In Focus: Refundable Tax Credits

May 28, 2014  |  PERMALINK »

New York’s Paycheck Plus Pilot Can Inform EITC Expansion Policies

By Helly Lee

Recently, MDRC released a brief providing more details about their pilot to test an expanded Earned Income Tax credit (EITC) in New York.  The Paycheck Plus pilot tests a new, EITC-like earnings supplement for low-income workers.   Targeting those earning between $6,667 and $18,000, the pilot recruited over 6,000 individuals, half of whom were randomly selected to receive a supplement of up to $2,000 a year for three years (for earnings from tax years 2014, 2015, and 2016).  The other half of the study participants form a control group that is not eligible for the supplement.

The Paycheck Plus pilot sought to include participants with significant financial challenges, including non-custodial parents, those who were formerly incarcerated, and individuals with little or no earnings.  The supplement will only be available to those participants in the experiment group who work and file taxes.  A select subset of individuals eligible for the Paycheck Plus supplement will also be given referrals to employment services.  These efforts will assess whether combining the supplement with assistance produces larger effects.  The pilot project will be implemented through 2017.

Pilots like Paycheck Plus can help inform future policymaking by showing the impact of enhanced EITC proposals for low-wage earners.  The pilots provide a unique opportunity to analyze the effect a policy can have on a specific population and gather best practices that may be scaled up to a national level. 

Federal policymakers are recognizing more and more the importance of expanding the EITC to better serve low-wage workers.  Recently, President Obama proposed expanding and strengthening the EITC for childless adults, including modifying the age limits. In addition, three congressional proposals (the Working Families Tax Relief Act of 2013; the Earned Income Tax Credit Improvement and Simplification Act of 2013; and the EITC for Childless Workers Act of 2014) have been introduced to strengthen the EITC for childless workers.   These proposals require Congressional action in future tax policy debates, which can be informed by lessons learned from local pilots.

The Earned Income Tax Credit (EITC) is known to have long-lasting benefits for low-wage workers and their families.  As we’ve written before, the EITC is one of the nation’s largest and most effective anti-poverty programs.  In 2012, the EITC lifted 6.5 million people, including 3.3 million children, out of poverty and made work pay for low-earning parents.  However, the EITC offers less help for adults without dependent children, including non-custodial parents.  Their average credit is about $270—less than one-tenth of the average credit for filers with children.  An estimated 5.8 million workers under 25 and over 64 are ineligible simply because of their age.

Childless adult workers are the only group taxed into poverty.  In 2012, federal income and payroll taxes pushed 1.2 million childless workers into poverty and another 5.8 million deeper into poverty.  Expanding the EITC for this population will reduce poverty among childless workers and incentivize work.  We look forward to learning from Paycheck Plus as it is implemented, and we will continue to advocate for national policies that better support low-wage workers. 

Mar 20, 2014  |  PERMALINK »

The Universal Credit: Not a Universal Solution

By Helly Lee

This year marks the 50th anniversary of the War on Poverty, a campaign that put in place the essential social safety net that helped keep millions of Americans out of poverty. Policymakers have used this occasion to highlight their ideas for an economic agenda. One of the most prominent voices has been that of House Budget Committee Chairman Paul Ryan (R-WI), who recently cited the United Kingdom’s Universal Credit as a model to consider here in the United States.

The Universal Credit is a major safety net overhaul implemented in the United Kingdom that merges a half dozen income assistance programs -- including cash benefits, tax credits, and housing subsidies -- into a single credit for low-income individuals and families. While the concept of simplifying multiple programs may seem appealing in theory, policymakers should take note of cautionary lessons from the United Kingdom’s experience. CLASP has collaborated with the Center for American Progress (CAP) and the Center for the Study of Social Policy (CSSP) on Universal Credit: A Primer, a brief that provides an explanation of the Universal Credit for U.S. audiences. The timely release of this brief aims to equip policymakers and advocates with a deeper knowledge of the Universal Credit and the reasons why such a model could be harmful for the U.S. safety net in serving its poor.  In particular, the brief highlights the fact that the Universal Credit is being implemented in the context of austerity-driven cuts to the social safety net that make benefits less responsive to changing economic conditions.  Moreover, low-income individuals and families need multiple ways to apply for benefits, not just online portals as provided in the U.K. program.

