“The EITC program has become, in many respects, increasingly a ‘rural program’ as rural areas and small cities contain the highest claims of EITC”
- Center for Rural Affairs, 2014
We continue our EITC series this week by exploring the effects of a proposed state Earned Income Tax Credit (EITC). Today, we look at the specific impact a state credit has on rural communities. (For a quick recap, it may be helpful to read past blogs to learn about the EITC program more broadly and how a state credit would work in Montana)
Since its inception in 1975, the federal Earned Income Tax Credit (EITC) developed into a model anti-poverty program. Over time, the federal program has become more targeted in rural households. Nationwide, over 1 in 5 rural households claim the federal EITC, and these families receive a greater share of EITC benefits than those living in urban areas (largely due to lower income levels in rural America). This is also the case in Montana. In 2013, 21% of rural Montanans claimed a federal credit, compared to 17% of the state’s total population. Since many rural residents already claim the federal EITC, expanding a statewide EITC will further benefit these Montana communities.
In Montana, 17% of the total state population lives below the poverty line. However, rural families experience poverty at a greater rate. Between 26% and 35% of those living in counties like Glacier, Blaine, Roosevelt, and Big Horn have incomes below the poverty line. Furthermore, earnings are lower in rural communities compared to more populated areas in Montana. On average, the median household income is $46,000, but those living in rural areas earn about $9,000 less per year. A state EITC is the single best solution to improving the wellbeing of rural communities by increasing income, reducing poverty conditions, and stimulating economies.
In 2013, the federal EITC lifted 6 million people out of poverty in America. Expanding a state EITC in Montana will continue to lift rural families out of poverty by encouraging individuals to work, increasing their earnings, and enabling families to establish financial security. The proposed state EITC (HB592) can contribute a maximum benefit of $312 to a low-income household. Families earning more can pay off debts and make necessary household purchases that (without the EITC) can be difficult to cover. Since individuals qualifying for a federal credit also qualify for a state EITC, combined credits effectively increase wages and push households above the poverty line.
A state EITC will also have a significant impact on rural economies. In 2010, the federal EITC brought $10.5 billion into rural communities throughout the country. Enacting a state EITC will bring another $8.5 million into Montana annually. And since rural families claim a greater share of federal EITC benefits, it stands to reason that a large portion of these dollars will go into strengthening rural communities, workers, and businesses.
Since use of the federal EITC program is greater in rural communities, it is clear that enacting a Montana state EITC will benefit rural households. A state credit is an effective avenue toward improving the wellbeing of rural families in the state.
MBPC is a nonprofit organization focused on providing credible and timely research and analysis on budget, tax, and economic issues that impact low- and moderate-income Montana families.