In Focus: Refundable Tax Credits

Sep 17, 2015  |  PERMALINK »

Refundable Tax Credits Significantly Reduce Poverty, But Key Provisions are at Risk

By Elizabeth Lower-Basch

New U.S. Census data provides striking evidence of the effectiveness of refundable tax credits, such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).  In an analysis using the Supplemental Poverty Measure (SPM), which takes taxes and non-cash transfers into account, the Census found that child poverty (as measured by the SPM) would be more than 40 percent higher if these credits did not exist.  In 2014, they reduced overall poverty by 3.1 percentage points and child poverty by a remarkable 7.1 percentage points.

This calculation only takes into account the income transferred by the EITC and CTC. So while these figures are impressive, they don’t capture the credits’ strong role in promoting work and increasing labor force participation by low-income parents, as documented in multiple studies. These credits also offset possible work disincentives—that might otherwise result from means-tested programs that phase out, such as cash assistance under TANF.  Research now suggests that the EITC and CTC also lead to improved educational outcomes—including improved test scores, higher high school graduation rates, and higher college attendance rates—for young children in low-income households.

However, critical improvements to the EITC and CTC are scheduled to expire at the end of 2017 if Congress does not act. These include marriage penalty relief, a modestly larger EITC for families with three or more children, and allowing low-income workers to qualify for the refundable CTC starting at $3,000 (rather than the $14,700 that would otherwise be needed to qualify).  These changes help ensure that work pays for the lowest-income workers.  According to the Center on Budget and Policy Priorities, more than 16 million people in low- and modest-income working families, including 8 million children, will fall into—or deeper into—poverty in 2018 if policymakers don’t make these key provisions permanent. Some 50 million Americans, including 25 million children, would lose part or all of their tax credits.

Unfortunately, while bills to extend these critical provisions have been introduced in both the House and Senate, Congress has yet to take action. Instead, the House Ways and Means Committee voted today along party lines to reinstate and permanently extend five tax breaks, mostly benefiting large corporations.  If enacted, these bills would increase the deficit by more than $400 billion over the next decade and make it harder for Congress to agree on a budget deal that mitigates the ever-increasing cuts to discretionary spending, including job training, child care, and other programs for low-income people.  Congress should only consider corporate tax extenders in the context of a balanced package that continues EITC and CTC improvements and generates enough revenue to end the threat of a sequester.

Mar 13, 2015  |  PERMALINK »

House and Senate Members Join Efforts to Strengthen Critical Tax Credits

By Helly Lee

Refundable tax credits, such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) are a critical support for low- and moderate-income working families. They encourage work and help families lift themselves out of poverty by offsetting some of the rising costs of raising children. Research has shown that these tax credits have long-lasting benefits, such as higher educational achievement among children, as well as increased work effort and earnings in adulthood.  However, unless Congress takes action, in a few years, some of the lowest-income working families will get less benefit from these credits.  If Congress undertakes tax reform this year, it is critical that efforts to make permanent and strengthen credits that support working families are a priority.

Last week, Representatives Lloyd Doggett (TX), Richard Neal (MA), Rosa DeLauro (CT), and Sander Levin (MI) joined Senators Dick Durbin (IL), Chuck Schumer (NY), Patty Murray (WA), Sherrod Brown (OH) and Michael Bennet (CO) to unveil a package of proposals to support working families. These bills stake out an agenda as Congress begins working on tax reform.

In the House, Congressman Neal’s Earned Income Tax Credit Improvement and Simplification Act, H.R. 902 makes permanent key improvements to the EITC included in the 2009 American Recovery and Reinvestment Act (ARRA), which expanded the EITC for families with three or more children. These larger families can now receive up to $672 more than they would have without the ARRA change, which is set to expire in 2017. It also expanded marriage penalty relief in the EITC, allowing married couples to receive larger benefits at modestly higher income levels. These two improvements aided an estimated 600,000 people in lifting themselves out of poverty and reduced the severity of poverty for approximately 10 million people in 2013.

H.R. 902 would also expand EITC for childless workers – a provision that has gained strong bipartisan support. Low-wage workers without children are the only category of people taxed further into poverty. The current EITC, which offers only modest credits to childless workers, is not enough to lift them out of poverty as it does for millions of families with children.

Congresswoman DeLauro’s bill, the Child Tax Credit Permanency Act, H.R. 1286, would make permanent the improvements that ARRA made to the Child Tax Credit (CTC) and adjust the CTC to inflation. Before ARRA, the minimum income amount used to calculate the refundable portion of the CTC was set to increase to $12,550. This meant that a family needed to make at least that amount to be eligible; however, ARRA lowered that threshold to $3,000, allowing very low income families access to the credit. Much is at stake for Congress to address these two important tax credits. Unless Congress acts, key improvements in the EITC and CTC are set to expire in 2017, which could cause 16 million people in low- and moderate-income working families to fall into – or deeper into – poverty.

Senators Brown and Durbin announced the Working Families Tax Relief Act,  which expands and extends the EITC and CTC in addition to making the Recovery Act expansions on both credits permanent.  This bill was introduced in the last Congress, and will likely be re-introduced in the coming weeks. Like Congressman Neal’s H.R. 902, this bill would also expand the EITC for childless workers and index the CTC to inflation.

