AT: No state income tax

Like the federal EITC, state EITCs have a long, successful history of using the income tax to improve the economic security of low-income working families. Some question whether a state without an income tax could offer similar assistance, since state revenue departments in these states do not typically collect the information about family income and structure needed to determine EITC eligibility. The example of Washington State’s Working Families Tax Rebate, however, illustrates how states without an income tax could work with the IRS to provide a state credit.

The Washington EITC has never taken effect because the state legislature hasn’t funded it,a but its design shows how it would work in the absence of a state income tax. To confirm eligibility, Washington State would use data on federal EITC claimants that the IRS provides to state revenue departments under a data-sharing arrangement. Piggybacking on these federal efforts saves administrative costs for the state. State officials estimate that when the credit was phased in fully, the administrative costs would constitute only about 4 percent of the cost of the EITC itself.b (Administrative costs in states that already have an income tax are substantially lower, typically well below 1 percent of the credit’s value.) If Washington were to increase the size of its credit, the administrative costs would be an even smaller share of the total cost.

Other states without a broad-based income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming) could follow the Washington State model. State EITCs could be particularly helpful in these states because their tax systems rely heavily on excise taxes, property taxes, and in most cases sales taxes. Because of this reliance, low- and moderate-income families in these states tend to pay a significantly higher share of their income in taxes than wealthier families.c