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

Ryan Adds Momentum to Expanding EITC for Childless Workers

July 24, 2014 at 4:56 pm

House Budget Committee Chairman Paul Ryan highlighted the Earned Income Tax Credit (EITC) today as one of the most effective anti-poverty programs and joined growing bipartisan calls to expand it for childless adults (including non-custodial parents), the lone group that the federal tax system taxes into poverty.  We applaud this step, though we encourage him to reconsider some of his proposals to offset the cost — which would hit vulnerable families — and his opposition to a much-needed increase in the minimum wage.

Ryan proposes lowering the eligibility age for the EITC for workers not raising minor children from 25 to 21, doubling the maximum credit to about $1,000, and phasing in the credit more quickly as a worker’s income rises.

Ryan’s poverty proposal makes a strong, and broadly shared, case for these changes:

  • It notes that young adults’ labor force participation has dropped precipitously in recent years and their unemployment rate is very high.  “[T]he sooner young adults join the workforce, the more experience they will gain and the stronger their attachment will be,” it points out.
  • It cites the findings by the University of Wisconsin’s John Karl Scholz, one of the country’s top EITC experts, that strengthening the EITC for childless workers could lower unemployment, promote marriage, and reduce incarceration rates.  (See our report for more on these issues.) 

President Obama has proposed a very similar EITC expansion, and Senator Marco Rubio (R-FL) has highlighted the need to increase wage subsidies for childless workers.  Congressional Democrats have also championed substantial improvements to the EITC for childless workers.

Unfortunately, Ryan’s proposal has two serious flaws.

First, he would pay for it in part by eliminating the refundable part of the Child Tax Credit for several million children in low-income immigrant working families, including citizen children and “Dreamers,” thereby pushing many of them into — or deeper into — poverty. He would also eliminate the Social Services Block Grant, a flexible funding source that helps states meet the specialized needs of their most vulnerable populations, primarily low- and moderate-income children and people who are elderly or disabled.  (This program provides the kind of services and state flexibility that Ryan says we need more of when he promotes other parts of his plan that would enable states to cut food stamps and rental assistance and shift the resources to services.)

Also among the programs that Ryan would end is one that provides fresh fruits and vegetables primarily to children in schools in low-income areas.  By contrast, the President would pay for his EITC expansion by closing tax loopholes for wealthy taxpayers.

Second, Ryan presents the proposal as an alternative to raising the minimum wage, which has lost 22 percent of its value since the late 1960s due to inflation.  As we have explained, it takes both a strong EITC and an adequate minimum wage to ensure that work “pays” adequately for those in low-wage jobs.  The two policies should be seen as complements, not substitutes.

Related Posts:

Greenstein on Ryan’s “Opportunity Grant”

July 24, 2014 at 4:52 pm

CBPP President Robert Greenstein just issued a commentary on House Budget Committee Chairman Paul Ryan’s “Opportunity Grant” proposal, part of his new poverty plan.  Here’s the opening:

A centerpiece of House Budget Committee Chairman Paul Ryan’s new poverty plan would consolidate 11 safety-net and related programs — from food stamps to housing vouchers, child care, and the Community Development Block Grant (CDBG) — into a single block grant to states.  This new “Opportunity Grant” would operate initially in an unspecified number of states.  While some other elements of the Ryan poverty plan deserve serious consideration, such as those relating to the Earned Income Tax Credit and criminal justice reform, his “Opportunity Grant” would likely increase poverty and hardship, and is therefore ill-advised, for several reasons.

Click here for the full commentary.

Understanding Marginal Tax Rates and Government Benefits

July 22, 2014 at 12:58 pm

Some Washington policymakers are increasingly focused on whether government benefits for low- and moderate-income people create disincentives to work — in particular, when these benefits phase down as the earnings of beneficiaries rise, our new commentary notes.  That phase-down rate is often called the “marginal tax rate” because it resembles a tax — benefits fall as earnings rise.  As we explain:

[P]olicymakers across the ideological spectrum share concerns about marginal tax rates and agree that, all else being equal, lower marginal tax rates are preferable to higher ones.  Unfortunately, all else is not equal, and lowering marginal tax rates entails significant and very challenging policy trade-offs. . . .

[M]arginal tax rates are the product not of bad policy design but rather of competing policy goals:  providing needed assistance to financially struggling individuals and families and limiting costs by not providing help to those with more adequate income.  Any serious discussion of the marginal tax rate issue must grapple with the fundamental tension between limiting assistance, controlling costs, and reducing marginal tax rates.

No such serious discussion is likely to result, however, from exaggeration of the marginal tax rates that most low-income families face, overstatement of the impact those marginal rates have on actual work behavior by low-income households, or glossing over the tough policy trade-offs that policymakers must face when seeking to reduce marginal rates.

Click here for the full commentary.

House Should Reject Backwards Child Tax Credit Bill

July 18, 2014 at 2:11 pm

The full House next week will consider the Ways and Means Committee’s recently passed Child Tax Credit (CTC) bill.  A recent Tax Policy Center (TPC) analysis confirms our previous critical assessments of the proposal, finding that it would make many relatively affluent people better off while making low-income working families poorer.

