The Center's work on 'Poverty and Income' Issues

The Center analyzes major economic developments affecting low- and moderate-income Americans, including trends in poverty, income inequality, and the working poor. In addition, we analyze the asset rules in various public benefit programs that can discourage low-income people from building modest savings and highlight potential reforms.

States Looking to Strengthen Earned Income Tax Credits

March 30, 2015 at 10:56 am

As states continue to turn the corner on the Great Recession, policymakers in a number of states are looking to help low-paid working families by creating or expanding refundable state earned income tax credits (EITCs). These credits build on the federal EITC, which promotes work, helps families make ends meet, lifts them out of poverty, and yields lasting benefits for kids, studies show.

States considering EITC expansions include:

  • Illinois, where lawmakers have proposed doubling the size of the EITC to 20 percent of the federal credit, helping around 1 million working households.
  • Massachusetts, where Governor Charlie Baker has proposed doubling the EITC to 30 percent of the federal credit, helping more than 400,000 working households. Meanwhile, bills proposed in both houses of the state legislature would boost the EITC to 50 percent of the federal credit.
  • Minnesota, where Governor Mark Dayton has proposed a new EITC expansion — on top of the large increase enacted last year — that would make another 30,000 working Minnesotans eligible and boost the credit for more than four in five current recipients.
  • Rhode Island, where Governor Gina Raimondo has proposed building off of last year’s EITC changes (which cut the credit to 10 percent of the federal EITC but made it fully refundable, producing a net gain for most recipients) by increasing the credit to 15 percent of the federal EITC.
  • Washington State, where Governor Jay Inslee has proposed funding the EITC, which the state enacted in 2008 but has never funded due to the recession, helping over 400,000 working households.

States considering new EITCs include:

  • California, which has the nation’s highest poverty rate under a poverty measure that accounts for taxes and non-cash benefits as well as cash income; a recent proposal to create an EITC would benefit around 3 million working households.
  • Montana, where families with poverty-level wages pay some of the nation’s highest state income taxes; a proposed EITC would benefit 80,000 working families.

A number of states improved their credits in 2014, as our updated paper explains.  Most notably, the District of Columbia expanded the EITC for workers without dependent children in the home, an idea with bipartisan support at the federal level.  Twenty-five states plus the District of Columbia have EITCs (see map).

States are smart to use one of our most effective tools to ensure working families recover along with the economy.  State EITCs allow state lawmakers to leverage the power of the federal credit at a relatively low cost.

Estate Tax Repeal = More Inequality + Bigger Deficits

March 24, 2015 at 10:20 am

As our new paper explains, the House Ways and Means Committee is scheduled to consider a bill this week to repeal the federal estate tax on inherited wealth, just one week after the House Budget Committee approved a budget plan calling for $5 trillion in program cuts disproportionately affecting low- and moderate-income Americans.

Repealing the estate tax would be highly misguided — especially in the context of the House Budget Committee plan, which would repeal health reform and cut Medicaid deeply, causing tens of millions of Americans to become uninsured or underinsured; cut the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), making it harder for millions of low-income families to put food on the table; and cut Pell Grants, raising the financial hurdle for people of modest means to attend college.  Despite these and hundreds of billions of dollars in additional cuts that were largely unspecified, the budget included no revenue increases.  And while concerns of future deficits supposedly drive the budget plan’s harsh cuts, repealing the estate tax would significantly expand deficits.

Repeal would: 

  • Reduce revenues by more than $250 billion over the next ten years. The legislation before the House would not offset this cost, contrary to Republican calls for a balanced budget.
  • Do nothing for 99.8 percent of Americans. Only the estates of the wealthiest 0.2 percent of Americans — roughly 2 out of every 1,000 people who die — owe any estate tax.  This is because of the tax’s high exemption amount, which has jumped from $650,000 in 2001 to $5.43 million per person (effectively $10.86 million for a couple) in 2015.  Repeal would bestow a tax windfall averaging over $2.5 million apiece — or roughly the same amount that a typical college graduate earns in a lifetime — on the roughly 5,400 wealthy estates that will owe the tax in 2015.

  • Exacerbate wealth inequality, which has grown significantly in recent decades. In 2012, the wealthiest 1 percent of American families held about 42 percent of total wealth, new data show. Large inheritances play a significant role in the concentration of wealth; inheritances account for about 40 percent of all household wealth and are extremely concentrated at the top.  Repealing the estate tax would exacerbate wealth inequality by benefiting only the heirs of the country’s wealthiest estates, who also tend to have very high incomes.

    In addition, despite policymakers’ frequent statements about the importance of work, repeal would reduce the incentive for heirs of large estates to work.

Evidence shows the estate tax is an economically sound tax.  Contrary to claims that the estate tax hurts the economy, it likely has little or no impact on wealthy donors’ savings, and it encourages heirs to work.  The estate tax is an economically efficient way to raise revenue that supports public services and lowers deficits without imposing burdens on low- and middle-income Americans.  The tax plays an important role in our revenue system, particularly given our long-term budget challenges.

Click here for the paper.

House, Senate Budget Plans Each Get 69 Percent of Cuts From Low-Income Programs

March 23, 2015 at 3:58 pm

The 2016 budget resolutions that the House and Senate will consider this week each cut more than $3 trillion over ten years (2016-2025) from programs that serve people of limited means — representing 69 percent of their cuts to non-defense spending, as we explain in a new analysis (see chart).

The plans are strikingly imbalanced.  While 69 percent of their cuts come from programs for people with low or modest incomes, these programs constitute less than 25 percent of federal program costs.  Moreover, spending on these programs is already scheduled to fall as a share of the economy between now and 2025.

