The Effect of the Earned Income Tax Credit on Infant Health

Featured in print Bulletin on Aging & Health

The Earned Income Tax Credit (EITC) has become the most important cash transfer program for low-income families - in 2010, the EITC reached 26 million families at a total cost of $59 Billion. In the current challenging fiscal climate, social safety net programs such as the EITC are subject to cuts, making it all the more important to understand their effects.

Many past studies have examined the effect of the EITC on labor supply, but relatively few have examined its effect on health. This is the subject of a new NBER working paper by Hilary Hoynes, Douglas Miller, and David Simon, Income, the Earned Income Tax Credit, and Infant Health (NBER Working Paper 18206).

The EITC is a refundable tax credit for low-income working families with children. In 2011, families with income up to $40,964 were eligible for the credit. The maximum value of the credit was $5,112 for families with two or more children and $3,094 for families with one child.

In their analysis, the authors take advantage of expansions in the EITC that occurred in 1986, 1990, and 1993 to examine the program's effect on birth outcomes. The reforms expanded the EITC differentially by family type - for example, between 1993 and 1996, families with two or more children saw their maximum EITC payment rise by $2,045, as compared to $718 for families with one child. The reforms were also phased in over time, generating different EITC amounts in different years.

There are several pathways by which higher EITC payments may affect infant health. The first is income. It is well established that higher family socio-economic status is associated with better health, though establishing that there is a causal effect of income on health has proven more difficult. On the other hand, higher income could facilitate greater pre-natal smoking and drinking, which would negatively affect infant health.

In addition to the direct income channel, the EITC could encourage women to enter the work force or to work more, since the value of the credit rises (up to a point) with earnings. Finally, because eligibility for and the amount of the credit depend on the presence and number of children, an expansion in the EITC could theoretically lead to increases in fertility (though any induced increase in employment could tend to dampen fertility).

Turning to the results, the authors find that EITC expansions reduce the incidence of low birth weight and increase mean birth weight. This finding holds whether the authors compare mothers having a second or later child to those having a first child (childless women represent a pseu-do-control since they are eligible for a much smaller credit than mothers) or mothers having a third or later child to those having a second child (mothers of two children experience a larger increase in the credit than those with one child).

Specifically, the authors find that an increase in EITC income of $1,000 (in 2009 $) is associated with a 6.7 to 10.8 percent reduction in the low birth weight rate for single mothers with a high school education or less. Effects for African-American women are larger. The magnitude of these findings is in line with that found in (relatively scant) existing evidence on income and infant health.

The authors also explore the mechanisms behind these effects. They find that part of the explanation may lie in greater use of pre-natal care, as EITC income increases the probability of using pre-natal care and of receiving such care before the third trimester. They also find that higher EITC income leads to fairly large decreases in pre-natal smoking (and less robustly, drinking). By contrast, the EITC has relatively little effect on health insurance status, though there is some shifting from Medicaid to private insurance.

Finally, the authors estimate the dollar benefit of reductions in low birth weight. Using results from the existing literature on the relationship between low birth weight and "excess hospital costs," they estimate that each $1,000 of EITC income may reduce hospital costs by $20 to $245. As the authors note, "hospital charges are just one of potentially many measurable benefits of reductions in low birth weight, and so these estimates are lower bounds" on the external benefits of the EITC.

The authors conclude, "our results suggest there are non-trivial health impacts of the EITC. Importantly, these impacts are typically not taken into account given the non-health nature of the program and should be considered in discussions of the value of the safety net."

The authors acknowledge funding from the U.C. Davis Center for Poverty Research, which receives funding from the U.S. Department of Health and Human Services, and from the Center for Health and Wellbeing at Princeton University.