Last week’s Supplemental Poverty Measure report confirmed at least one thing we already knew. The refundable tax credits lift more people out of poverty than any other major public benefit, except Social Security.
The more powerful of the tax credits — the Earned Income Tax Credit — boosted 6.2 million people, including 3.2 million children over the poverty threshold in 2013, according to the Center on Budget and Policy Priorities.
The Child Tax Credit did the same for 3.1 million people, including 1.7 million children, again per CBPP.
These tax credits have enjoyed broad bipartisan support, as well they might. The EITC in particular is said to serve as an incentive to work, for which there is some evidence. And who would stand against help for working parents raising children?
We now have the germs of a bipartisan consensus on certain improvements to both. For example, both some leading Democrats and the Senate and Congressman Paul Ryan have proposed making more childless workers eligible for the EITC and increasing the credit for them.
Senators Marco Rubio and Mike Lee say they have a proposal that will, among other things, raise the Child Tax Credit, end the phase-out and make the credit refundable against payroll, as well as income tax liabilities. Fine print as yet to be seen.
And fine print could make a very big difference to low-income families — as well as some immigrant families, even if not low-income — as the now-passed House child tax reform bill shows.
Into the dialogue, if we can call it that, comes the Center for American Progress, with a set of recommendations — some already proposed by others, some new. Here’s a somewhat selective — and occasionally elaborated — summary.
Keep the Improvements We Have
First and foremost, CAP says, Congress should make the Recovery Act’s improvements in both the EITC and the CTC permanent law. Both are due to expire at the end of 2017. And thus far, Republicans in Congress have shown no inclination to extend them.
For the EITC, no extension would mean a reversion to a more severe “marriage penalty,” i.e., a lower credit (or no credit) for some workers who marry. It would also mean a stingier credit for families with three or more children.
For the CTC, no extension would mean no credit at all for very low-income working families. The current $3,000 threshold for claiming the credit would revert to what’s in the permanent law, with all the annual upward adjustments since 2001 — thus a threshold estimated at $14,700 for 2018.
And for those clearing the threshold, the refunds would shrink because they’re based on a percent of income over the threshold, up to $1,000 per child.
About 1.8 million people, including a million children would fall into poverty, CBPP warns. Far more would fall deeper into poverty — 14.6 million, including 6.7 million children.
Expand Eligibility for the EITC
CAP takes note of the disadvantages the EITC poses for childless workers — and for workers whose children haven’t lived with them for more than half the year. They’re actually at a double disadvantage, it says, because some research suggests that employers take account of the EITC in setting wage rates.
It endorses, in general terms, an expanded credit for them. Also a lower age for eligibility. But instead of the commonly-mentioned 21, it favors 18, provided that the workers’ parents don’t claim them as dependents.
Boost Child Tax Credit Refunds
CAP wants the CTC to become fully refundable, as the EITC already is. Families would then receive refunds for the total amount that the credit, plus whatever other credits and deductions they can claim reduce their tax liability to less than zero.
It also recommends indexing the credit to keep pace with inflation. This would achieve somewhat the same results as the already-indexed provisions of the EITC do.
But the CTC would still have the same $3,000 threshold, whereas workers can claim the EITC, no matter how little they earn. The Tax Policy Center has recommended eliminating the threshold, a reform also advocated by others.
Change Other Policies to Promote Financial Stability and Upward Mobility
CAP has several recommendations to make it easier — and more attractive — for workers to save at least part of their EITC refunds. Several others would make it easier — and less costly — for workers to improve their earning prospects by getting a college education or job training.
All but one of these reaches beyond the EITC itself. And none can be properly summarized in a paragraph or two. Those interested can find the asset-building recommendations here and the education recommendations here.
CAP does, however, have a financial stability proposal strictly for the EITC — a partial early refund. Workers could initially receive up to $500 of the refund they were already eligible for during the second half of the tax year — more in later years because the limit would rise with the inflation rate.
This, CAP says, would help them pay for unusual expenses, e.g., a car repair, moving costs, without resorting to payday loans or the newer, equally extortionate auto title loans.
An estimated 21% of eligible workers don’t claim the EITC. Various reasons for this, including the complexities of filing. Perhaps more would if the “rainy day fund” proposal, as Generation Progress calls it, were adopted.
But if Congress has to pick and choose, then I think it should give top priority to making the temporary improvements permanent — and to giving childless workers a fair shake.