be decided how the EITC will

intersect with it. The EITC could be added on to the SP or replace the

SP, or the tax filer who is benefited by either could be allowed to elect

between them.

Of course the issue of instituting a state EITC at this time must be considered in

the context of the current recession, which sharply reduces the resources available to fund

any tax expenditure, while at the same time increasing the economic distress facing the

Commonwealth’s working individuals and families.


the directive of section 304.1 of the Tax Reform Code of 1971 (TRC). This provision,

enacted in July 2008, directed the Commission to “conduct . . . a comprehensive study to

determine whether alternative forms of special tax provisions for poverty would be more

beneficial to persons who, because of poverty, are determined to be in need of special tax