In Focus: Refundable Tax Credits

Jun 7, 2016  |  PERMALINK »

Strengthening the Social Safety Net: Building on What Works—and Avoiding Bad Ideas


Today, U.S. House Speaker Paul Ryan (R-WI) acknowledged the effects of poverty on too many Americans yet offered the wrong solutions. Instead of building on what works—such as the Earned Income Tax Credit (EITC), expanded Head Start and child care subsidies, and nutritional assistance—the policy paper released this morning by Speaker Ryan offered the same tired answers of consolidations, cuts, waivers, and participation requirements that have been shown to undermine the effectiveness of key income and work support programs.

Building on what works

The safety net works to reduce poverty, improve families’ wellbeing, and—according to strong emerging evidence—improve the long-term life chances of children who benefit from key programs. In 2014, the U.S. Census Bureau’s Supplemental Poverty Measure (SPM) shows that refundable credits, such as the Earned Income Tax Credit and Child Tax Credit, reduced overall poverty (as measured by the SPM) by 3.1 percentage points and child poverty by a remarkable 7.1 percentage points. Similarly, Supplemental Nutrition Assistance Program (SNAP) benefits reduced overall poverty by 1.5 percentage points and child poverty by 2.8 percent. Researchers at Columbia University who used similar methods to analyze the effect of these key programs found that in 2012, the most recent year with available data, government tax and transfer policies reduced the share of people who are poor by almost half, from 29 percent to 16 percent. By contrast, in 1967, tax and transfer programs reduced poverty by just 1 percentage point, from 27 percent to 26 percent.

Recent rigorous studies of both SNAP and public health insurance have demonstrated the positive effects of access as a child to these safety net programs on life outcomes into adulthood. Having access to SNAP in early childhood improves adult outcomes including health and economic self-sufficiency. Expanding health insurance coverage for low-income children has large effects on high school completion, college attendance, and college completion.

At a Center for American Progress event this morning, U.S. Senator Sherrod Brown (D-OH) called for an expansion of the EITC for adults without minor children and recommended that recipients be able to access a portion of their benefits in advance (rather than waiting on an annual income tax refund), in order to meet urgent needs and avoid high-cost payday loans. Working childless adults are the only group taxed into poverty. Young adults ages 18 to 24—who have the highest joblessness rate in the country—are completely ineligible for the EITC if they don't have children; those young adults who are working have higher poverty rates than the overall population and would significantly benefit from an expansion of refundable tax credits. Mr. Ryan has previously supported an EITC expansion to bolster the earnings of these low-income workers, but there is no mention of such an expansion in today’s proposal.

Avoiding what doesn't work

The proposal explicitly uses the Temporary Assistance for Needy Families (TANF) block grant as a model to be replicated to other public assistance programs operating at the federal level—even though the history of TANF shows vividly why block grant programs don’t work. The value of the TANF block grant has fallen by 33 percent over the last 20 years, leaving fewer than 1 in 5 poor children with any help at all from the program (and fewer than 1 in 10 in 17 states). And unlike the core safety net programs like Medicaid and SNAP that provided more help to states, families, and communities when revenues shrank and need rose during the Great Recession, TANF barely responded at all because of its capped resources —failing states and families when they needed help the most. The block grant has also given states so much flexibility in the use of federal and state expenditures that basic monthly assistance accounts for only 27 percent of spending under TANF (and work programs for only 8 percent); instead program funds have been used to plug holes in state budgets or to support other social programs that may vaguely meet one of the core statutory purposes of TANF.

The proposal also doubles down on work mandates—for example, in housing assistance programs—even though work requirements without strong public investment in jobs and training typically serve only to cut poor individuals off from help they need, rather than helping them get jobs. These so-called requirements also ignore the evidence that most poor families are already working—what they need most is stability in their lives (including a stable place to live, health care, and child care) and the opportunity to move up at work. Far from being an example of success, the provisions governing work in TANF fly in the face of research evidence about what helps families succeed at work. For example, TANF's work participation rate requirement limits the type of countable work-related activities, making it challenging for those participants with severe barriers to employment—such as a physical or mental disability, very low educational attainment, or persons with criminal records—to fully engage in activities mandated by the work requirement. States are rewarded for cutting such families off of assistance, which has led to an increase in deep poverty. By contrast, the Workforce Innovation and Opportunity Act (WIOA) of 2014, which Congress passed in a nearly unanimous bipartisan vote, emphasizes effective skills training leading to postsecondary credentials that employers recognize as having value in the labor market, which research has found to be “the most important determinant of differences in workers’ lifetime earnings and incomes.”

Another example of the bad ideas in this proposal is one that builds on ill-advised provisions of the House child nutrition reauthorization bill, which would shrink coverage of the very successful community eligibility provision and inappropriately increase verification paperwork for families, creating additional barriers for low-income children who need access to free or reduced price meals in order to succeed at school. The House bill also includes a three-state block grant proposal that would immediately cut the funding to operate the school nutrition programs in those states, and cap funding thereafter. With each year, the programs’ ability to serve low-income children will erode even further and states will be unable to respond to any increase in need arising from a recession or population growth.

And the paper’s claim that anti-poverty programs can be dramatically improved—including the elimination of "cliff effects" resulting from the loss of benefits as earnings increase—with no additional spending, while appealing, is just not true. The reality is that many key elements of economic security—child care, housing, transportation, and education—are unaffordable for low-wage workers even when they are able to find steady employment. No amount of state flexibility or coordination will substitute for adequate funding for these essentials.

Bold new ideas

But reducing poverty requires more than just avoiding bad ideas. As CLASP Executive Director Olivia Golden testified before the House Ways and Means Committee two weeks ago:

“Congress should avoid bad ideas that demonstrably don’t work—such as block grants, misguided requirements, and cuts in key programs—and should seize opportunities that build on research and experience. These include expanded access to child care for all low-income parents, investment in effective workforce development programs and career opportunities, financial access to postsecondary education and completion for today’s low-income students, crucial fixes to the work support system for adults and families, and basic standards for fairness at work, including raising the minimum wage. Many of these solutions would also benefit middle-income Americans who struggle with some of the same problems that hold back parents, workers, and students living in poverty—such as the high cost of child care and of postsecondary education, the need to develop new skills, and the lack of paid leave and fair, predictable work schedules.”

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Additional CLASP resources on related topics are linked below:

TANF 101” Policy Brief Series

Social Impact Bonds: Overview and Considerations

Does Head Start Work? Wrong Question

Child Care Assistance Spending and Participation in 2014

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.

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