The Center's work on 'Earned Income Tax Credit' Issues


A Congressional Budget Dictionary

March 27, 2015 at 10:03 am

Congressional Republicans are using complicated — and likely poll-tested — language to make their budget plans’ deep spending cuts and dramatic structural changes in key programs for low- and moderate-income people sound benign and even positive.

As Budget Committee member Sen. Chuck Grassley (R-IA) noted before the plans’ release, “From the standpoint of a budget, the less words of the English language you use, the better off you are.”

While it’s common practice for lawmakers to use language that puts their plans in the best possible light, it’s important to understand exactly what they mean.  Here are three key “translations”:

The House budget summary says:
It will make Pell Grants, which help more than 8 million students from low- and modest-income families afford college, “permanently sustainable.”

This turns out to mean:
The House budget would institute sharp funding cuts in Pell Grants, which in turn would make it harder for millions of students to afford college at a time when those costs are rising quickly.  Over time, this likely would reduce economic opportunity and the readiness of the U.S. workforce.

The House budget summary says:
The budget would convert both the Supplemental Nutrition Assistance Program (SNAP) and Medicaid to “State Flexibility Funds.”  It states that this would give state governments “the power to administer [SNAP] in ways that best fit the needs of their communities with greater incentives to achieve better results,” and also would “empower state policymakers to tailor their Medicaid programs based on the unique challenges they face.”

This means:
The budgets would convert SNAP and much or all of Medicaid to “block grants,” with fixed — and sharply reduced — federal funding.

The programs would no longer respond automatically to increased need due to rising poverty and unemployment during economic downturns.  And the combination of block grants and big funding cuts would leave states having to figure out whose benefits to cut or terminate.  The magnitude of the cuts would leave them without good options.  The SNAP cuts would force states to shrink or eliminate food assistance for millions of low-income families, while the Medicaid cuts would force them to make eligibility and benefit cuts that would likely leave millions of beneficiaries uninsured or underinsured (on top of the loss of coverage that millions of poor Americans would face due to the House and Senate budget plans’ repeal of health reform and its Medicaid expansion).

Finally, sometimes even silence needs a translation.  The House and Senate budgets make no mention of extending crucial provisions of the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) for low- and modest-income working people now slated to expire at the end of 2017.

This means:
The plans would allow these provisions to expire,  thereby pushing more than 16 million people — including almost 8 million children — into or deeper into poverty and squandering the opportunity to help promote work, reduce poverty, and support children’s development.

Once you get beyond the euphemisms and flowery language, a clear agenda stands out in these plans:  shrinking government in substantial part through steep reductions in programs for low- and moderate-income Americans that, in turn, would lead to higher levels of poverty and inequality, less opportunity, and a future workforce that’s less able to compete with its counterparts overseas.

Congressional Budget Plans Hurt Low-Income Working Families

March 19, 2015 at 1:49 pm

As we’ve explained, the new budget plans from House and Senate Budget Committee Chairmen Tom Price and Mike Enzi would impose deep cuts in programs for low- and moderate-income Americans, exacerbating poverty and inequality.  One way they would worsen poverty is by allowing crucial provisions of the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) for low- and modest-income working people to expire at the end of 2017.  That would push more than 16 million people, including almost 8 million children, into or deeper into poverty (see chart).

In 2009, policymakers reduced the earnings needed to qualify for a partial CTC, thereby expanding the credit for millions of low-income working families and making other families newly eligible for a partial credit.  They also raised the income level at which the EITC begins to phase down for married couples to reduce the marriage penalty some two-earner families face in the EITC.  And they boosted the EITC for families with more than two children to help them cover their higher living costs.

