Bills Would Increase Participation in State Earned Income Tax Program

Legislation that would remove a significant, unintended impediment to receiving the state earned income tax credit (EITC) has been introduced in the Illinois General Assembly. Due to this impediment, Illinois taxpayers are three times more likely not to receive the state EITC than taxpayers in other states. Sen. Jacqueline Collins and House Majority Leader Barbara Flynn Currie are the chief sponsors of this legislation, Senate Bill 538 and House Bill 556.

The problem arises from a provision included when the state EITC became refundable in 2003. This provision states that EITC refunds are subject to the availability of funds from the Temporary Assistance for Needy Families (TANF) block grant and the state’s ability to meet its required Maintenance of Effort (MOE).

Federal law allows states to expend TANF and MOE funds to provide the refundable portion of state EITCs. Illinois was looking for ways to expend its TANF block grant fully and meet its MOE obligation in 2003 when this provision was enacted. The provision was thus intended to identify a funding source. No one intended that this provision would limit eligibility for the state EITC. Rather, all parties involved in the legislative process thought that any taxpayer who qualified for the federal EITC would also qualify for the state EITC.

However, the Illinois Department of Revenue reads this provision as limiting the refundable portion of the state EITC to only those taxpayers who qualify for TANF or MOE funds. Five groups of taxpayers qualify for the federal EITC but are not eligible for TANF or MOE funding and therefore, by IDOR’s reading of the statutory provision, are not eligible for the state EITC:

•     foster parents;
•     parents of totally and permanently disabled adult children;
•     parents of children 19–24 who are full-time students;
•     parents of children who turn 18 during the tax year; and
•     childless adults.

If this was not convoluted enough, the Department of Revenue is excluding two groups of taxpayers who even by its own reading of the statutory provision should be eligible for the refundable portion of the state EITC: foster parents who are unlicensed relatives and families with 18-year-old children who are full-time students. Both of these groups are eligible for TANF and MOE funds.

The Department of Revenue includes a very complicated work sheet in the tax-form instructions to identify the five excluded groups of taxpayers. Not only are the five groups not receiving the state EITC, but also many eligible taxpayers are confused by the complicated instructions and are not applying for the state EITC. Only 86 percent of Illinois taxpayers who receive the federal EITC also receive the state EITC, while 95 percent is the norm in other states.

The legislation would remove the TANF and MOE language. This would allow the excluded five groups to receive the state EITC. It would also end the exclusion of eligible taxpayers who are confused by the Department of Revenue’s tax-form instructions. The state may still use TANF or MOE funds toward the cost of refundable EITCs, as is allowed under federal law. The Department of Revenue estimates that enactment of this change would increase tax credits going to low-wage workers who qualify for the EITC by $4 million annually.

For more information, contact Dan Lesser, danlesser@povertylaw.org