Policies aimed at improving the safety net can only work if they are backed up by the investments needed to insure that low-income workers can meet their families' basic needs and succeed in the workplace.  For a number of years, the U.K.'s commitment to reducing poverty was backed up by such investments and was making a demonstrable difference. Deep cuts to safety net programs in the U.K. are threatening to undo years of progress in reducing child poverty. The U.S. should certainly not emulate that part of the U.K. changes.

The brief notes that since the U.K. safety net structure is significantly different from the U.S. federal-state partnership, the concept cannot simply be transposed into our system. The Universal Credit also starts with programs that provide more basic assistance than what is available in the U.S. and sits on top of a universal health care system. These key differences are important for policymakers to understand and consider when thinking about reform here.

In the U.S., other efforts have been underway to improve access to benefits, such as the Work Support Strategies (WSS) Initiative which supports multistate demonstration projects to test and implement more effective, streamlined and integrated approaches to delivering key services. Strategies like WSS recognize the important role that states play in providing services and delivering critical programs. 

CLASP believes low-income families should have access to the range of income- and work-support programs needed to get back on their feet during times of difficulty, and to thrive at all times. The success of our system should not be measured by the number of programs, but by whether needy individuals have access to benefits that meet basic needs, respond to economic conditions, and support workers and families.

Mar 6, 2014  |  PERMALINK »

President Proposes Expanding and Strengthening EITC To Youth and Childless Adults

By Helly Lee

On Tuesday, President Obama released his FY 2015 budget, which includes a proposal to expand and strengthen the Earned Income Tax Credit (EITC) for low-income childless workers, including non-custodial parents.

EITC is one of the country’s most important anti-poverty programs. In 2012, it benefited over 27 million Americans, lifting 6.6 million people (including 3.3 million children) out of poverty. The program has long been known to encourage work among low-income people because one must be employed to be eligible for the credit.  However, individuals without dependent children are only eligible for a very small credit—a maximum of about $500—and begin to lose the benefit even before their earnings reach the poverty threshold.

In his budget, President Obama proposes doubling the maximum credit for childless workers to about $1,000 and increasing the income limit to qualify for the credit from less than $15,000 to $18,000. In addition, the President proposes to make the EITC available for young workers age 21 and over and older workers up to age 67, consistent with the rising Social Security full retirement age. The current age limits are 25 to 65. The proposed changes would have a significant impact on low-income workers who do not currently have access to the EITC.

Young adults, especially those with limited education and skills, continue to face employment challenges in our still recovering economy. They disproportionately work in low-wage jobs without a career path and are among the millions of the working poor. This proposal is significant because those newly eligible would include 3.3 million working young adults ages 21 to 24.  Full-time students who can be claimed as tax dependents would not qualify for the EITC.

Research has shown the lasting benefits of the EITC, notably that it promotes work and raises the income of low-wage workers. This proposal to expand and strengthen the program is critical to helping low-wage workers address major financial challenges.

The President’s budget also proposes to make the 2009 American Recovery and Reinvestment Act (ARRA) improvements to the EITC and the Child Tax Credit (CTC) permanent. ARRA 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 this change. It also expanded marriage penalty relief in the EITC, allowing married couples to receive larger benefits at modestly higher income levels. These two improvements lifted an estimated 600,000 out of poverty and reduced the severity of poverty for approximately 10 million people in 2012. Under  ARRA, the CTC was also expanded,  reaching more low income working families and increasing the credit amount for current recipients. This change lifted 900,000 people out of poverty in 2012. These improvements to both the EITC and CTC are set to expire in 2017 unless Congress makes them permanent.

The EITC has long received bipartisan support because it is recognized as a program that successfully encourages and rewards work. As debates around tax reform continue, CLASP will remain steadfast in our support for strengthening these critical tax credits for low-income families.

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