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The Inclusive Economy

Rainy Day EITC: A New Idea to Boost Financial Security for Low-Wage Workers

By Ezra Levin on 09/03/2015 @ 04:00 PM

Tags: EITC, Federal Policy, News

CFED believes the Earned Income Tax Credit (EITC) is a vital tool for helping create an opportunity economy, inclusive of low-income families. As we argued recently, the EITC—a refundable tax credit that helps boost the income of working-class families—is much more than it seems. At a January event on Capitol Hill co-hosted by CFED, sociologist Kathryn Edin described the findings of a book that found the EITC is more than an income booster: it helps families save, invest and move up the economic ladder. But as great as the EITC is, it was not built to contend with the recurring financial shocks that define low-wage life in America. The book authors suggested strengthening the EITC on this front, and we at CFED jumped at the idea, working with a number of our partners to develop a new proposal: the Rainy Day EITC.

Since our January Capitol Hill event, we’ve been working with the authors of the book, tax preparers from the Taxpayer Opportunity Network, and researchers and advocates in the financial security field to develop a new proposal that would help buffer low-income families from recurrent financial shocks.

The Rainy Day EITC would give low-wage workers a new tool to build emergency savings at tax time. The policy was designed to work as simply as possible: EITC-eligible workers would be given the option on their tax return of opting into the Rainy Day EITC. For a family that would have initially received $2,500 through the EITC, they would instead receive $2,000 now and defer $500 for later. Six months later, the IRS would automatically deposit that $500, plus a 50% match, into the family’s bank account.

The value of the proposal is that it maintains the benefits of the lump-sum EITC payment while addressing the fact that many low-wage workers don't have emergency funds. The $750 that a family would receive halfway through the year is enough to pay off a surprise medical expense or fix a broken car without having to rely on high-cost, often predatory payday loan products. In other words, the Rainy Day EITC is a clear way to protect consumers and boost financial security at tax time and beyond.

Of course, the Rainy Day EITC isn’t a silver bullet. Workers still need good jobs with good wages and good benefits. And, many low-wage workers need their entire tax refund as soon as possible, meaning not all workers will opt in. But for others, this reform would provide a new tool to help them achieve financial security year-round, rather than just during tax-season.

As we wrote in The Hill when we released the proposal, Congress has the power to create this powerful tool. By our estimate, the initial cost would amount to only about a 1.3% increase of current spending on the EITC. We are now talking with congressional offices to show them how this modest investment could help millions of low-wage families. We’re hopeful that, with the right champion, we can convert this new idea into law.

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