EITC Reforms Would Give Childless Workers a Fair Shake

February 27, 2014

As the tax filing season opens, the Internal Revenue Service, local government agencies and nonprofits across the country have launched their annual campaign to inform potentially eligible workers about the Earned Income Tax Credit and to help them claim it.

IRS estimated that about 21% didn’t in 2010. Roughly 26% didn’t here in the District of Columbia — a higher percent than in all but five states.

The District workers missed out not only on the federal credit, but on the credit the District provides in its own tax code. Twenty-five states have their own EITC as well, though one of them — North Carolina — won’t after this filing year.

Notwithstanding the missing claimants, the EITC is one of the most powerful anti-poverty programs we have — second only to Social Security. Last year, it lifted 6.5 million people, including 3.3 million children above the poverty threshold.

This is partly because it’s a refundable credit. In other words, if claiming it reduces what filers owe to less than zero, IRS pays them the negative balance. The EITC is also refundable in all but four states that have one.

The EITC enjoys broad support across the political spectrum — something you can hardly say for most other programs that only people below a certain income level qualify for. This is because it’s available only to people who’ve earned income by working — and thus widely viewed as a work incentive.

A substantial body of research indicates that it actually is — or at any rate, has been, since much of the work has focused on single-mother employment in the late 1990s, shortly after welfare “reform” and several expansions of the EITC.

Yet, as I’ve written before, the EITC shortchanges childless workers. Those under 25 aren’t eligible for the credit at all. For those who are older, the credit is very small — just 7.65% of earned income to a maximum of $496 for this tax year.

And there will be no more credit available for a single childless workers when earnings reach $14,590 — less than what a full-time, year round job at the federal minimum wage pays. Hardly better for childless married couples.

These restrictions doubly disadvantage childless workers in the District and most of the EITC states because their tax credits are pegged to the federal. In other words, workers are eligible for a fixed percent of their federal EITC benefit.

Here in the District, it’s 40%. So the maximum childless workers can to receive this year is $195 — a partial explanation perhaps for those missing claimants.

The Center on Budget and Policy Priorities notes that some prominent conservatives have recently recommended reforms to make the EITC a more effective support for childless workers — mainly as a substitute for raising the minimum wage.

Such reforms are nevertheless one anti-poverty measure that might bring conservatives and progressives together, CBPP cautiously suggests.

Caution is certainly called for here — and not only because conservatives are pumping the EITC as a way of dumping on the long-overdue federal minimum wage increase.

We’ve got EITC reform bills in Congress right now that would drop the eligibility age to 21, double the maximum credit for childless workers, boost the rate at which their earnings rise to the maximum and extend the phase-out.

No Republican cosponsors. One reason may be that expanding the EITC will result in more and larger refunds. As Politico notes, they’re counted as federal spending — something we’d hardly expect Republicans to support more of (except for defense).

Thus, for example, Presidential-hopeful Marco Rubio’s anti-poverty plan would replace the EITC with a wage subsidy that would benefit childless workers and families with children equally. But, says his spokesperson, the proposal will be revenue neutral. So it will take from one needy group to give to another.

If President Obama really thinks that he and Rubio can work together to strengthen the EITC for single childless workers, as his State of the Union address suggested, he’s probably in for another disappointment.

And clearly disappointment from lead House Republicans, who swiftly found reasons to oppose the as-yet unseen EITC expansion in his Fiscal Year 2015 budget.

As with the minimum wage, the District may just forge ahead rather than wait for Congress to do what it seems unlikely to do in the near future.

The DC Tax Revision Commission has recommended changes that would make the District’s EITC significantly more beneficial to childless workers. They would:

  • Raise the maximum credit to 100% of the federal credit.
  • Extend the availability of the maximum credit to $17,235 of adjusted gross income for both single and married childless workers.
  • Fully phase out when AGI reaches $22,980.

The EITC is often referred to as a measure that makes work pay. The Commission’s proposal would certainly make work pay more for childless workers at the low end of the income scale.

A good step, though not the only one to make the District’s tax code more progressive. And it might reduce the poverty rate too.

