In Focus: Refundable Tax Credits

Apr 15, 2013 | Permalink »

Highlighting State EITC Efforts on Tax Day

It’s tax day and for many months now, Volunteer Income Tax Assistance (VITA) sites across the country have assisted working families with their taxes in time to meet today’s deadline. By filing taxes, many low wage workers and families are able to get important refundable tax credits. Among these is the Earned Income Tax Credit (EITC), one of the largest anti-poverty programs having reached more than 27 million families and individuals in 2012 and that has far-reaching work, income and health benefits for its recipients. In fact, EITC lifted 6 million people out of poverty in 2011, according to the latest Supplemental Poverty Measure.

Because of the federal EITC program’s proven anti-poverty success, many states have adopted similar state-level Earned Income Tax Credits added onto the federal EITC. Low-income families and individuals who are eligible for the federal EITC are also eligible for the additional state EITC. Currently, 26 states provide a state EITC, 23 of which provide a refundable or partially refundable EITC. In facing tough budget decisions, however, many states have turned to the EITC as a place to cut costs while other states are pushing for improvements to their state programs.

Large Share of Tax-Based Student Aid Goes to Higher Income Families

By Center for Postsecondary and Economic Success

This is fourth in a five-part series highlighting work from CLASP’s recent publication, Reforming Student Aid: How to Simplify Tax Aid and Use Performance Metrics to Improve College Choices and Completion. The paper was written as part of the Bill & Melinda Gates Foundation project Reimagining Aid Design and Delivery.

To maximize the nation’s investment in student aid, we must target resources to low- and modest-income families -- those most likely to respond to incentives to enroll in and complete college. Unfortunately, tax-based student aid provides substantial support to individuals who are already highly likely to attend college and so may have little effect on access or completion for these students. In 2013, the Tax Policy Center estimates that 25 percent of the benefits of American Opportunity Tax Credit (AOTC) will go to families making more than $100,000 per year; 29 percent of the benefits of the Lifetime Learning Credit (LLC) will go to families making more than $75,000; and almost half of the benefits of the Tuition and Fees Deduction will go to households with annual incomes of $100,000 or more.

According to the National Center for Education Statistics, in 2010, the immediate college enrollment rate—the percentage of high school completers who enroll in two- or four-year colleges in the fall immediately after completing high school—was 52 percent for low-income families (bottom 20 percent of income), 67 percent for middle-income families (middle 60 percent of income), and 82 percent for high-income families (top 20 percent of income, approximately $100,000 for all tax units).

We can do better. By simplifying and better targeting tax-based student aid--and delivering it in “real time” instead of just when taxes are due--we can make tax aid more like grant aid, which has been shown to increase college enrollment by low- and moderate-income students and reduce their chances of dropping out. See our recent report for these and other policy recommendations on how to reform student aid.

Figure 1: Distribution of Tax-Based Aid Versus Pell Grants

Source: CLASP, based on data from the Tax Policy Center.

Mar 05, 2013 | Permalink »

Tax-Based Student Aid Quadrupled – Largely Unnoticed – Over the Past Decade

This is third in a five-part series highlighting work from CLASP’s recent publication, Reforming Student Aid: How to Simplify Tax Aid and Use Performance Metrics to Improve College Choices and Completion. The paper was written as part of the Bill & Melinda Gates Foundation project Reimagining Aid Design and Delivery.

From 2000 to 2010, tax-based aid grew from $7.4 billion to $32.4 billion, a more than four-fold increase. Despite making up nearly half of the nation’s investment in non-loan aid, it goes largely unnoticed both by policymakers and beneficiaries. According to Suzanne Mettler, Professor at Cornell University, almost 60 percent of individuals who claim a higher education tax credit do not realize they have received help from the government to pay for college.

One problem with this “stealth” aid – and a big reason for its invisibility – is that it doesn’t reach students and parents when they need it most — when college bills are due. Rather, this aid, which is built into annual income tax filings, can be delayed as long as 16 months. Moreover, students and parents may not even realize this aid is available until filing their taxes, if at all, further weakening the potential impact of this aid on college access and completion.

For a federal investment topping $34 billion annually, which rivals the Pell Grant program, shouldn’t we expect more? We can start to address these issues by simplifying and better targeting tax-based aid and piloting “real-time payment” of the American Opportunity Tax Credit (AOTC) to deliver this aid to students when they enroll, not just at tax time. Read our report for these and other policy recommendations to make our growing investment in tax-based aid work better.

Historical Spending on Tax-Based Aid

Notes: Figures are in constant dollars (2010). "Other tax benefits include other education tax benefits for postsecondary education, such as the above-the-line deduction for tuition and fees and employer-provided educational assistance.
Source: CLASP based on data from the Office of Management and Budget.