Critical Tax Credits for Working Families Need to be Preserved
by Alan W. Houseman
On Tax Day, much of the talk will be around the tax rate for wealthy Americans making over a million dollars a year. And a great deal will be written about the problems with our federal tax system, the need for simplification of the tax code, deficit reduction and whether and how we should address preferential treatment and tax credits. Often overlooked is the critical role in reducing poverty and improving the lives of low-income people of two tax credits: the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).
The EITC is a federal tax credit for low- and moderate-income working families. Eligibility for and the amount of the EITC depends on the income, marital status and number of children of the family. For example, working families with children with annual incomes below $36,900 to $50,300 are eligible. Over 27 million working families receive the EITC -- nearly one in five families in the United States.
The CTC helps offset the cost of raising children by up to $1,000 per child. To be eligible a family must earn $3,000, but families that earn between $3,000 and $9,667 receive only a partial credit and families with more than one child must earn $16,000 to receive the full credit.
These two tax credits have an enormous anti-poverty impact on low-income families. According to our colleagues at the Center on Budget and Policy Priorities (CBPP), in 2010 the EITC lifted 6.26 million people above the poverty line, including 3.3 million children and the CTC lifted 2.6 million people above the poverty line, including 1.4 million children.
Both the EITC and the CTC were expanded by the 2009 American Recovery and Reinvestment Act (ARRA) and continued for two more years in December of 2010. ARRA provided EITC tax credits to families with three or more children adding up to $655 in tax credits and allowed married couples to receive larger benefits. ARRA also reduced the zero credit threshold from $8,500 to $3,000 of wages and allowed a family to receive a credit of 15 cents for each dollar of wages above that level. A family with two children now is able to receive the full credit when its earnings reach $16,333.
These expansions by themselves made a significant difference in the income available to low-income people. Data from CBPP indicates that the CTC expansion kept over 1 million people out of poverty and the EITC kept 490,000 people out of poverty.
As we continue to debate how to improve our tax system and how to address the deficit, we need to make sure that we do not harm vulnerable low-income people. Because the EITC and CTC extensions will expire at the end of 2012, it is critically important to ensure that they are continued in whatever tax decisions are made in December 2012 and that low-income families continue to benefit and are not harmed by the end-of-the-year high stakes negotiations.