Minimum Wage Increase vs. EITC Is a False Choice

March 1, 2013

Opponents of a minimum wage increase argue, among other things, that it’s not an effective anti-poverty tool.

Most minimum wage workers don’t live in households below the poverty line, says Michael Saltsman at the Employment Policies Institute — a think tank funded by the restaurant industry and other low-wage employers.

Besides, minimum wage workers tend to be young, he says. This is true, but as I’ve earlier noted, intended to mislead us into thinking that they’re mostly teenagers who work just to earn a little running around money.

At the same time, Saltsman argues that a minimum wage increase will harm these young workers because they’ll lose those entry-level jobs that put them on the bottom rung of a wage ladder they’d climb if employers could just pay them little enough at the start.

He doesn’t stop there, however, as some who are fond of this meme do.

The better alternative, he says, is an expansion of the Earned Income Tax Credit. He’s far from alone in this view — and joined by some who’ve no vested interest in supporting low-wage business donors.

Washington Post columnist Charles Lane, for example, asserts that the EITC is a “more efficient, better targeted alternative” to a minimum wage increase — more efficient, I infer, because more of the money would flow to poor families.

And if “poverty reduction, income equality and maximal employment can be thought of as public goods,” we should all “purchase” them through a tax-code subsidy.

Like Lane, economist Edward Glaeser believes that we should all pay for measures to alleviate poverty and “make work more attractive for the poor” — through either an enhanced EITC or a brand new federally-funded program.

Blogger Evan Soltas favors the EITC too, noting that economists generally agree on its value as an anti-poverty measure.

We’ve got good evidence for the anti-poverty impacts of the tax reductions and refunds the EITC provides.

According to the Center on Budget and Policy Priorities, an analysis of Census Bureau data shows that the tax credit helped lift 9.4 million people above the poverty threshold in 2011.

So does it follow that we should scrap the proposed minimum wage increase and expand the EITC instead?

The puzzle is why we’re asked to choose. Do we, for example, ask whether we should provide job training or a tax benefit for people who find work as a result?

As CBPP President Robert Greenstein argues, we need both a minimum wage increase and a stronger EITC “to lift working families’ incomes to an adequate level.”

Every expert I’ve read agrees that we can’t, at this point, convert the minimum wage to a genuine living wage without truly risking job losses. As I’ve already indicated, job losses caused by a modest increase are a whole other matter.

On the other hand, making up for low wages through the EITC alone would cost the federal government more than what policymakers “would likely countenance,” Greenstein says.

Understatement. We should recall that Republicans didn’t want to extend the expanded version of the EITC that was originally part of the Recovery Act — even though it reduced a potential deterrent to marriage.

Would they now expand it to give childless workers more than a pittance — enough so that, at the very least, those who are single wouldn’t owe any federal income tax if they earned the minimum wage?

In short, we should be very wary of the notion that some unspecified improvements in the EITC trump the President’s proposed minimum wage increase.

We know that certain businesses interests might prefer it because, as Rortybomb blogger Mike Konczal says, the EITC partially subsidizes employers by enabling them to pay rock-bottom wages.

But the either/or framing is, in many cases, just a way to seem concerned about working people in poverty while helping to ensure they remain as poor as they are.

In others it’s a failure to grasp — or perhaps care about — the real-world political consequences.

Census Bureau Reports 16.1% Poverty Rate

November 15, 2012

Another round of news on poverty in the U.S. — this time from the Census Bureau’s latest report on the results of analyses using its Supplemental Poverty Measure.

Once again, the national poverty rate is higher than the rate the Bureau earlier reported, using its official measure — 16.1%, as compared to 15.1%.

In other words, about 3 million more people — a total of nearly 49.7 million — were living in poverty last year.

On the other hand, the percent of people living in extreme poverty, i.e., below 50% of the applicable threshold, is 1.5% lower than the official measure shows.

We get a mixed picture for state-level poverty rates, for which the Bureau uses three-year averages. Some of the rates are higher than the official rate. Some lower.

