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 Without legislation, these improvements would have expired at the end of 2017, and the AOTC would have been replaced by the non-refundable HOPE credit.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.