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. 

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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