Association for Public Policy Analysis & Management

Background: Poverty affects about 21% of children in the United States and is associated with heightened risk for adverse social, health, and economic outcomes across the life course. Early childhood poverty has a stronger impact on life outcomes than poverty in later life (Duncan, Magnuson, & Votruba-Drzal, 2014). Among safety net policies, the federal Earned Income Tax Credit (EITC) reduces the most child poverty in absolute terms (Fox, 2017). Oregon is one of many states that have implemented state-specific EITCs to reinforce the poverty-reducing impact of the EITC. In 2016, the Oregon Earned Income Credit (OEIC) was expanded to provide an additional 3% to families with children age three and under (other eligible families receive 8%). The purpose of this study is to estimate the impact of the OEIC on child poverty.

Data and Method: This study relies on the most recent American Community Survey (ACS) from IPUMS. Because the ACS does not include tax information, we imputed tax values – including the EITC and the OEIC – from the NBER TAXSIM version 27. Further, we anticipate further adjusting the ACS sample with administrative data from the Oregon Department of Human Services (DHS) and the Oregon Employment Department (OED) to account for underreporting of certain benefits.

A series of poverty measures were calculated for all children age 18 and under and children age three and under. We emphasize (a) the Official Poverty Measure (OPM) and (b) an adjusted OPM that accounted for the EITC and OEIC. In addition to headcount poverty rates, poverty depth and severity were calculated with the Foster-Greer-Thorbecke indices (1984). Distributional impacts were assessed at levels of poverty (.75, .50, .25 of the Federal Poverty Line). We then simulated the impact of three policy changes: (1) increasing the OEIC rate as a percent of federal EITC, (2) changing the eligibility criteria to reach more children, and (3) redirecting resources from the working non-poor to the non-working poor. Counterfactual poverty measures were estimated for each simulation scenario. Following Jolliffe (2005), we accounted for survey design in testing for statistically significant differences between observed and counterfactual poverty measures.

Preliminary Findings: Compared to the OPM, the poverty rate with the EITC and OEIC resulted in a non-significant reduction in young child poverty: from 21.3% to 21.1%. Increasing the generosity of the OEIC to large amounts (simulation 1) had little impact on the child headcount poverty rate. However, via simulation 1 and 2, we found the OEIC significantly reduced poverty depth and severity. Preliminary evidence suggests that redistributing resources to the non-working poor (simulation 3) would have a relatively greater impact on child poverty.

Significance: This study adds to the debate about how state EITCs affect family economic well-being. We exploit an innovative Oregon policy that targets resources to young children and highlight the current policy’s limited impact. The simulated outcomes of alternative policies suggest future directions for state policy.