The rate for the District of Columbia rises sharply — from 19% to 23.2%. This is higher than the rate for any state except California.

As I’ve written before, the official measure sets poverty thresholds at three times the annually adjusted costs of what used to be the U.S. Department of Agriculture’s cheapest food plan.

The SPM starts from the costs of basic living expenses, adjusted for differences among major geographic areas and also differences in living situations, e.g., renting versus owning.

To these, it adds some other “necessary expenses,” e.g., payroll taxes, health care co-pays and other out-of-pocket costs.

On the other side of the ledger, it takes account of not only cash income, but some “near-money” federal benefits like tax credits and also some in-kind benefits, e.g., food stamps, two forms of child nutrition assistance, housing subsidies.

And it uses actual household size, rather than counting only household members who are related to one another, as the official measure does.

These differences explain not only the difference between the overall SPM rate and the official rate, but shifts in rates for different age and race/ethnicity groups.

We see, for example, that:

  • The child poverty rate drops from 22.3% to 18.1%, reducing the number of children in poverty by about 3 million.
  • The poverty rate for seniors rises from 8.7% to 15.1%, increasing the number of poor people 65 and older by somewhat more than 2.6 million.
  • The poverty rate for blacks drops from 27.8% to 25.7% — still far higher than the non-Hispanic white rate of 11%, but now 2.3% lower than the rate for Hispanics.
  • The poverty rate for Asians rises from 12.3% to 16.9% — the largest percent change for any race/ethnicity group reported.
  • For children, the extreme poverty rate is less than half what it is under the official measure — 5.1%, as compared to 10.3%.
  • For seniors, however, the extreme poverty rate rises — from 2.3% to 4.3%.

This year’s report is unusually timely because it gives us a read on the anti-poverty effects of some benefits that are at immediate risk. It tells us that:

  • Food stamp benefits lifted more than 4.6 million people, including  about 2.1 million children, out of poverty last year.
  • Well over 8.6 million more people, including nearly 4.7 million children, would have fallen below the poverty threshold if their family’s disposable income hadn’t been boosted by refundable tax credits.
  • Unemployment insurance benefits kept nearly 3.4 million people out of poverty — mostly adults, but about 963,400 children too.
  • And Social Security — the single most effective anti-poverty program we’ve got — accounted for 25.6 million fewer poor people than there would have been without its benefits. Poverty rates for all age groups would have been higher. The rate for seniors would have soared to 54.1%.

So there are the benefits. Now here are the risks.

The farm bills now pending in Congress would cut food stamp benefits for at least half a million households — 1.3 million if the House version prevails. The House bill would also mean no more food stamps at all for as many as 3 million people.

As you’re well aware, the Bush-era tax cuts are expiring. We can be quite confident that most will be renewed.

But Congressional Republicans want to extend earlier versions of the refundable Earned Income Tax Credit and Child Tax Credit, not the expanded versions that have made a significant difference to low-income working families.

The federal program that funds unemployment insurance benefits for longer-term jobless workers will also soon expire. Some two million workers and their families may face the new year with no source of cash income.

Lead Republicans in Congress are about to sit at the bargaining table with their Democratic counterparts and White House officials to thrash out an alternative to the so-called fiscal cliff.

They say they’ll be amenable to increased revenues (not to be confused with higher tax rates for the wealthiest 2%).

But the deal must also include “real changes to the financial structure of entitlement programs” — apparently something along the lines of the recommendations in the plan produced by the co-chairs of the President’s fiscal commission, a.k.a. Bowles-Simpson.

These recommendations would cut Social Security retirement benefits in several different ways. With the average benefit now only $1,230 a month, we could see more seniors in poverty if the Democrats don’t hold firm to the position they’re taking now.

NOTE: A couple of the benefits impact figures reported by the Center on Budget and Policy Priorities are a bit higher than mine. This is also true for figures reported by the Center for American Progress. I’m at a loss to explain the discrepancies.

Who Are Those Folks Who Don’t Pay Federal Income Taxes?

