should be thinking hard about low-income families and the tax code these days.
In 2010, the federal income tax system will still deliver substantial
assistance to low-income families with children through refundable tax credits.
commentators may not recognize the significance of these tax measures, but refundable
tax credits can substantially reduce poverty among families with children.
absent any changes to the poverty measure except the inclusion of tax credits
in a family’s available resources, the Tax Policy Center estimates a third fewer children
would be in poverty.
reality is that these tax credits are among the most potent anti-poverty
programs we have for families with children.
without legislative action, some aid targeted to the poorest families will
disappear as two key pieces of legislation expire in 2011: the Economic Growth
and Tax Relief Reconciliation Act (EGTRRA) of 2001 and the American Recovery
and Reinvestment Act (ARRA) of 2009.
in benefits to low-income families will be precipitous. And although the facts
surrounding these tax measures can be complex and daunting, it is worth taking
the time to be clear about their effects for low-income families.
a family with poverty level wages ($14,570) and two children under age 17 can
increase its income by more than 50 percent with tax credits. The Earned Income
Tax Credit (EITC) is worth $5,036, a Child Tax Credit (CTC) totals $2,000, and
a Making Work Pay (MWP) credit provides an income boost of $400 for a single parent
or $800 for a married couple with at least one worker.
legislative changes, the MWP credit created by the ARRA will disappear and the
CTC will revert to its pre-EGTRRA level of $500 per child and become largely
nonrefundable, as it was prior to the EGTRRA legislation. Nonrefundable credits
can only offset taxes owed, whereas refundable credits can go to people who do
not owe income taxes.
where a family does not owe income taxes, refundable credits are received as a
tax refund. If the CTC reverts back to being largely nonrefundable, few low-income
families will benefit from it since they do not have positive taxes that the
credits can offset.
The EITC currently
augments income by as much as 34 to 45 percent of earnings, depending on the
number of children in a family—up to $3,050 for a one-child family, $5,036 for
a two-child family, and $5,666 for a family with three or more children. And
the EITC is fully refundable, so eligible families receive the full credit
regardless of tax liability.
qualify for the maximum credit, they keep getting it until their earnings reach
$16,450, or $21,460 if married. At that point, the credit starts phasing out at
a rate of about 16 cents for each additional dollar earned for families with
one child and 21 cents for each additional dollar earned for families with at
least two children.
In 2011, the
EITC for married couples will begin phasing out at the same point it does for
single parents. Families with at least
three children will go back to receiving the same credit as families with two
In 2010, the EITC will deliver $53.6 billion to 33.5 million
low-income children. If legislators do not extend
current policy, 1.4 million children will see their benefits disappear and 13.5
million will see their benefits decreased.
provides a credit of up to $1,000 per child and is partially refundable. Over 50 million families receive
a credit of 15 percent of earnings over $3,000—though only about a third of
this aid goes to families with incomes below $30,000. A family’s
credit equals the sum of their nonrefundable and refundable credit amounts.
the CTC is scheduled to revert to its pre-EGTRRA level of $500 per child, and
only some families with at least three children will qualify for a refundable
This is actually
two legislative changes. First, EGTRRA expanded the CTC to $1,000 per child and
made the credit partially refundable on earnings exceeding $10,000. That
$10,000 threshold was adjusted for inflation so that in 2010, the threshold
would have been around $12,000. In 2009, ARRA reduced that threshold to $3,000.
Both pieces of legislation expire at the same time.
refundable MWP boosts earnings by up to 6.2 percent. It provides much more total
assistance than the EITC, some $60 billion in all, but goes to almost all workers.
Only about a third of the aid goes to families with incomes below $30,000.
face three decisions as the CTC provisions expire: should the $1,000 per child
credit remain in place or should the CTC revert to being worth half that as it
was before EGTRRA, should the current rules for broad refundability be extended
and, if so, at what level?
current rules for refundability would continue the credit for lower income
families, who likely need it most. Further, the lower the threshold for
refundability, the more benefits go to the poorest families. Under EGTRRA,
refundability only starts when earnings exceed about $12,000. ARRA dropped that
threshold to just $3,000.
EGTRRA and ARRA provisions are allowed to expire, the CTC will provide $13.2
billion to 19.7 million families. The vast majority, 89.4 percent, will go to
families with at least $30,000 in income.
extended EGTRRA provisions – including not only the expanded refundability but
allowing the credit against the Alternative Minimum Tax and the larger $1,000
credit – the CTC would deliver an additional $30.7 billion. There would be 20.1
million more children eligible for benefits than if the EGTRRA provisions expire
and an additional 51.8 million children would receive higher benefits.
extension of CTC related ARRA provisions (the lower threshold for
refundability) would deliver $8.2 billion more in benefits than simply
extending the EGTRRA provisions. 10.2 million children would receive higher
benefits and 59.6 million children would be eligible for benefits.
could go even further and help an additional 8.4 million children and boost
benefits for 5.8 million more if it simply eliminated the threshold and made
the credit refundable from the first dollar of earnings similar to the EITC. That
would deliver $10.5 billion in benefits, relative to extending only EGTRRA.
increasingly tight budgets, the expansion or even continuance of any program
deserves thoughtful consideration. Policymakers could lower the thresholds
where the CTC begins to phase out in order to pay for expansions for lower
income families. Doing so would target limited resources at those most in need.
tax code to deliver assistance to low-income families makes good sense.
starters, the credits discussed here are designed as work incentives. Many
studies show that, unlike traditional spending programs, the EITC does indeed
encourage people – particularly single moms – to enter the labor force. This is
a major reason why the EITC enjoys bi-partisan support.
On top of
that, the tax system provides an administratively convenient way to aid
low-income working families. Unlike most other agencies, the IRS has reliable
employer-provided information on earnings, the basis for credit eligibility.
And it’s easier for low-income families to claim credits on their tax returns
than to apply for assistance in person at welfare offices—a major reason why
more eligible people receive tax credits than Temporary Assistance for Needy
Families (TANF) or food stamps (now Supplemental Nutrition Assistance Program
said, tax credits can be blunt instruments for distributing assistance. They
typically arrive once a year, after tax claims have been filed, rather than
throughout the year. A regular income stream might help low-income families
more than a lump sum does. Also, error rates on the EITC are higher than for
traditional welfare programs. But increasing participation in the Advanced EITC
option, which allows eligible families to get part of their credit delivered
through the year, in addition to simplifying eligibility rules could solve both
why policymakers should extend the EITC and CTC provisions in the EGTRRA and
also keep the ARRA rules for the CTC in place. They should also consider making
the CTC more generous toward low-income families by reducing the refundability
threshold to $0. This would both help low-income people survive and simplify
the tax code.
system delivers substantial assistance to low-income families, and the amount
has increased in recent years. Turning back the clock now to reduce or
eliminate that assistance could wreak financial hardship on the low-income
families who rely on tax credits to boost their incomes.
Elaine Maag is a Research
Associate at the Urban-Brookings Tax Policy Center and at the Urban Institute.