By setting the state credit at a flat percentage of the federal credit, states make the credit fairly simple for taxpayers to compute. A fourteenth state, Minnesota , also offers an EITC based on federal eligibility rules with a structure very closely related to that of the federal credit. Because the federal credit is refundable, a family receives the full amount of its credit even if the credit amount is greater than the family's income tax liability. If a state follows the federal practice of making its state EITC refundable, the credit will benefit a wide range of low-income working families with children, including workers just entering the workforce and those with very low earnings. A non-refundable EITC can provide substantial tax relief to some families, but it provides no benefits to working families that have income too low to owe state income taxes.
States increasingly prefer the advantages of a refundable credit.
Nine of the 12 state credits that have been enacted or expanded since 1997 the credits in Colorado, the District of Columbia, Kansas, Maryland, Massachusetts, Minnesota, New Jersey, New York, and Vermont are refundable. The federal EITC provides a somewhat larger credit to families with two or more children than to families with just one child, in recognition of the increased cost of living for large families. Most state credits to date have been financed from funds available in a state's general fund the same funding source typically used for other types of tax cuts. New federal regulations offer the opportunity to finance a portion of the cost of a refundable credit from the federal Temporary Assistance to Needy Families block grant. No matter how it is financed, however, an EITC can complement a state's welfare program by assisting low-income working families with children.