The nascent bipartisan momentum for fighting poverty

The end-of-year budget deal struck in Congress has rightly been hailed as a surprising triumph for a legislative body weakened by years of gridlock.  But it was also a major success for millions of low-income working families, who benefit from anti-poverty tax code programs that were finally made permanent by the budget deal.

The Earned Income Tax Credit is our most successful anti-poverty program, saving six million people from poverty each year.  It provides refundable tax benefits to low-income working families that increase with their earnings up to a certain income level.  The budget deal solidified EITC expansions for married couples and families with three or more children.

Congress shouldn’t stop there, however.  It should seize this newfound momentum to enact commonsense EITC improvements that have support on both sides of the aisle.

The EITC enjoys rare bipartisan support.  While conservatives wavered in recent years, they’ve largely come back around to the tax credit that they dreamt up in the 1970s, heartened by the EITC’s ability to promote work.  Likewise, liberals support the EITC because it puts extra money in the pockets of the poor.

Both parties also broadly agree on how to continue making the EITC better. For instance, leaders from both parties support expanding the number of workers benefiting from the EITC.  The current EITC provides generous benefits to working families, but provides little to childless workers.

As President Obama briefly alluded to in his final State of the Union, both he and Speaker Paul Ryan have proposed increasing EITC benefits for childless workers.  But they disagree on how to fund it.  Liberals like Obama and Sen. Patty Murray favor closing corporate tax loopholes, while conservatives like Ryan want to pay for it through cuts to other anti-poverty programs.  While hardly insurmountable, this funding disagreement poses a hurdle to expanding the EITC.

A better place to start may be with reforming how we pay the EITC to current beneficiaries.  Today, families receive their EITC in a lump sum through a single annual tax refund.  This makes it costly to access benefits that families have earned, as many find it necessary to pay for tax preparation services.  It also weakens the connection between EITC benefits and work.  According to economist Raj Chetty, only 5 percent of those eligible for the EITC understand that its value increases as their earnings rise — a key policy tenet behind the EITC.

Both liberals and conservatives have embraced ideas to fix this by making periodic EITC payments throughout the year.  In Speaker Ryan’s 2014 anti-poverty plan, he endorsed converting the EITC into a wage subsidy so that it would automatically top off a worker’s paychecks.  Aside from simplifying access and tightening the connection to work, Ryan also favored periodic payments because they would reduce fraud and defuse the case for a higher minimum wage.

Liberals rightly balk at undermining the minimum wage, but have nonetheless endorsed variations on periodic EITC payments of their own.  Proposals from the liberal Center for American Progress and Sen. Sherrod Brown would allow workers to tap into some of their EITC refunds early to cover unexpected expenses.  These proposals help reduce the boom-and-bust budget cycle experienced by low-income households under the current EITC.

Aside from the potential for increased EITC participation, providing a periodic payment option would be virtually costless to administer.  And there’s already evidence that this kind of program works.

In Chicago, researchers enlisted 343 families to receive half of their expected EITC refund in four periodic payments.  By receiving periodic payments, these families gained improved financial stability and greater disposable income.  They built up their savings while avoiding costly short-term debt and predatory private refund advances.  Ninety percent wanted to sign up for periodic payments again.

Even better, periodic payments may increase earnings among participants. Economists like Chetty have found that making the program’s core incentive more apparent — that earning more nets you a higher refund — tends to increase recipients’ earnings.  If periodic payments help increase the general understanding of the connection between work and refund size, EITC recipients’ total earnings may very well increase under such a reform.

The details of the program will need to be hashed out.  Conservatives (including Sen. Marco Rubio) support regular payments made through workers’ paychecks, whereas liberals have so far supported less frequent payments through government checks.  The Advance EITC, which was scrapped in 2010, essentially tried the conservative method, but failed to attract many beneficiaries because it was run through employers and ran the risk of overpayment.  Still, EITC expert Steve Holt notes that periodic payments for tax credits like the EITC have proven highly popular in countries like Australia and New Zealand.

Giving working families the chance to receive their EITC throughout the year would provide them with much-needed financial relief and would strengthen the program’s work incentives.  Liberals and conservatives can coalesce around this reform, and keep the budding legislative momentum around improving the EITC going in the new year.

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