




Because the EITC begins at $0 for families who do not work and then gradually increases in value as pretax earnings grow, it encourages people to work. But this increase in labor market participation has a downside: With more potential workers, low-wage employers can reduce wages, diluting the value of the credit. Reduced wages are particularly problematic for single adults with no children who are rarely eligible for the EITC. As a result, while low-income families overall benefit from the credit, ineligible low-wage workers may see their earnings from work fall. This means the tax credit is not as effective as it could be: The best estimates suggest that out of every dollar spent on the EITC, employers capture at least 27 cents due to reduced wages.

Importantly, a minimum wage can counteract this dilution. By placing a floor under wages, a minimum wage prevents employers from lowering wages in response to a more generous EITC. This is why it is good policy that all six states that expanded their state-level EITCs in 2019 also already have or will have state minimum wages that are significantly above the federal floor. When EITC expansions are coupled with minimum wages, both policies work together to improve low-wage workers’ economic situations.

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