There are many government initiatives aimed at alleviating poverty. One of the most effective is in the tax code: the Earned Income Tax Credit, which returns money to low-income working families — money that they typically spend on living expenses. Since it’s a tax credit, it also incentivizes work.
It’s popular among politicians on both the right and left.
“The EITC has political support partly because it is better than many of the alternatives,” David John Marotta wrote in Forbes wrote in 2013. “It is an incentive to work … Studies suggest it increases employment rates. And because it operates as part of the tax code, it is free of the waste normally associated with entitlement programs.”
While the EITC and the accompanying Child Tax Credit are effective at easing poverty, they need help from Congress. In the wake of the recession of 2008, Congress changed both credits to offer recipients additional benefits.
Those changes should become permanent at the same time Congress extends a package of business tax breaks, rather than waiting until they are set to expire in 2017. Congress is expected to discuss these so-called tax extenders, which range from energy and research credits to bonus depreciation to charitable donations, any day now.
“As Congress debates the reauthorization of expired business-related tax provisions this year, working Maine families shouldn’t be left behind,” said Sen. Angus King. “Instead, we should find a way to simultaneously reauthorize tax benefits that help both families and businesses.”
King has signed on to a bill, sponsored by Sen. Sherrod Brown, D-Ohio, that would make the changes permanent and expand some of their provisions.
Two important changes to the EITC are set to expire at the end of 2017 unless Congress intervenes. One is the elimination of the “marriage penalty.” Currently, the tax credit begins to phase out at an income level $5,000 higher for married couples than for single filers. Without an extension, the income difference will only be $3,000.
Federal legislation in 2009 also raised the EITC for large families. Without an extension, families with more than two children would see their credit reduced by more than $700.
The Child Tax Credit began in 1997 as a way to help working families with the cost of child care. One shortcoming was that the credit didn’t kick in until a family made more than $14,500. This meant the poorest families didn’t receive the credit or that they received only a portion of it. To remedy this, the credit now kicks in after $3,000 in earnings. Allowing the exclusion to rise back to $14,500 would push millions of low-income families into poverty.
The Center on Budget and Policy Priorities estimates that if these two credits revert to their pre-2008 levels, 37,000 Maine families, including 64,000 children, will be affected. Because families receive these credits in one lump-sum refund each year, they mainly spend the money on one-time expenses such as car repairs or to pay down debt.
Although the payments aren’t large, research has shown that these tax credits effectively reduce dependence on welfare, especially among single mothers, and improve the health of children and their mothers. Low-income children in families that receive these benefits are also more likely to see improved school achievement.
Maine is one of 26 states that have a state-level earned income tax credit. In the budget that passed this spring, lawmakers made Maine’s EITC refundable, meaning it’s now available to families whose incomes are so low that they don’t owe state taxes. This change could raise after-tax earnings for 100,000 working poor families in Maine by $7 million-$9 million per year, according to the Maine Center for Economic Policy.
Not everyone who qualifies claims their refund; a quarter of potential recipients don’t claim it. The IRS does little to promote it, although it declared Feb. 1 as EITC Awareness Day.
The public policy group Demos suggests that the U.S. Department of Labor encourage employers to alert workers about the credit. They could put notices in paychecks or include information about the credit in information workers receive when they are hired.
In the meantime, Congress should maintain the credits’ effectiveness as poverty-fighting tools.
