Earned Income Tax Credit Shorts Childless Workers

August 1, 2013

Seems we’ve got a comprehensive tax reform effort underway in both the House and the Senate. It’s a genuine effort and, to some extent, bipartisan.

Nothing may come of it — in this Congress at least. But we could have a better tax code, even without a total overhaul.

Everybody agrees that the tax code is way too complicated. But, as I’ve written before, there’s a big divide on what should be done with revenues gained by closing loopholes, eliminating exclusions and the like.

And every single tax break got into the code because some interested parties wanted it there. Probably still do, as the Washington Post‘s report on the lobbying blitz indicates.

That said, there just might be an opportunity to make some changes that would help grow the economy, make the tax code fairer and promote other important policy objectives — the three criteria for “special provisions” laid out by the Senate Finance Committee Chairman and top-ranking Republican member.

One good candidate is the refundable Earned Income Tax Credit. This is a tax break that’s already got a lot going for it.

The EITC puts — or at least, leaves — more money in the pockets of low and moderate-income families. This is more money they can spend. And those who get refunds generally do. Some boost to the economy here.

The EITC is also a powerful anti-poverty measure. It lifted about 6.1 million people out of poverty in 2011.

Whether it also reduces poverty by encouraging work is a more complex issue. It certainly seems to have done so among mothers in the Temporary Assistance for Needy Families program, who got a bonus of sorts by moving from welfare to work.

Yet the EITC could use some retooling.

Much has been written about the marriage penalty built into the rules, i.e., the fact that some single parents wind up with greater tax burdens when they marry.

We see much less discussion of another sort of penalty that reforms could address — specifically, the disadvantageous treatment of childless workers.

A new report from the Center on Budget and Policy Priorities provides details.

Briefly, childless workers under 25 aren’t eligible for the EITC at all — even if they’re wholly dependent on what they earn. Perhaps also supporting someone else as well.

I mention this in part because “childless,” for the purposes of the EITC, means no child living with you for more than half the year. So parents paying child support will often be ineligible.

For childless workers so-defined, the full credit is very small — 7.65% of earned income. This is less than a fourth of the rate for workers with just one child.

The income basis for the credit hits the maximum at $6,370 and stays there only until the worker earns $7,970. Within this narrow window, the credit itself is a piddling $497, as compared to $3,250 for a worker with one child.

The credit then begins to phase out. For childless workers who aren’t filing jointly, there’s no credit left when earnings hit $14,340, i.e., when they’re earning less than a full-time minimum wage.

The so-called break even, i.e., zero credit, point is $37,870 for single filers with a child and even higher for married couples filing jointly.

The CBPP analysis assumes that a full-time minimum wage worker earns $14,500 a year.* Because this is higher than the break even point, the worker will have a federal tax burden of at least $1,109.

It’s more than double that if you count the employer’s share of payroll taxes, as CBPP apparently prefers.

Counting that share, a worker with wages at the projected 2013 official poverty level will owe $1,186. Thus, says CBPP, “childless workers are the lone group that the federal tax system taxes into, or deeper into, poverty.”

It cites diverse experts to argue for the virtues of a less stingy EITC for childless workers.

We’d perhaps see more young men in the formal labor market because low-wage work would be more rewarding for them. More older men with less than a high school education there too — and for the same reason.

This, says Ron Haskins at the Brookings Institution, would make them better marriage prospects — obviously assuming that they’re not just in the labor market, but gainfully employed.

We’d then have fewer of those single-mother households that many find so worrisome, he suggests. Less crime and other anti-social behaviors too. Healthier, higher-achieving kids, CBPP adds.

All this seems to me a lot to claim, even tentatively, for some fairly modest changes in a federal tax credit like the EITC reforms in the pending House and Senate bills that CBPP endorses.

And I don’t think we need to go so far.

The proposed drop in the EITC eligibility age for childless workers, plus the quicker phase-in and higher maximum credit for them would clearly make the tax code fairer and promote other important policy objectives.

CBPP estimates that these changes would lift more than 300,000 childless workers out of poverty and reduce the severity of poverty for 3.8 million more.

That’s good enough for me.

* This is $580 lower than the commonly-cited figure for what a full-time, year round worker at the federal minimum wage level earns. CBPP clearly assumes fewer hours, but I don’t know why.


Two Ideas for Harnessing Tax Reform to Affordable Housing Expansion

December 10, 2012

The Presidential campaigns primed us (again) for comprehensive tax reform. And now it’s reportedly on the table as negotiators try to forge a “grand bargain” that will pull us back from the so-called fiscal cliff.

Some key differences between Republicans and Democrats, as you undoubtedly know. But cross-party agreement on broadening the base — an oblique term for getting rid of tax breaks.

As I’ve mentioned before, the second largest tax break for individual filers is the home mortgage interest deduction. It cost the federal government an estimated $140.5 billion last year alone.

Chances Congress will get rid of this homeownership preference altogether are somewhere close to zero, I think.

But two organizations have ideas for changing it to address the affordable housing needs of low and moderate-income people.

