Refundable Tax Credits

Income and work supports may be provided through the tax system as well as through benefit programs. The most important tax credits for low-income households are the refundable Earned Income Tax Credit and the Child Tax Credit (credits that together lifted an estimated 8.7 million people out of poverty in 2011), and the partially refundable American Opportunity Tax Credit, which reduces the cost of postsecondary education.  These credits were improved by the 2009 American Recovery and Reinvestment Act, and these improvements were extended through 2018 by the American Taxpayer Relief Act of 2012. 

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.

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