Congressman Doggett’s bill, the American Opportunity Tax Credit Act, H.R. 1260, includes improvements to the American Opportunity Tax Credit (AOTC), which supports families to offset the rising cost of college by increasing the tax credit they can receive per student. The bill makes the AOTC permanent and consolidates it with the Lifetime Learning Credit into one simplified AOTC that would provide families up to $2,500 per year, per eligible student, with a maximum refundable credit of $1,500. It also replaces the number of years a student can use the AOTC with a $15,000 lifetime limit cap and improves the coordination between Pell Grant and AOTC. Furthermore, H.R. 1260 would expand eligibility for part-time students.  Senator Schumer has introduced a similar bill (S. 699) that would also increase the maximum AOTC amount to $3,000 per year, per student, and would allow families earning up to $200,000 per year to be eligible (or, $100,000 for a single filer), an increase from the current level of $180,000 for joint filers and $90,000 for single filers. 

Senators Murray and Bennet also joined in introducing the Helping Working Families Afford Child Care Act, which makes changes to the Child Dependent Care Tax Credit (CDCTC), which is intended to defray the cost of child care for working families. The bill would increase the amount of child care expenses families can count toward the credit and make the credit refundable. It also phases out eligibility for the credit so that higher-income families would receive less credit. Other CDCTC bills have been introduced in the Senate, but were not a part of this package announcement.

Senator Murray also introduced the 21st Century Worker Tax Cut Act, which would create a new tax credit for households with two working parents. Couples must have earned income, file taxes jointly, and have at least one child under age 12 to be eligible. Senator Murray’s proposal includes a 10 percent credit on up to $10,000 of the secondary earner’s income, allowing qualified families to reduce their income tax by up to $1,000.

The Obama Administration supports efforts to make permanent key improvements and strengthen critical tax credits. President Obama’s 2016 budget proposed a number of the improvements echoed in the proposed package of tax credits to support working families. The president’s budget also proposed to create a new $500 second-earner tax credit, expand the EITC for workers without children and non-custodial parents, and make the Recovery Act improvements permanent. In addition, the president’s budget would increase the maximum Child and Dependent Care Tax Credit (CDCTC) for families with children under age five and make the credit available to families with incomes up to $120,000. Finally, the president’s budget proposes to make the AOTC permanent, increase the refundable portion to $1,500, and expand eligibility to include part-time students.

On the Republican side, Senators Rubio (FL) and Lee (UT) also released a framework for a tax reform they promote as being pro-family.  However, the new child credit they would create is only partially refundable, which would leave out many of the lowest-income families.  As Congress begins to discuss tax reform, it is important to ensure that low-income working families are not left behind.

These efforts are a critical starting point in the coming months as members of Congress discuss tax policies. The lives of millions of hard-working Americans will be affected by the actions, or inactions, of Congress to support these working-family tax credits.

Jan 22, 2015  |  PERMALINK »

State of the Union Address Reiterates Need for Improving Tax Credits

By Helly Lee

In Tuesday’s State of the Union Address, President Obama highlighted the importance of “helping folks afford child care, college, health care, a home, retirement [by] lowering the taxes of working families, and putting thousands of dollars back into their pockets each year.”

The president reiterated his commitment to making permanent the 2009 Recovery Act improvements to the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) that are set to expire in 2017,  as well as expanding the EITC for workers without children and noncustodial parents.

The president’s efforts to lower the taxes of working individuals to help them support their families are important and will ensure that future tax policies do not leave out middle- and low-wage earners. The EITC and CTC have been shown to effectively help lift families out of poverty, and more needs to be done to strengthen these credits permanently for working families.  The Recovery Act improvements to the EITC added a “third tier” for families with more than two children that increases the credit by up to an additional $672. Another EITC improvement is a reduced “marriage penalty” for some two-earner couples. Together, these EITC improvements lifted nearly 600,000 people out of poverty and reduced the severity of poverty for roughly 10 million people.

The Recovery Act improvements also lowered the CTC’s earnings exclusion so that all but the first $3,000 in earnings count toward the determination of the family’s CTC.  Before this change, the earnings exclusion was set to rise to $12,550, which would deny the full value of the credit to the lowest income working families, who need it the most. This improvement allows more low-income families to get a larger credit and millions more to qualify for a partial credit. Should Congress allow the CTC and the EITC improvements to expire, it will push 16 million people into -- or deeper into --poverty.

The president’s plan includes expanding the EITC for workers without children.  This is identical to his proposal from last year, which was also adopted by Representative Paul Ryan (R-WI) as part of his budget proposal. This will have a significant impact on young workers, non-custodial parents, and workers nearing retirement. Under current law, low-income workers without children receive little or nothing from the EITC. As a result, childless workers are the only group of people that the federal tax system taxes deeper into poverty. Expansion of the EITC for childless workers has garnered bipartisan support because it has proven to promote work, alleviate poverty and supplement low wages.  

President Obama spoke in depth about the importance of affordable and quality child care and his plan to simplify and expand the child and dependent care tax credit up to $3,000 per child annually. Under this proposal, the maximum child care credit would cover 50% of child care expenses up to $6,000 for children under the age of 5, and it would be available to many more middle-income families. This tax credit would remain non-refundable, which means that it would not benefit families whose incomes are too low to owe federal income taxes. However, in the State of the Union address, the president also called for additional funding to expand the number of children who are able to attend affordable, high-quality child care.

President Obama also proposed consolidating a number of tax benefits for higher education into an improved and permanent American Opportunity Tax Credit (AOTC), which would be made more refundable and available for the first time to students attending college less than half time.  Finally, the president proposed a new tax credit for dual-income married couples, recognizing that work expenses can reduce the benefits of employment for second earners.

CLASP looks forward to working with the Administration and Congress in the upcoming year on advancing common-sense policies, including strengthening refundable tax credits that will support working individuals and families.

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