The Inclusive Economy
Building on What Works: Congress Can Strengthen the EITC by Expanding and Simplifying Eligibility
By Chad Bolt on 03/15/2017 @ 06:00 AM
Depending on who you talk to in Washington, tax reform is either charging full steam ahead or it’s completely dead. Either way, if Congress and the Trump Administration want to make the tax code work for working people – and not for corporations and the wealthy – they will focus on turning our upside down tax code right side up. This means reforming the biggest areas of wealth-building expenditures in our tax code – higher education, homeownership, and retirement savings – so that they actually help people who need the most help.
Opportunities to Strengthen EITC: Expanding to Workers Not Raising Children and Rainy Day EITC
But one right side up program that actually does help people who need it most is the Earned Income Tax Credit, the most effective anti-poverty tool we have. Last year, 27 million tax filers claimed the EITC, receiving an average benefit of $2,454. Many tax filers used their refund to put money aside for an emergency, pay down debt or invest in a long-term asset. The EITC has a proven track record of success and has long enjoyed bipartisan support.
Recent expansions of the EITC were made permanent at the end of 2015, ensuring that 16 million families won’t be taxed further into poverty. This was a major win for anti-poverty advocates, but Congress still has opportunities to strengthen the EITC with further expansion in eligibility and reduction in improper payments.
One major omission from the 2015 expansions were so-called “childless workers,” or workers not raising children. The disparity in benefits for a single worker not raising a child and a single worker raising a child is huge: $215 vs. $3,373 in 2016. Workers aged 24 and under not raising children are not eligible for the EITC at all. Not only are these workers taxed further into poverty, these non-existent or very small benefits provide little or no incentive to enter the labor force, which is one of the main purposes of the EITC. Congress should expand eligibility to these workers and increase the level of benefit, as Congressman Richard Neal’s Earned Income Tax Credit Improvement and Simplification Act does.
Another way to strengthen the EITC is to use it to empower tax filers to save for emergencies. First proposed by the authors of It’s Not Like I’m Poor and then introduced as legislation by Senators Jerry Moran and Cory Booker, the Rainy Day EITC proposal would allow filers to defer 20% of their EITC benefit for six months. Recognizing that many Americans living in poverty do not have $400 to cover a financial emergency, the Rainy Day EITC would empower filers to save up for those inevitable moments – 20% of the average EITC benefit is $480.
Further Reducing Improper Payments
Even though EITC improper payments represent a tiny slice of the overall tax gap and Congress recently passed “the most robust improvements to address waste, fraud, and abuse in the tax code in nearly 20 years,” the specter of “fraud” persists. As the Center on Budget and Policy Priorities points out, “the EITC’s ‘improper payment rate’ is not a ‘fraud rate’ and shouldn’t be characterized as such. Congress should increase the EITC benefit for workers not raising children, which would reduce the disparity in benefits between EITC claimants who are raising children and are not raising children. To further simplify eligibility and reduce confusion over which children qualify, the IRS should rely on the residency determinations of other benefit programs like TANF, Housing Choice Vouchers, SNAP or state benefit programs.
Finally, Congress should establish minimum competency standards for paid tax preparers. Paid tax preparers are more likely than any other type of preparer to file inaccurate returns and 68% of EITC filers use a paid tax preparer to file their taxes. The vast majority of paid tax preparers are not required to meet minimum standards of competency like passing a certification test or engaging in continuing education to demonstrate that they have an understanding of current tax requirements. The Volunteer Income Tax Assistance program – with its 94% accuracy rate – is a model for such competency requirements. Congress should establish standards to further reduce EITC improper payments.
As Congress considers tax policy over the next few months, whether it’s tax reform or just tax cuts, they should seize these opportunities to build on and strengthen a feature of the tax code that we know works well for working people.