Creating a Revenue Stream for the National Housing Trust Fund

The National Low-Income Housing Coalition would convert the mortgage interest deduction to a tax credit — thus making it available to all homeowners instead of only those who itemize.

The Coalition would also drop the cap on the mortgage value subject to the benefit from $1 million to $500,000. Same for the interest paid on home equity loans.

These changes, it says, would save the federal government at least $20 billion a year — maybe as much as $40 billion.

NLIHC wants at least some of the savings — actually additional revenues collected — to provide a funding stream for the National Housing Trust Fund.

Brief summary of my earlier post on why that’s needed.

Congress created the Trust Fund in 2008 to provide federal financial support for affordable housing construction and preservation — mainly rental housing that extremely low-income households can afford, i.e., those with incomes no greater than 30% of the median for their area.

To finance the Fund, Congress allocated a percent of the value of new business generated by Fannie Mae and Freddie Mac.

Then the housing bubble burst. The agency that regulates Fannie and Freddie effectively declared itself their legal guardian because the risky loans they’d made put them at risk of insolvency.

And it told them to indefinitely suspend what, in ordinary times, they would have contributed to the Trust Fund.

So the Fund has remained one of those good ideas on paper only.

The NLIHC proposal is the latest of several to put some money into it — and so far as I know, the only one that would give it an ongoing revenue stream.

Creating a Renters’ Credit

The Center on Budget and Policy Priorities also begins with a revenue-raising conversion of the mortgage interest deduction to a tax credit.

In its proposal, some share of the savings would go to states in the form of tax credits they would then distribute to reduce rental costs for low-income families — mainly those classified as extremely low-income.

The credits would work somewhat like housing vouchers, though the way they’d compensate rental housing owners is different.

They’d generally ensure that beneficiaries paid no more than 30% of their income for rent — the usual standard for affordability. And state agencies administering the credits could do this in several different ways.

They could give the credits — or some of the credits — directly to renters, who’d then find suitable apartments (and willing owners).

The owners would then claim the credits on their tax returns, based on the difference between what the tenants paid and the units’ market rates.

Or they could pass the credits through to their mortgage holders, who’d claim the credits and lower mortgage payments accordingly. This, of course, only if the mortgage holders agree to such an arrangement.

States could also allocate some credits to specific affordable housing projects. In this case also, the owners would claim the credits or pass them through.

Finally, states could allocate credits directly to financial institutions, with the understanding that they’d reduce mortgage payments for owners who agree to rent at affordable rates.

If, as the Center suggests, the total cost of the credits were capped at $5 billion a year, about 1.2 million more very low-income renter households would have affordable places to live.

And the number who are now paying at least half their income for rent would be cut in half. An estimated 700,000 low-income families would no longer have to choose between a roof over their heads and other basic needs.

Like the NLIHC proposal, the Center’s is an innovative approach to our nationwide affordable housing problem — and the disproportionate financial assistance our system now provides to homeowners in the top fifth of the income scale.

As Will Fischer at the Center notes, Congress doesn’t have to choose one or the other. The two could work nicely together.

And with a proper cap on the mortgage interest tax credit, there’d still be money left over to help reduce the deficit that’s apparently top-of-mind for our federal policymakers.


Medicaid Block Grant Not The Only Threat To Health Care For Low-Income People

July 7, 2011

Economist Jared Bernstein reminds us that cost shifting is not cost saving — this in connection with Congressman Paul Ryan’s plan to convert Medicare to a voucher system.

I wonder whether the President and his White House advisors have their minds around this obvious fact — or frankly, how much they care.

What’s got me wondering is a new brief from the Center on Budget and Policy Priorities that takes us through the complexities of a proposal for Medicaid savings that the White House has offered up as part of its deficit reduction plan.

It’s called a blended rate because what it would do is create a single rate for the federal match that each state gets to help cover the costs of insuring low-income adults and children under Medicaid and CHIP (the Children’s Health Insurance Program).

Basically, the federal government now pays a fixed percentage of states’ regular Medicaid costs and a higher percentage for their costs of insuring children enrolled in CHIP.

Under the Affordable Care Act, it will initially pick up the full costs of ensuring people who become newly eligible in 2014, when the minimum federal income cut-off rises in 2014 and childless adults gain a right to coverage. It will then cover somewhat lower percentages, bottoming out at 90% in 2020.

States that expanded Medicaid coverage to childless adults before the ACA was passed will still get a match for them, even though they’re not newly eligible. This match phases in, reaching 100% in 2020.

In short, we’ve got a mix of matching rates — some higher than others. The blended rate would replace them with a single match. Which may sound okay until we learn that states would get significantly less than they would under current law.

Back in April, the White House issued its overall framework for deficit reduction. Savings from Medicaid totaled $100 billion over the first 10 years. CBPP President Robert Greenstein says that as much as $65 billion would have to come from the blended rate.

States would apparently realize some modest savings in administrative costs. But they’d be stuck with the rest of the loss from the replacement of their current and prospective matching rates.