As we explained, the bill makes three main policy decisions that, taken together, constitute poor policy:

  1. It extends the Child Tax Credit higher up the income scale — on a permanent basis — so more families with six-figure incomes will benefit.  The bill raises the income levels at which the CTC begins to phase out.  (It also indexes those thresholds to inflation.)  Couples with two children making between $150,000 and $205,000 would become newly eligible for the credit; a family making $150,000 a year would receive a new tax cut of $2,200 in 2018. 
  2. It fails to make permanent a key CTC provision for working-poor families that will expire in 2017 unless Congress acts.  The provision, which was enacted in 2009, made more working-poor families eligible for the CTC and enlarged it for other working-poor families who had been receiving only a partial credit, by phasing in the credit as a family’s earnings rose above $3,000.  If this low-income provision expires on schedule — as the Ways and Means bill allows — a single mother with two children who works full time throughout the year at the minimum wage and earns $14,500 would lose $1,725 in 2018, as her CTC would be eliminated. 
  3. It indexes the current maximum credit of $1,000 per child to inflation.  This provision benefits only those with incomes high enough to receive the maximum credit.  If the low-income provision is allowed to expire in 2017, millions of working-poor families would either lose their CTC altogether or have their CTC cut and no longer receive the maximum credit, which would make the inflation adjustment meaningless for them.  Under the bill, indexing wouldn’t benefit a family with two children in 2018 until it has earnings of at least $28,050 — nearly double what full-time minimum-wage work pays an individual, as we have explained. 

TPC’s analysis illustrates how the combined effects of these policy decisions harm low-income families while benefiting many with higher incomes.  As the first chart below shows, families with children that have incomes between $100,000 and $200,000 would gain, on average, nearly $550 apiece in 2018, while families with incomes below $40,000 would lose, on average.

The Ways and Means bill’s effects on households’ after-tax incomes are also striking.  As the next chart below shows, households earning less than $20,000 in 2018 would face, on average, a drop in their after-tax income of more than 3 percent while those with incomes between $100,000 and $200,000 would get a boost in their after-tax earnings.

TPC’s analysis underscores the downsides of the Ways and Means bill for low-income working families.  These are parents who work for low or modest wages as cashiers, waitresses, home health aides, and day laborers; they clean office buildings or perform other low-paid work.  Policymakers should reverse course and put these families’ needs first, rather than last, when the full House considers the bill.

Without Extending Key 2009 Improvement, Indexing Child Tax Credit Leaves Out Many Families

June 25, 2014 at 6:26 pm

The House Ways and Means Committee passed legislation today to expand the Child Tax Credit (CTC) in ways that, as we highlighted yesterday, have things upside down — providing a permanent new CTC expansion for families well up the income ladder, while effectively letting expire a key CTC improvement of 2009 that has enabled more low-income working families to receive the credit and thereby lifted large numbers of children in these families out of poverty.

The bill would raise the credit’s top income eligibility thresholds.  It also would index for inflation those thresholds and the maximum credit amount of $1,000 per child.  During the Committee’s deliberations today, Chairman Dave Camp (R-MI) suggested that the bill would help all families, including those with low incomes, because it indexes the maximum credit amount.  That’s incorrect.

Indexing the maximum credit only benefits families with incomes high enough to qualify for it.  And because the Ways and Means bill fails to make permanent the CTC provision originally enacted in 2009 that has enabled many more working-poor families to qualify for the CTC or to receive a larger CTC, millions of low-income families would lose their CTC and get no credit at all after 2017, while many others would no longer qualify for the maximum credit.

The 2009 improvement made more working-poor families eligible for the CTC and enlarged it for others by beginning to phase the credit in as a family’s earnings rose above $3,000 (instead of not starting to phase in the credit until a family had earned far more than that).  This critical improvement, along with important enhancements to the Earned Income Tax Credit (EITC) also first enacted in 2009, was extended through 2017 under the “fiscal cliff” law of early 2013 that made most of President Bush’s tax cuts permanent.

The Ways and Means Committee bill enlarges the CTC for many families with six-figure incomes and makes those expansions permanent, but it lets the improvement for working-poor families expire on schedule at the end of 2017.  As we explained in our earlier post,

Couples with two children making between $150,000 and $205,000 would be newly eligible for the credit; a family making $150,000 a year would receive a new tax cut of $2,200 in 2018.  Meanwhile, a single mother with two children who works full time throughout the year at the minimum wage and earns $14,500 would lose $1,725, as her CTC was eliminated after 2017.

Some Committee members raised this stark inequity this morning.  In response, Chairman Camp said that the bill’s indexing provision would benefit all families eligible for the credit — including those at the lower end of the income scale.  But that’s not the case.

First, beginning in 2018, families making less than about $14,500 a year — the amount that a full-time minimum wage worker earns — will no longer receive any CTC.  Indexing would do nothing for the many working families who could no longer receive the credit.

Second, indexing the maximum credit amount matters only to people who receive the maximum credit of $1,000 per child.  If Congress fails to make the 2009 improvement permanent, many low-income families with incomes somewhat above $14,500 will see their credit cut and will not receive the maximum amount.  In fact, under the bill that Ways and Means passed today, indexing won’t benefit a family with two children in 2018 until they have earnings of at least $28,050 — nearly double what full-time minimum-wage work pays an individual.

As we previously explained, and as the chart below shows, the net effect is that the bill’s failure to extend the 2009 improvement will hurt low-income filers.  Only those higher up the scale will benefit from the inflation indexing.  And the families benefiting the most from the bill will primarily be families with six-figure incomes.

The mischaracterization of the bill’s impacts underscores a key fact — the Ways and Means Committee’s most pressing priority regarding this credit should be to make permanent the recent improvement in it (and the accompanying EITC improvements) for low-income working families.  Those families face much greater challenges in being able to afford to meet their children’s basic needs than the families who would be the big tax-cut winners under this bill.