October 25, 2012

You recall, I’m sure, the 47% of Americans who don’t pay income tax and thus can’t be persuaded to “take personal responsibility and care for themselves.”

Romney’s since said his statement was “completely wrong” — undoubtedly referring to the part that wrote all these people off because the part about 47% not paying federal income taxes is basically correct. Or would be if we substitute “households” for “people.”

The Center on Budget and Policy Priorities dug into data from a Census survey and the Tax Policy Center to find out who they are.

Not surprisingly, 22% of the non-payers are elderly — many of them presumably former low-wage workers now trying to get by on Social Security benefits or very elderly people who now rely on Social Security because they’ve exhausted whatever they had in retirement savings.

But the tax code gives seniors some special preferences. Their standard deduction is higher, for example. And all or some portion of their Social Security benefits may be tax-exempt.

These preferences, plus a credit for those with low incomes help explain why so many elderly filers wind up not owing anything.

Another 17% of the non-payers are students, people who aren’t working because they’re too sick or too severely disabled and some heterogeneous others, e.g., jobless workers, those who retired early (maybe because they couldn’t find jobs.)

Which leaves a surprising 61% who are working, as indicated by the fact that they pay, through deductions, the taxes that go to Social Security and Medicare.

About half of these people don’t pay federal income taxes simply because they don’t earn enough. The standard deduction, plus however many personal exemptions they’re entitled to brings their taxable income down to zero, as Roberton Williams at the Tax Policy Center explains.

Another 30.4% of working families, especially those with children don’t owe federal income taxes because the Earned Income Tax Credit, the Child Tax Credit and, in some cases, the Child and Dependent Care Tax Credit wipe out whatever tax they’d otherwise owe.

I personally have some difficulty understanding why I should be able to claim a higher standard deduction just because I’ve managed to live past the age of 65.

The tax breaks for working families are an altogether different story.

Anyone, I think, can understand why federal policymakers — Republicans as well as Democrats — decided to give low-income parents an incentive to work instead of relying on welfare benefits.

Also why they expanded the incentives when they ended welfare as we knew it, putting time limits on the benefits and setting the stage for the extraordinarily low level of support they now provide.

What’s difficult for me to understand is why Congressional Republicans — and apparently Romney as well — want to let the EITC and Child Tax Credit revert to their narrower pre-Recovery Act forms.

These, after all, are tax preferences that support core bipartisan values — work, marriage, child rearing, etc.

They also, in and of themselves, reduce the official poverty rate, as CBPP’s analysis of the 2010 Census figures shows.

If their end result is some 11.5 million or so working families owing no federal income taxes, that’s mainly because our policymakers prefer spending through the tax code rather than directly, as outlays in the annual budget.

Has nothing whatever to do with defects in personal responsibility — or, it seems, lead to solid support for the President, though some might say it would if the 47% voted their enlightened self-interest.

What’s at Stake for DC If the Expanded EITC and Child Tax Credit Die?

August 2, 2012

Yesterday, the House passed a bill to extend the Bush tax cuts that’s virtually identical to the Senate Republicans’ recently defeated bill — this after defeating an alternative much like what the Senate passed.

What will happen next is anybody’s guess. What will happen if the Republicans finally prevail on the issue of the refundable Earned Income Tax Credit and Child Tax Credit isn’t — thanks to some great number-crunching by Citizens for Tax Justice.

As I earlier wrote, the Republicans don’t want to extend the tax credits in their current forms, i.e., with expansions originally made by the Recovery Act.

Without them, parents with more than two children wouldn’t get as large an EITC credit as they can now. And married couples would again incur a significant “marriage penalty.”

The refundable Child Tax Credit wouldn’t be available at all for very low-income working families. Refunds would be much smaller for many others because they’re a percent of income above a threshold that would rise from $3,000 to about $13,300 initially — and keep rising as time went on.

CTJ provides state-by-state breakouts for some of the impacts. Here’s what it tells us about the District of Columbia, with some additional observations from me.

