A Plan to Expand Tax Credits, Lifting Several Million Out of Poverty
By Darrel Thompson & Carrie Welton
The U.S. tax code is the single largest way the government supports wealth and asset building. However, a disproportionate share of federal tax benefits is funneled to wealthy, White households that own homes and businesses and have savings and investment accounts. The Working Families Tax Relief Act (WFTRA), introduced by Senators Sherrod Brown (OH), Michael Bennet (CO), Dick Durbin (IL), and Ron Wyden (OR), strengthens the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), recognizing the importance of tax policy in promoting economic mobility. If enacted, the Act’s changes would raise the incomes of 46 million households.
The EITC is a refundable tax credit for low- and moderate-income earners that provides income and supports work. The CTC is a partially refundable tax credit that helps working families with the cost of raising children and is worth up to $2,000 per eligible child (under age 17). The EITC and CTC have positive effects on health, asset building and savings, and educational achievement in children. For instance, credits as little as $1,000 have been shown to improve children's test scores and increase the likelihood of those children attending college and earning high wages as adults.
In conjunction with the CTC, the EITC lifted 8.9 million Americans out of poverty in 2017—including 4.8 million children—and reduced the depth of poverty for an additional 7.7 million people. Nevertheless, one of the EITC’s biggest flaws is the paltry credit it provides to adults who are not raising children, which is too small to offset childless workers’ tax liability. As a result, the tax code essentially taxes some of these workers into poverty—even after they receive the EITC. The WFTRA addresses this concern by expanding the EITC for childless workers by raising the maximum credit from $529 to $2,074 and expanding the age range from age 25-64 to 19-67.
Under current law, the CTC is $2,000. The refundable portion is $1,400. However, the refund is only available to households earning at least $2,500 in monthly income. This precludes the lowest-income households from receiving the refund. The WFTRA would fix that problem. The bill would make the credit fully refundable for families who have children and earn less than $2,500 monthly.
The WFTRA would also provide a Young Child Tax Credit of $1,000 for each child under age six, which would be adjusted for inflation. This change would increase the maximum credit for young children to $3,000 per child. In addition, rather than paying the CTC as a lump sum at tax time, the legislation would require families be paid periodically throughout the year, which can help them meet recurring expenses such as rent, gas, or diapers.
One of the most notable provisions in the WFTRA fixes the exclusion of our fellow American citizens in Puerto Rico from the full benefits of EITC and CTC. Currently, families in Puerto Rico are only eligible for the CTC if they have three or more children, and even then, the credit is still smaller than that received by comparable families on the mainland. Under the WFTRA, tax-filing families in Puerto Rico, regardless if they have one or two children, would receive the same CTC as do families in the rest of the country. The legislation would also lend the federal government’s support to Puerto Rico’s new self-funded EITC.
Tax policy plays an important role in promoting economic mobility. CLASP is dedicated to protecting, strengthening, and expanding tax policies that promote financial security. And we urge Congress to pass the Working Families Tax Relief Act so many more households have access to economic opportunity through a fairer tax code.