Estimating the effects of fully phased-in Earned Income Tax Credit (EITC)

There has been a dramatic shift in U.S. social welfare policy in the 1990s. Diverting from helping non-working families in the past, a new focus has been placed on assisting low-income working families with children. This significant change was accompanied by a nearly fifty percent decline in Aid to Families with Dependent Children (AFDC), which was replaced with Temporary Assistance to Needy Families (TANF). The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 that enacted TANF at a national level was the culmination of the nation’s effort to move families on assistance off welfare to self-sufficiency through work. While most policy analysts have attributed this decline to the success of welfare reform, some scholars have pointed out the fact that the substantial decline occurred before these newly implemented welfare policies came into effect and/or before welfare recipients reached the time limits. Several studies have examined why such an unprecedented decline in the AFDC/TANF caseloads occurred after 1994, when caseloads reached its highest point since 1960 (The Brookings Institute, 2001). These previous studies attributed the decline in the welfare caseloads during the 1990s primarily to the adoption of federal AFDC waivers, TANF, and a booming economy (Blank, 1997; CEA, 1997, 1999; Moffitt, 1999; Ziliak et al., 2000). However, the previous studies overlooked an important change in U.S. family policy in the 1990s—the series of expansions of the Earned Income Tax Credit (EITC). In particular, the Omnibus Budget Reconciliation Act (OBRA) in 1990 and 1993 significantly increased credit rates and the EITC’s maximum benefit and expanded income eligibility limits. OBRA 1993 required that the EITC be fully phased-in by 1996, and as a result, the fully phased-in EITC has become the largest benefit program for low-income working families with children in the United States (see Table 6A.1 of Scholz and Levine, 2001, for complete data). Moreover, the success of the federal EITC has led a number of states to enact state EITCs that supplements the federal EITC. Altogether, 15 states and the District o