In 2013 alone:

  • Nearly 7,940 District families, including an estimated 11,673 children, could no longer get any Child Tax Credit refund.
  • These families, plus those who could still claim the credit would collectively lose $7.6 million — a hit to not only their budgets, but our local economy because there’d be that much less for them to spend.
  • About 8,285 families, including 24,435 children, would lose some portion of their federal EITC.
  • These losses would total $5.3 million.

Families would also lose out because the District’s own EITC is linked to the federal. Taxpayers can get 35% of whatever their federal credit is — and reimbursements if claiming the credit brings the taxes they owe to less than zero.

Rough back-of-the-envelope calculation suggests that total EITC losses could be well over $7.1 million.

In 2010, 1.6 million more people would have fallen below the poverty line if the Recovery Act hadn’t expanded the EITC and Child Tax Credit, according to analyses by the Center on Budget and Policy Priorities.

Hard to believe we wouldn’t have more District families in poverty if Congress extends the credits in their earlier, more restrictive forms.

Republicans Say No Tax Increases, Except for Low-Income Working Families

July 30, 2012

As I remarked earlier, Republicans in Congress don’t actually want to prevent tax increases for everybody.

The votes in the Senate last week confirm this. And the upcoming vote in the House almost certainly will as well.

The Republicans — Mitt Romney included — are dead set against increases for the wealthiest 2% of households — those who’d pay more if the two top tax brackets reverted to their pre-Bush levels.

They’re bound and determined to preserve the huge estate tax giveaway — an additional $1.1 million, on average, for heirs to the wealthiest 0.3% of estates.

But they’re opposed to extensions of the current Earned Income Tax Credit and Child Tax Credit — both expanded by the Recovery Act and then extended, in their current forms, as part of the December 2010 tax cut/unemployment insurance deal.

These tax credits, they say, were temporary stimulus measures. “Stimulus” is, as we know, a pejorative when used by Republicans, who are heavily invested in claiming the Recovery Act failed.

The rest of the Bush tax cuts were also nominally temporary and initially sold as a stimulus. But this is nit-picking, I suppose.

What ought to concern us now is what will happen to low-income families if the Republicans get their way.

Citizens for Tax Justice has a new brief that answers this question — though not entirely — both for the nation as a whole and for each state and the District of Columbia.

Refundable Tax Credit Basics

As you probably know, the EITC is a refundable tax credit available to low and moderate-income working families.

In other words, if the credit, plus deductions and other credits they can claim leaves the amount they owe at less than zero, they get a check for the difference from the Internal Revenue Service.

The credit they get — thus the reimbursement, if any — phases out until it disappears. At what income level depends on family structure.

When we talk about the Child Tax Credit in this context, we’re actually talking about a technically separate additional credit that’s partially refundable.

Parents can get up to 15% of their earnings refunded, but only if they’ve earned more than a set minimum. Both the credit itself and the refundable amount are capped at $1,000 per child.

Expiring Recovery Act Improvements

Before the Recovery Act, the EITC provided no additional credit for families with three or more children. And its structure imposed a severe “marriage penalty” because the phase-out was the same for individual filers and couples filing jointly.

The Recovery Act added a tier for larger families and a separate phase-out schedule for the joint filers.

The refundable Child Tax Credit could be claimed only by parents with incomes over $12,050* — and only for earnings above this amount.

So it wasn’t available for the lowest-income families at all. And refunds were well below the $1,000 maximum for those who didn’t earn much more than the threshold.

The Recovery Act dropped the threshold for claiming the credit to $3,000 — thus also the point at which the 15% starts to kick in.

What No Extensions Would Mean

If the two tax credits revert to their pre-2009 forms, 13.6 million families, including 25.7 million children, would lose, on average, $843 in 2013 alone, according to the CTJ brief.

But losses for some would be considerably greater.

For example, a married couple with three children and earnings at the estimated 2013 federal poverty line would lose $1,934 — nearly 7% of their income — due to the combined changes in the EITC and the CTC.

A single mother with two children and a full-time minimum wage job would get $1,552 less if the Child Tax Credit reverts to its pre-2009 threshold. That’s more than five weeks of her pay.

