A Good Policy Gone Bad: The Strange Case of the Non-Refundable State EITC

Twenty states and several cities have adopted their own EITC programs, typically piggy-backing on the federal EITC by offering benefits equal to some designated proportion of the federal benefits. In all but four states, the state EITC is fully refundable, just like the Federal EITC. Using the example of Delaware, which adopted a non-refundable EITC in 2006, I show the peculiar distribution effects of such a policy. Roughly the lower income half of the EITC recipient population is ineligible for the Delaware non-refundable EITC. Married couples and both single-parent and two-parent families with less than two children also often lose eligibility and/or a substantial portion of benefits. The average benefit received by Federal EITC recipients falls by almost two-thirds. It is likely that these impacts of EITC non-refundability results would hold in other states considering such a policy.