In Focus: Refundable Tax Credits

Mar 18, 2016  |  PERMALINK »

Young Child Tax Credit Would Offer Help during a Critical Developmental Period

By Helly Lee

This month, Congresswoman Rosa DeLauro (D-CT) introduced the Young Child Tax Credit Act, which would provide families that have young children under the age of 3 with an additional $1,500 refundable tax credit per child, with no minimum income threshold. The bill would also establish a program for making advance payments of the credit—rather than paying a lump sum at tax time—allowing the credit to be used for ongoing needs. For example, if the credit were paid in monthly installments, families would receive $125 a month for each qualifying child.

A Young Child Tax Credit could help working parents who are struggling to make ends meet. Increased investment for families with young children is important because these first few years of life are a critical developmental period. In addition, infants and toddlers require both the care and attention of their parents and more material needs such as diapers, formula, and child care, which is more expensive for infants. Children growing up in poverty may experience hardships such as food insecurity and inadequate health care or housing. Poverty can also create pressure and stress on parents that can interfere with all aspects of their life, including their parenting. Young children in poor families face negative impacts in early development that can have lasting consequences for their future health, education, and economic success. Interventions at this early part of a child’s life are critical and can have particularly high pay offs.

The Young Child Tax Credit would also build on the success of other existing tax credits for working families such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), which are critical supports that help families make ends meet and have been shown to promote work, reduce poverty and support children’s development in the short and long run.

Proposals such as the Young Child Tax Credit can have deep impact on the lives of low-wage earning parents and their young children. A Center for American Progress paper shows that a Young Child Tax Credit would reach several disadvantaged groups of children who are underserved by the current CTC because their caregivers tend to have disproportionately lower earnings. Two-generational approaches that focus on the needs of both parents and children – in this case, helping low-income working parents access additional resources for their young children – increasingly are becoming recognized as an effective model to support families living in poverty. While $1,500 a year will not meet all of a young child’s needs, when that amount is coupled with expanded investments in child care assistance and other supports including the EITC and CTC, these resources can go further to make a difference in the lives of our country’s youngest children.

CLASP applauds Representative DeLauro for her leadership in proposing this important investment in supporting young children and their families during the critical early years.

Jan 7, 2016  |  PERMALINK »

All Workers Should Benefit from the EITC

By Nune Phillips

In December, Congress passed a budget that includes tax provisions to support families’ economic security. As CLASP highlighted, Congress made permanent increases to the Earned Income Tax Credit (EITC) for certain families with children, reduced the marriage penalty for those claiming the EITC, and lowered the income threshold for workers to qualify for the refundable Child Tax Credit (CTC). This marks a major victory for low-income working families, but there is much left to be done. Congress should build on these steps by extending tax benefits to workers without children.

The EITC is essential to poverty reduction; it incentivizes workforce participation for impoverished adults. However, childless adults (including noncustodial parents) receive only a modest EITC, and those under age 25 and over age 64 are ineligible for the credit. The maximum EITC for childless adults is $500; however, the Center on Budget and Policy Priorities notes that these workers receive just $270 on average. Eligibility phases out as income increases. As highlighted in President Obama’s expansion proposal, childless adult workers who reach the federal poverty line (FPL) receive just half of the EITC credit, and those working full time in minimum-wage jobs receive less than $25.

Expanding the tax credit for childless adults and modifying the age limit will help individuals who cannot find full-time work. Further, it will encourage young adults to create the foundation for a lifetime of workforce participation. The president’s proposal would increase the maximum credit to $1000, increase the eligibility threshold to 150 percent of FPL, and expand the age qualification to 21-66 years old. These changes would benefit an additional 8.5 million workers who would become eligible for the EITC, including millions in low-wage industries such as retail, restaurants, sanitation, and labor.