Additional Losses

The EITC estimates reflect only losses directly due to changes in the federal tax code.

Twenty-three states and the District have their own EITCs — virtually all a percent of what their residents can claim on their federal returns. All but three of these are fully refundable — just like the federal EITC.

So many families who lose all or some portion of their federal EITC would lose out on their state taxes too. Still more losses in a couple of local jurisdictions because they’ve got EITCs too.

* Before the Recovery Act, the threshold was linked to a cost-of-living index, like many other key parts of the income tax code. CTJ says the threshold would be $13,300 next year if Congress doesn’t extend the refundable Child Tax Credit as-is.

McConnell Tax Cut Bill Forgets Low-Income Workers

September 23, 2010

As expected, Senate Minority Leader Mitch McConnell (R-KY) has introduced a bill that would permanently extend all the Bush-era tax cuts.

He’s vowed to block the President’s alternative, which would extend only those that benefit the “middle class,” i.e., individuals earning less than $200,000 and married couples with incomes below $250,000.

The debate has understandably focused on the benefits high-income filers would reap, what would happen if they expired and how much they’d add to the deficit.

A partner in a big accounting firm has crunched some numbers for a hypothetical millionaire in New York City. If we flip them from how much more this fellow would pay if the Bush tax cuts expire to what he’d gain under the McConnell bill, we see that he’d have at least $46,130 more next year — and, barring serious financial mishaps, every year thereafter. Enough to keep him in new BMWs for the rest of his life and then some.

But what about workers at the bottom of the income scale? Seems that McConnell has overlooked them — or simply doesn’t care. Because his bill would wipe out expansions in the Child Tax Credit and the Earned Income Tax Credit that were part of the economic recovery act.

The National Women’s Law Center forecasts the results. Here’s what its brief says, with some fleshing out of my own.

Child Tax Credit. The earned income threshold for claiming the partially-refundable Child Tax Credit would rise from $3,000 to $12,750. As in the past, the threshold would then be annually adjusted to rise with the rate of inflation.

This would not only make the credit unavailable for very low-income families. It would reduce the amount of the credit for numerous still-qualifying families. NWLC says that 12.9 million taxpayers would lose a total of $8.4 billion — all but 2% of them in the bottom two-fifths of the income scale.

The Center on Budget and Policy Priorities has also analyzed the impacts of a return to the 2001 version of the tax credit. Based on what were then current Census data, it figured that families with about 18.1 million children would either lose the whole credit or see it significantly reduced.

A family with one full-time minimum wage worker and two children would immediately lose nearly $1,500 — more than a month of wages. Some 600,000 children would fall into poverty.

Earned Income Tax Credit. The fully-refundable Earned Income Tax Credit would no longer provide any additional amount for workers with more than two children. At the same time, the so-called marriage penalty would return to its pre-2009 level. This means that the credit for a married couple would begin to phase out at close to $2,000 less than it does now.

NWLC says that 11.7 million taxpayers — 91% of them in the bottom two-fifths of the income scale — would lose nearly $3.2 billion.

Impacts on Single Mothers. According to NLWC, more than 30% of single mothers would no longer get any benefit from these tax credits. The new Census figures give us some perspective on what this would mean.

In 2009, more than 4.4 million households headed by women lived below the poverty threshold. For a mother with two children, the threshold was just $17,285. But a great many of these woman-headed households had incomes way below the applicable threshold. The average gap between their incomes and this threshold was $9,218.

A shocking 54.3% of children in woman-headed households lived below the poverty threshold. At least some of their mothers — or other women they were living with — gained cash benefits from the Child Tax Credit and/or the EITC.

Clearly, the McConnell bill would make their hardships even worse.

But would it be okay if the tax credit provisions were fixed? Not by me. Surely we have better things to do with $1 trillion than help the wealthiest 2% or so of Americans gain a greater share of the nation’s income.

But if we’re going to have all the tax cuts extended, even temporarily, let’s make sure we’re not financing the purchase of new BMWs at the expense of low-income workers.


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