$15 Minimum Wage and the Earned Income Tax Credit: Public Policy Interactions

On July 1, 2020, the minimum wage in the District of Columbia will be $15 per hour. Our  recently published study in the Economic Development Quarterly, finds that a $15 minimum wage will produce significant income gains for most of the District of Columbia’s 61,000 low-wage resident workers and only slightly impact the city’s level of relatively low-wage jobs (see here and here). The study also finds that in 2021 approximately 62 percent of the resident workers impacted by the city’s $15 minimum wage policy ($15 MWP) will consequently lose a sizable amount of their Earned Income Tax Credit (EITC). This policy-induced increase in wage income, however, is estimated to more than offset the amount lost in EITC for this subpopulation of resident workers.

Fig1

The Income Effects of the $15 MWP on the Workers that Claim the EITC

The federal EITC is based on a schedule where many EITC recipients earn a decreasing EITC amount as their annual income increases. The policy simulation models we used in this study indicate that most of the resident workers in this analysis are expected to lose some federal and DC EITC dollars as a direct result of the $15 MWP. Figure 2 shows that the average full-time worker in 2021 will gain $3,097 in higher annual wage income.  (Year 2021 is one year after the full implementation of the $15 MWP and when the national & local economies are estimated to be recovering from the current pandemic and recession.) However, the higher income from the $15 MWP will cause the worker to lose an average of $332 in combined federal and DC EITC, causing the average worker (with 1 EITC dependent) to be better off with a net increase in resources amounting to $2,765 or 11.3 percent (Figure 3). In contrast, full-time workers that do not have dependents and are not EITC recipients are likely to be only $2,587 or 10.5 percent better off (Figures 4 and 5). The interplay between the $15 MWP and the EITC is such that the consequent lower federal and DC EITC amounts for many under the $15 MWP are more than offset by the policy-induced wage rate increase.

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Conclusion

On July 1, 2020, the minimum wage in the District of Columbia will increase to $15 per hour, and every year thereafter the wage will be increased in tandem with the area’s inflation rate. Via the policy interaction of the $15 MWP and the EITC, we find that there is a substantial overlap of subpopulations of DC resident workers from each policy. We estimate that of the 61,000 resident workers impacted by the $15 MWP, 38,000 of them will lose $16.4 million in federal and local EITC payments in 2021 in exchange for $54.6 million in higher wage income.

The economic burden of the pandemic is currently being borne mainly by low-wage workers in the hospitality and retail sectors. As the economy reopens and these workers are re-employed, the planned increase in the minimum wage will help in 2021 to reverse some of the economic setbacks to low-wage workers in the sectors most affected by the pandemic.

The District of Columbia Reforms its DCEITC for Childless Workers

In 2015, the city replaced its local Earned Income Tax Credit (DCEITC) policy for childless workers as a fixed percentage of the Federal Earned Income Tax Credit (EITC) with a formula that appreciably increased both the local credit amounts and maximum eligible income. (See full policy brief here.) In this new formula, the city applies the federal maximum credit amount to a much larger income range ($6,600 to $18,111) and the federal phase-out credit rate to higher income levels ($18,111 to $24,040). As shown in Figure 1, the DCEITC encompasses all the city’s childless workers eligible for the Federal EITC plus a substantially larger number of workers who earned between $14,800 and $24,040 in annual wage income in 2015.

Fig1

In 2014, 53,839 tax filers received the EITC and DCEITC. These were comprised of 41,391 filers with qualified children and 12,448 without qualified children (Figure 2).  With the expansion of the DCEITC for childless workers in 2015, there was a 26.8 percent increase in total DCEITC claimants with nearly all the increase being attributed to 12,490 new childless workers (2,983 who were also eligible for the Federal EITC and 9,507 who were still not eligible for the Federal EITC and not previously eligible for the DCEITC).

Fig2

Structure of the Childless Worker EITC: DC v. Federal

A comparison of the structure of the expanded DC childless worker EITC with the federal credit focuses on the five income ranges. In Figure 3, the first income range (wage and salary income less than $6,600), labelled Income Range 1, is the phase-in range for both the federal and District credit, where both the federal and local credits increase by 7.65 cents for every additional dollar of earnings. The second income range (income between $6,600 and $8,250), Income Range 2, is the plateau of the EITC structure, where the credit is $503 for both the federal and local credits, regardless of earnings. Income Range 3 (income between $8,250, and $14,800) is the phaseout range for the federal credit, where the federal credit is reduced by 7.65 cents per dollar of earnings, while the District credit remains at $503 regardless of earnings.  For Income Range 4 (income between $14,800 and $18,111) each childless worker receives a DC credit of $503 regardless of earnings but receives no federal credit. And for Income Range 5 (income between $18,111 and $24,040), a DC childless worker receives a DC credit that decreases by 7.65 cents for every additional dollar of earnings up to an income level of $24,040. Beyond $24,040 in income, a resident is ineligible for the DCEITC childless worker credit.

Fig3

The DCEITC Impact on Low-income Households

Table 1 shows how the DC childless worker credit varies across the identified income ranges and compares the DC childless worker credit to that of the federal’s for Tax Year 2015, the first year the new DC credit was in effect. In 2015, there were 2,983 new claimants who were eligible for both the Federal EITC and the DCEITC (Income Range 3), and 9,507 new DCEITC claimants who were not eligible for the Federal EITC (Income Ranges 4 and 5). Tabl1_After Fig3

 

In tax year 2015, the District expanded the eligibility for its local credit for childless workers by extending the credit to childless workers with income from $14,800 to $24,040; it also increased the local credit amounts. The maximum Federal EITC for a childless worker in 2014 was $496, and the maximum local credit amount a childless worker could receive was $198 (Figure 4). Under the 2014 policy, childless workers in a narrow range of income ($6,600 to $8,150), making up 12.8 percent of all DCEITC childless workers, claimed a combined maximum amount of $694. Workers that earned more than $14,550 that year were not eligible for either the federal nor local credit.

Fig4

Under the new 2015 policy, 12,632 claimants (50.7 percent of all DCEITC childless workers) that earned between $6,600 to $18,111 in income received a DCEITC of a maximum amount of $503 (Figure 5). And further, claimants with income between the narrow range of $6,600 and $8,250 received a combined EITC and DCEITC of $1,006. Stated differently, childless workers with income less than $8,250 received a DCEITC that was a 100 percent match of their federal credit, and claimants with income between $8,250 and $14,800 received a DCEITC that was an average of 192.3 percent more than their Federal EITC.

Fig5

The DCEITC in a Changing District

The expanded DCEITC for childless workers provides additional income support and security for the city’s lowest income earners, encourages labor market participation, and helps to facilitate poverty alleviation. But, it may also be incentivizing continued city residency for a growing number of the city’s lowest income earners through higher refundable tax credits that could be used to help counter the rapidly rising costs of living in the city.