Impact of the earned income tax credit on the fiscal health of United States cities
Date
2022
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Publisher
University of Delaware
Abstract
This dissertation investigates the linkages between urban fiscal health and the Earned Income Tax Credit. Fiscal health emerged as a topic of academic interest during the financial crises of the 1970s, when cities were plagued by budget shortfalls, decreased government aid, high interest rates, and stagnant economic growth. In response to these crises, a wealth of research was produced; however, scholars have yet to reach consensus on the definition of municipal fiscal health or agree on which metrics should be used to evaluate a city’s fiscal condition. Over this same fifty-year period, the federal Earned Income Tax Credit (EITC) was established and expanded, becoming the United States’ most significant anti-poverty program. First adopted by the government in 1975, many states quickly implemented their own state-level EITCs, usually at some percentage of the federal credit. This expansion increased benefits available to citizens, positively impacting poverty, labor force participation, and household incomes. ☐ Despite the prominence of research on fiscal health and the EITC across the academic literatures on social policy, public finance, and economics, no scholarly exploration has connected the two areas to date. To address this gap, this dissertation evaluates the impact of the EITC on the fiscal health of cities in the United States. Specifically, this study examines how the generosity and availability of state-level EITCs impacts a selected group of fiscal health measures related to municipal revenues, expenditures, operating ratios, and debts. Since fiscal health is inherently related to the ability of governments to raise income, EITC-driven revenue increases are hypothesized to have positive impacts on the fiscal health of municipalities. ☐ This study utilizes the Lincoln Institute for Land Policy’s Fiscally Standardized Cities (FiSC) database to evaluate fiscal health’s relationship to the EITC across 212 American cities, regardless of how individual jurisdictions finance public services. Comparing cities with available state EITCs against those without, a difference-in-difference methodology is employed to examine the variance in fiscal health outcomes across the two groups. The results of these regressions reveal a small but statistically significant relationship between fiscal health and the EITC, with own- source revenues, long-term debt, and public safety expenditures falling as EITC increases. Importantly, regression results underscore the existence of significant differences across city types, particularly related to demographic, socioeconomic, structural, and political variables. Like many urban policy analyses, interrelated urban challenges and unique city circumstances reveal a series of opportunities for future research, particularly on the EITC’s relationship with fiscal health in legacy cities.
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Keywords
Earned income tax credit, Fiscal health, Poverty, Public finance, Urban policy