If Congress allows these provisions to expire, millions of low-income working families would lose all or part of their EITC and CTC. For example:

  • None of the $14,500 in earnings of a full-time, minimum-wage worker would count toward the CTC.  The earnings needed to qualify for even a tiny CTC would jump from $3,000 to $14,700.  The earnings needed to qualify for the fullCTC would rise from $16,330 to more than $28,000 for a married couple with two children.  A single mother with two children who works full time at the minimum wage (and earns $14,500) would lose her entire CTC of $1,725.
  • Many married couples would face higher marriage penalties and cuts to their EITC.  Currently, to reduce marriage penalties, the income level at which the EITC begins to phase out is set $5,000 higher for married couples than for single filers.  After 2017, it would be $3,000 higher than for single parents, which would shrink the EITC for many low-income married filers and increase the marriage penalty for many two-earner families.
  • Larger families would face a cut in their EITC.  After 2017, the maximum EITC for families with more than two children would fall by over $700.

These provisions are too important to ignore.  Making them permanent would promote work, reduce poverty, and support children’s development.

Building Momentum for Vital Tax Credit Provisions

March 5, 2015 at 10:19 am

Democratic lawmakers announced a series of important bills yesterday that would reward work and reduce poverty for low-income workers.

Senators Sherrod Brown (D-OH), a Finance Committee member, and Richard Durbin (D-IL), the Senate Minority Whip, announced the Working Families Tax Relief Act, which expands the Earned Income Tax Credit (EITC) for “childless workers” — adults without children and non-custodial parents — and makes permanent key provisions of the EITC and Child Tax Credit (CTC) that are set to expire at the end of 2017. Most Democratic senators, including Finance Committee Ranking Member Ron Wyden (D-OR), support the bill.

In the House, Rep. Richard Neal (D-MA), a Ways and Means Committee member, and 51 co-sponsors introduced the Earned Income Tax Credit Improvement and Simplification Act, which also expands the EITC for childless workers and makes permanent the key EITC provisions. Rep. Rosa DeLauro (D-CT) also announced a bill to make the CTC provision permanent.

By making permanent the key provisions of the EITC and CTC and boosting the EITC for childless workers, these bills advance crucial priorities for this Congress.

The EITC and CTC encourage work, reduce poverty, and support children’s development, research finds. Unless policymakers act, key features of the EITC and CTC will expire at the end of 2017, causing millions of low-income working families to lose all or part of their credits. More than 16 million people in low- and modest-income working families, including 8 million children, would fall into — or deeper into — poverty in 2018. A single mother with two children who works full time at the minimum wage (and earns $14,500) would lose her entire CTC of $1,725, for example. The bills announced yesterday would ensure that working families continue to receive the EITC’s and CTC’s far-reaching benefits.

The bills also would strengthen the EITC by expanding it for low-income childless workers, who currently receive little or nothing from the EITC and are the lone group the federal government taxes into (or deeper into) poverty. The proposals would significantly increase the maximum credit for childless workers from around $500 to roughly $1,400 and double (from 7.65 percent to 15.3 percent) the rate at which the credit phases in with rising earnings. The proposals also would allow childless adults ages 21 to 25 to qualify for the EITC. The congressional proposals are part of a growing bipartisan consensus to expand the EITC for childless workers. House Ways and Means Committee Chairman Paul Ryan (R-WI) and President Obama have both proposed similar — though somewhat less generous — expansions (see figure).

For more on these vital tax credits, see our recently updated resources:

A Double Standard on Tax Compliance

February 13, 2015 at 1:23 pm

House Ways and Means Committee Chairman Paul Ryan suggested recently that Congress should expand the Earned Income Tax Credit (EITC) for childless adults and non-custodial parents and fully offset the cost by reducing EITC overpayments.  But he and other House Republicans voted today to permanently extend an expensive small-business tax break without offsetting the cost, such as by requiring any improved compliance in that part of the tax code — where the rates of error and loss to the Treasury far outstrip those for the EITC.  The IRS estimates that a stunning 56 percent of business income that individual returns should have reported went unreported in 2006, the latest year for which these data are available.

These developments highlight an egregious double standard in how lawmakers view tax compliance, depending on whether low-income working families or small businesses are at issue.

