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January 29, 2014

Balancing the Scale

Since the end of the recession, the gap between the highest earning and lowest earning Virginians has continued to grow dramatically, with low-income people not making enough to even scrape by. HB 1151, a bill sponsored by Delegate Ken Plum, would address this growing problem and take a step toward creating greater economic opportunity for Virginia families by making Virginia’s Earned Income Credit (EIC) refundable.

Between 2007 and 2012, the median wages of Virginia’s highest income earners rose by 8 percent while the lowest income families saw their wages shrink by about 8 percent.

Working families are the back-bone of our economy, and even though they are working full-time, many are not paid enough to even make ends meet, put food on the table or pay the utility bill. What’s more, economists say that our economy stalls when workers don’t have enough money to buy food, clothes and other goods and services from local businesses.

The EIC – which helps over 343,000 working Virginians – is a tax credit that working families can claim at tax time to offset their state taxes. This allows hard-working families to keep more of their wages so they can pay the bills and afford basic necessities. To get it, a family has to be working, and it is structured so that it encourages families to work more hours.

Allowing those who qualify for the EIC to get a tax refund would make it even more effective at helping families. Here’s how:  Under the present nonrefundable credit, a single mom with two kids working full-time at the minimum wage would owe roughly $300 in state income taxes and get a credit of roughly $1,074 when she files her taxes. This credit would eliminate what she owes in income tax but the rest of the credit would be left on the table, even though she pays hundreds of dollars in other state taxes, such as the sales tax on purchases. If the state EIC were refundable, she would get a tax refund close to $800, which she could use to pay the utility bill or get the car fixed by offsetting what she pays in other state taxes. Even if only half the credit was refundable, this working mother would receive a little more than $230.

Virginia’s EIC is modeled after the federal Earned income Tax Credit, which is refundable and has been very successful at helping working families. In the 1990s, the refundable federal credit was the most important factor fueling an increase in single mothers entering the labor force, research shows. Between 2009 and 2011, the federal credit and another credit for low-wage families helped 160,000 Virginians and 85,000 children makes ends meet and pull themselves out of poverty. 

Additionally, about 46,000 veterans and active duty military families got help through the refundable federal credit in 2010.

Virginia’s hard-working families, especially those serving our country, should not struggle to pay the bills because their expenses are rising while their wages are stagnant or declining. This year, legislators in the General Assembly should pass HB 1151 and allow Virginians to get a refund through the state EIC. Doing so would boost our hard-working families and our sputtering economy.

– Jeffrey Connor-Naylor, Program Director

Revised: February 10, 2014

The Commonwealth Institute

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