New York City is currently implementing a pilot project, Paycheck Plus, to measure the effects of an expanded EITC for childless workers earning less than $30,000 per year. The project includes 6,000 single adult participants, half of whom were selected at random to receive a bonus EITC credit. The bonus group, which is eligible for a $2,000 maximum credit for up to three years, reflects a mix of workers; 12 percent are noncustodial parents and 18 percent have previously been incarcerated. Early results from MDRC indicate positive effects. For the 2015 tax season, 46 percent of participants were eligible for a bonus and the average benefit was roughly $1,400. MDRC estimates that 65 percent of those participating worked in 2014; the employment rate change is not yet known, but it is expected that participation in the Paycheck Plus program resulted in an increase. A similar demonstration is underway in Atlanta. 

Proposals to expand the EITC to childless workers have received bi-partisan support; however, Congress has yet to act to implement the change. House Speaker Paul Ryan (R-WI) has previously called for such an expansion and is uniquely positioned to advance legislation as part of his poverty agenda in 2016.  We look forward to working with Congress expand the EITC to childless workers, including young adults and non-custodial parents.

Dec 18, 2015  |  PERMALINK »

Permanent Improvements to EITC and CTC, but More to be Done

By Helly Lee and Elizabeth Lower-Basch

Earlier this week, the House of Representatives passed a major tax bill that extends many expiring tax provisions, making some of them permanent. This bill is expected to pass the Senate along with the omnibus spending bill and be signed into law next week.

In a major victory for low-income working families and students the bill makes permanent what were previously time-limited extensions of improvements to three critical refundable tax credits -- the Earned Income Tax Credit (EITC), Child Tax Credit (CTC) and American Opportunity Tax Credit (AOTC). These improvements, originally passed in the Recovery Act of 2009, would otherwise have expired in 2017, pushing millions more families into, or deeper into, poverty. In 2014, the EITC and CTC reduced overall poverty by 3.1 percentage points and child poverty by a remarkable 7.1 percentage points.  The AOTC benefits students and their parents by making college more affordable.

Specifically, the bill makes permanent a modestly larger EITC for families with three or more children, marriage penalty relief by increasing the income phase-out range for married couples filing jointly, and it allows low-income workers who earn at least $3,000 to begin to qualify for the refundable CTC. Without legislation, these improvements would have expired at the end of 2017, and the AOTC would have been replaced by the non-refundable HOPE credit. (Non-refundable credits are not available to taxpayers who earn too little to owe federal income taxes.) For example, if the improvements to the CTC had been allowed to expire, a single mother of two children working full-time at the minimum wage would not have received any benefit from the CTC, because all of her earnings would have been under the threshold at which low-wage workers begin to qualify.

Unfortunately, the bill also includes some provisions that may make it more burdensome for non-citizens to obtain Individual Taxpayer Identification Numbers (ITINs) in order to file taxes. CLASP will monitor the implementation of these provisions. The bill also singles out tax filers with new social security numbers and prohibits them from retroactively claiming the EITC.  In addition, the bill would prevent all EITC and CTC recipients from receiving their tax refunds prior to February 15. These provisions unfairly target low-income workers for higher levels of scrutiny than other taxpayers, and they disadvantage children in low-income working families who are crucial to the nation’s future and who benefit from the economic stability provided by the credits.  Moreover, the bill fails to give the Internal Revenue Service authority to regulate paid tax preparers, which would be more effective in controlling fraud and abuse.  The bill does contain some helpful provisions, such as making higher education institutions provide students with forms showing the amount they paid towards tuition and fees, not just the amount billed.

In addition, we continue to urge Congress to expand the EITC for childless workers, which has received strong bi-partisan support. Under current law, workers without children are only eligible for a nominal credit and are denied the EITC entirely if they are under the age of 25. This has a significant impact on young, low-wage workers who are struggling to make ends meet. The expansion of the EITC for childless workers will also have a significant impact on low-wage workers of color. Of the 13.5 million childless workers who stand to benefit from an expansion of EITC, nearly 40 percent are Latino (3.3 million) and African American (2 million).

While the official estimated cost of the overall tax package is a hard to conceive $622 billion dollars, this figure is misleading; most of the business tax provisions in the bill have been extended year after year, without being paid for. In the absence of this bill, there was a real risk that the business tax provisions would have been extended, while low-income families were left out in the cold. While ultimately we will need tax reform that brings in needed revenue in order to adequately fund critical programs, this package is an important step forward for low-income families and students.   

site by Trilogy Interactive