During a Ways and Means Committee hearing, Ryan praised the EITC’s proven effectiveness in promoting work and reducing poverty and alluded to his proposal to expand the tiny EITC for childless workers — the lone group that the federal tax code actually taxes into (or deeper into) poverty and a group that needs the EITC’s pro-work income boost and incentives.  Ryan’s proposal to expand the childless workers’ EITC is nearly identical to one from the President, which would seem to make it ripe for bipartisan legislative action.

But Chairman Ryan seemed to suggest the need to generate offsetting savings within the EITC to pay, on a dollar-for-dollar basis, for the EITC change.  To be sure, Congress can and should take important steps to reduce EITC errors, including:  1) providing the IRS more adequate funding for enforcement; 2) giving the IRS the authority to regulate paid tax preparers to ensure they meet basic competency standards (a majority of EITC errors occur on commercially prepared returns); and 3) enacting a battery of measures the Treasury has proposed to reduce EITC errors.  Yet Congress has cut IRS enforcement funding heavily since 2010.  It also has failed to approve the Administration’s request to empower the IRS to take steps to significantly reduce errors by commercial tax preparers.

Further, the Joint Tax Committee is understandably cautious about “scoring” various measures to reduce errors on tax returns, whether they concern the EITC or other parts of the tax code.  The combined scored savings from all known legislative proposals to lower EITC errors fall well short of the costs of expanding the EITC for childless workers.  This raises a concern that lawmakers could propose measures to cut the EITC for honest low-income working families and misleadingly promote them as cutting “fraud, waste and abuse” when that’s not what they would do.  Sadly, some members of Congress have done just that in the past.

The small-business legislation that the House approved today would make permanent a generous tax break (known as “Section 179” expensing) for certain small-business investments.  Business income on individual tax returns is, by far, the largest source of tax non-compliance with, as noted above, an estimated 56 percent of this income unreported in 2006.  This resulted in an estimated tax gap of $122 billion, more than four times the gap due to all individual income tax credits (including the EITC).

A dollar is a dollar, whether it’s spent subsidizing small businesses or supplementing the wages of a low-wage worker striving to get a toehold in the economy.  Policymakers should work to improve compliance throughout the tax code.  And they should stop applying double standards to the effort.

Greenstein on the Obama Budget

February 2, 2015 at 11:47 am

CBPP President Robert Greenstein just issued a statement on the President’s fiscal year 2016 budget.  Here’s the opening:

 President Obama is proposing a surprisingly ambitious budget that would make progress — in some cases modest, in others large — in various areas in which policy sclerosis has prevented the nation from addressing significant problems.  It would expand opportunity, especially for children; reform various programs and tax incentives to make them more effective; and help large numbers of middle- and low-income families while scaling back inefficient tax shelters that mainly benefit those at the top.

The budget should also strengthen economic growth.  It would curb tax-driven economic distortions and invest part of the savings in initiatives that should make the labor force larger and more productive, such as pre-school education and child care, improved college access, stronger tax incentives for people to work, and much-needed infrastructure investments.

Along with financing such investments, the plan would use some of the new revenue and program savings for deficit reduction.  It would make modest but useful progress here, providing more than $1 trillion in deficit reduction over the next ten years (not counting the savings from winding down overseas wars).  In essence, the plan reflects the judgment, with which we concur, that the nation faces two kinds of serious deficits — in the long-term fiscal arena, but also in crucial areas that need resources.

Despite its investments, however, this is not a “big-spending budget,” contrary to some claims.  Total federal spending over the next ten years would average 21.75 percent of gross domestic product (GDP) — identical to the average for the Reagan years.  In fact, despite the budget’s proposals to ease the sequestration budget cuts, discretionary spending would fall by 2019 to its lowest level on record as a share of GDP, with data back to 1962.  So would non-defense discretionary spending.

Overall, the budget is rather bold, with an unusual number of major new proposals for a President’s seventh budget.  It includes major reforms in such programs as unemployment insurance and crop insurance, as well as in the tax code and immigration, and measures to push federal agencies to conduct more evaluation, collect more data on program effectiveness, and make more evidence-based decisions.

Click here for the full statement.