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How Well Did the EITC Work During the Recession?

In addition to being a highly effective poverty reduction tool, the Earned Income Tax Credit has been found to have a slew of other positive effects on recipients and their families. And in a decade that kicked off with an economic downturn and saw incomes stagnate and decline through a jobless recovery, the EITC tracked well with changes in a growing low-income population, bringing an economic boost into struggling communities at tax time. 

But questions remain about how effective the EITC is in a downturn as steep as the one we’ve just experienced, as unemployment rises and it takes longer for job seekers to find new employment.

We now have new local level data from the IRS that can shed some light on those questions. The latest individual taxpayer data come from tax year 2008, or the 2009 tax filing season. (To download or map TY2008 data down to the ZIP code level, check out EITC Interactive.) These data provide information on the first year of the downturn, and confirm that the EITC played an important role for millions of families in boosting their take home pay as the deepest recession since the Great Depression took hold.

Overall the number of taxpayers receiving the EITC nationally increased by 350,000 filers between 2007 and 2008 to 24.1 million--a bump of 1.5 percent--even as total number of tax filers declined. Together, these changes led the share of filers claiming the EITC to increase from 16.0 percent to 17.5 percent in the space of one year. At the same time, EITC dollars claimed increased by $533 million in real terms, to reach almost $50 billion in 2008. 

Multiple factors could explain the rise in EITC receipt, even as the recession pushed unemployment up. While some filers may lose EITC eligibility during a downturn due to job loss, others become eligible when two-earner families lose an earner; people get their hours cut or are only employed for part of the year; or people get laid off from good-paying jobs and end up in positions that pay less.

In the nation’s 100 largest metro areas—home to more than 62 percent of the country’s EITC filers--all but 8 metro areas saw the number of filers claiming the EITC increase in the first year of the downturn, with another 7 experiencing increases of less than half a percent. Many of these places--including Baton Rouge, Baltimore, Tulsa, and El Paso--remained relatively economically health through the first phase of the downturn (See this map). 

At the other end of the spectrum, the largest increases in EITC receipt between 2007 and 2008 were clustered in Florida and the Inner Mountain West, regions at the leading edge of the downturn after the housing market collapse. In addition, metro areas that shed manufacturing jobs, including Detroit and Indianapolis, also saw EITC recipients increase from 2007 to 2008. While other metro areas--like Austin, D.C., Des Moines, Raleigh, and Nashville--experienced upticks in EITC recipients as they as quickly added population, including low-wage workers.

And these figures don’t take into account the expansions made to the EITC and Child Tax Credit under the American Recovery and Reinvestment Act that went into effect in TY2009 (and are credited with keeping 1.5 million out of poverty in that year).

However, the latest data indicate that the EITC continues to be an important policy tool for boosting incomes and providing an economic cushion to working families--and the communities in which they live--during downturns in the economic cycle.   But it’s true that EITC only works for those who are working, which means efforts to strengthen and preserve safety net measures like unemployment insurance and food stamps become doubly important during periods with stubbornly high unemployment and weak job creation.