Among the programs that the plans would cut:

  • Health care for low- and moderate-income people. Each plan would repeal health reform, including its subsidies to make coverage affordable for people with low or moderate incomes and its Medicaid expansion, and block-grant much of Medicaid, while also making deep cuts to the program.  These cuts would make tens of millions of people uninsured or underinsured.
  • SNAP (formerly food stamps). The House plan block-grants SNAP starting in 2021 and cuts SNAP funds by $125 billion, or more than a third, over 2021 to 2025.  Cuts of this magnitude would end food assistance for millions of low-income families, cut benefits for millions of such households, or do some combination of the two.
  • Tax credits for low- and modest-income working families. Each plan would let critical provisions of the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) expire at the end of 2017, which would push more than 16 million people, including almost 8 million children, into or deeper into poverty.
  • Other mandatory (i.e. entitlement) programs serving low-income Americans. The House and Senate plans would each cut hundreds of billions of dollars from mandatory programs in the education and income security categories of the budget.  Although each plan lacks specifics, severe cuts would occur to Pell Grants, which help students from families with modest incomes afford college.
  • Low-income non-defense discretionary programs. The House and Senate plans each would make additional cuts on top of the significant reductions required by the Budget Control Act’s discretionary caps and sequestration.  These cuts would shrink the funds available for investments in education, research, and transportation, as well as for low-income programs such as housing assistance, Head Start, and the Low Income Home Energy Assistance Program.

Our assumptions regarding the size of the low-income cuts are conservative.  Where the plan leaves budget cuts unspecified, we assume that all programs in an affected program category would face the same percentage cut, even though some of the programs not targeted only on low- and moderate-income people, such as military retirement programs, would likely be cut significantly less than their equal share, if at all.

Click here to read the full report.

Safety Net Lifted 39 Million Americans out of Poverty in 2013

March 17, 2015 at 8:01 am

As the House Ways and Means Committee holds a hearing today on empirical evidence for poverty programs, it’s worth recalling that safety net programs cut poverty nearly in half in 2013, lifting 39 million people out of poverty.  The figures rebut claims that government programs do little to reduce poverty.

Our analysis of Census data shows that, in 2013:

  • Government policies cut the number of poor Americans by 39 million — from 88 million to 49 million.

    Of the 39 million people, “universal” assistance programs such as Social Security and unemployment insurance, which are widely available irrespective of income, cut poverty by 19 million. “Means-tested” benefits such as rent subsidies, SNAP (formerly food stamps), and the Earned Income Tax Credit (EITC), which target households of limited means, cut poverty by another 20 million.

  • For millions more people, government assistance makes poverty less severe: 34 million poor people were less deeply poor because of safety net benefits.

These figures use the federal government’s new Supplemental Poverty Measure (SPM), which — unlike the official poverty measure — accounts for taxes and non-cash benefits as well as cash income.  (The SPM also makes other adjustments, such as taking into account out-of-pocket medical and work expenses and differences in living costs across the country.) Because the SPM includes taxes and non-cash benefits, it gives a more accurate picture of the impact of anti-poverty programs than the official poverty measure.

Other analysts have recently used SPM data to show the strong impact of poverty programs.  For example,

  • Safety net programs lift thousands of children above the poverty line in every state, from 15,000 in Wyoming to 1.3 million in California, according to the Annie E. Casey Foundation’s Kids Count project.
  • Two tax credits for working families — the EITC and Child Tax Credit — combine to lift more than 9 million people in working families out of poverty, including more than 1 million each in Texas and California, according to the Brookings Metropolitan Policy Program.

If anything, these figures, understate the safety net’s impact. That’s because survey data miss a large share of safety net income due to underreporting by participating households, who often have trouble recalling benefits received months earlier or may feel embarrassed about receiving help.

Key Programs Lay Building Blocks for Kids’ Success

March 16, 2015 at 10:47 am

As Congress begins its budget deliberations, lawmakers should be concerned not only with how they’ll allocate funds next year but also with the long-term implications of their decisions.  Cuts to effective programs that ensure children start life on a positive path, such as WIC and home visiting, and those that help families meet their basic needs, like SNAP, rental assistance, and Medicaid, could prove costly in the long run.

A compelling and growing body of scientific research indicates that children living in unusually stressful situations (such as not having enough food to eat or living in unstable housing) may experience chronic stress levels severe enough (i.e., “toxic stress”) to damage the developing neural connections in their brains, impeding their ability to succeed in school and develop the social and emotional skills they will need to function well as adults.  These early adverse experiences also can undermine the body’s cardiovascular and immune systems, resulting in costly health conditions in adulthood such as diabetes or heart disease.

Jack Shonkoff, a key researcher on toxic stress, and his colleagues note in a recent American Academy of Pediatrics report that the scientific research not only shows the consequences of toxic stress but also points to areas that can help lay the foundation for healthy development:

  • sound and appropriate nutrition that begins with the future mother’s preconception nutritional status;
  • safe and supportive environments that provide spaces free from toxins and fear, allow active exploration without significant risk of harm, and offer support for families raising young children; and
  • a stable and responsive environment of relationships that provide young children with consistent, nurturing, and protective interactions with adults to enhance their learning and help them adapt and respond to life events in a healthy way.

As Shonkoff says:

Sound health in early childhood provides a foundation for the construction of sturdy brain architecture and the achievement of a broad range of skills and learning capacities. Together these constitute the building blocks for a vital and sustainable society that invests in its human capital and values the lives of its children.

This research provides a compelling case for investing in children, especially when they are very young and their life experiences are fostering — or hindering — their brain development.  Cutting programs that make a positive difference in children’s lives will cost kids, their families, and the economy much more than it saves in the years to come.