This doesn’t mean they’d make up the difference out of their own revenues. Anyone who wonders what they’d do need only look at what they’ve already done to reduce their Medicaid costs.

They’d cut payments to health care providers, though current reimbursement rates are already so low that many physicians, particularly specialists won’t treat Medicaid participants.

They’d scale back benefits they don’t have to provide to get federal funds, e.g., dental care, eyeglasses and hearing aids, home health services, organ transplants (!).

The President apparently opposes the House Republicans’ Medicaid block grant proposal. “Not on the table” in the deficit reduction talks, says his top Medicare-Medicaid administrator.

But the impacts of the blended rate could be much the same, though probably less drastic.

The federal government would spend less, but not by reducing the costs of providing the health care that low-income people need. It would save by dumping a bigger portion of the rising costs on the states.

The states would then try to minimize the shifted costs. They too would probably rely more on cuts than on genuine cost-reduction strategies, e.g., better quality control, coordination and preventive care.

Ultimately low-income people, including children, would pay — with their health, in some cases their lives — to reduce the federal deficit.

This, I trust, is not what the President had in mind when he embraced “shared responsibility and shared sacrifice.”

NOTE: This posting and my recent cross-posting from Laura’s Life are part of  a Medicaid blog-a-thon organized by MomsRising — a virtual grassroots community that acts on issues that affect mothers and families.

UPDATE: MomsRising now has an online listing of all the blog-a-thon postings, with links. You can find it here. More member Medicaid stories are available in a story map.


Widely-Reported Flat Poverty Rate May Be Deceptive

February 17, 2011

A New York Times editorial cites one of the Census Bureau’s alternative poverty estimates as evidence that “the safety net, fortified by stimulus” kept the number of people in poverty from rising in 2009.

For this, it relies on an analysis by the Center on Budget and Policy Priorities — the same one I used to arrive at a similar, though more cautious conclusion.

“Sorry,” says Shawn Fremstad, Director of the Inclusive and Sustainable Economy Initiative at the Center for Economic and Policy Research. “Poverty really did increase in 2009.”

True, the expanded food stamp benefits and tax credits that were part of the economic recovery act may have kept poverty from increasing as much as it would have otherwise. But they didn’t offset the impacts of massive job losses and related losses of health insurance.

According to Fremstad, the alternative poverty rate didn’t go up in part because the alternative poverty threshold that produced the no-increase result went down. This, he says, was also true for the threshold used to produce the official poverty rate, but the decline was smaller — slightly over a third of a percent, as compared to 1%.

The gap reflects differences in the data sets Census uses to establish the thresholds.

As I’ve written before, the official threshold is set at three times the early 1960′s cost of the U.S. Department of Agriculture’s Economy Food Plan, adjusted for inflation. The alternative threshold at issue is instead tied to the amount that moderate-income households spend on housing, utilities and food.

When the housing market tanks, as it certainly has, the alternative threshold won’t keep up with the overall inflation rate — even actually decline, as it did in 2009. This could boost some people above the cut-off, though they were as income-poor as those who fell below it were in 2008.

But if their housing costs were actually lower, wouldn’t their resources come closer to covering their basic needs? For the purposes of the poverty measure, that depends on what counts as a basic need.

Which brings us to Fremstad’s second point. The no-increase alternative measure doesn’t fully account for medical costs. Instead, it adjusts only for out-of-pocket medical expenditures, e.g., deductibles and co-pays.

Sounds reasonable enough until you consider what can happen when people lose health insurance, as 4.4 million did in 2009.

Some will be well enough off to pay for essential health care costs, notwithstanding the bigger drain on their resources.They’ll seem to be poorer because the measure picks up their costs.  Others will forgo care. They’ll seem to be relatively better off, though they could well be poorer than those who continue to pay for care.

Fremstad says the Census Bureau actually did publish some alternative poverty measures that include medical expenses, rather than just out-of-pockets. These produced higher thresholds than in 2008 and somewhere between 1.1 million and 1.8 million more people in poverty.

Still less than the 3.74 million in the official estimate, but enough to suggest that the poverty rate didn’t stay flat — if the test is whether people could afford essential expenditures.

Lastly, Fremstad notes that the Census Bureau counted the full value of refundable tax credits as 2009 income, even though “nearly all” the families who gained from the expanded Earned Income Tax Credit and Child Tax Credit got their benefits as a lump sum in 2010, i.e., after they filed their 2009 tax returns.

So they were no less poor in 2009 than they would have been with no refunds at all.

None of this is to say that CBPP erred in finding that major safety net programs, including the expansions effected by the recovery act, kept some millions of people out of poverty. Nor that the Times is wrong in saying that Congress should “take a good look at those numbers … before it commits to any more slashing and burning.”

But it does, I think, show how urgently we need a single, reliable poverty measure to tell us how many poor people there are — and who they are — at any given time and over time.

As the Times editorial indicates, this is not just of interest to economists and others of a wonkish bent. It’s got real world consequences for policymaking and for a still-unknown number of poor people affected by the policies made.


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