The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) provide important income supports for working people, families, and their children with low to moderate incomes. These two programs have the ability to lift more families out of poverty than any other government program besides Social Security but current shortcomings limit the programs’ ability to increase economic mobility and well-being for a significant proportion of working people with low to moderate incomes. In light of tax season, at CSSP we are thinking about ways these programs can better benefit all communities.
Lifting Families Out of Poverty
Tax credits allow individuals and families to access government programs through filing their annual income tax returns. Two of these programs are uniquely important to people and families earning low to moderate incomes. The Earned Income Tax Credit provides a refundable tax credit to individuals and families who have low to moderate incomes. However, the credit provides sustainably more support to filers with children. In tax year 2019, the maximum credit for a family with three qualifying children will be $6,557 while the maximum credit for a working adult with no children will be $529. The Child Tax Credit provides a credit to working parents of up to $2,000 per child aged under 17. The CTC is not fully refundable, but families who qualify for a credit that exceeds their pre-credit tax bill are eligible to receive a refund capped at $1,400 of their CTC. Because the program is only partially refundable, it does not reach families with the lowest incomes.
Even with shortcomings, together, the EITC and the CTC increased the incomes of 29.1 million working people in 2017. This figure includes 4.8 million children who were lifted out of poverty because of these tax credits. Research has shown that the extra boost in income gives families greater financial flexibility to do a number of things including, purchasing more groceries, reduce their debt burdens, save themselves from eviction, repair their credit, and make birthdays and holidays special for the children. The EITC and CTC provide income, but the benefit of a boost in yearly earnings extends beyond extra cash. Both programs promote positive health impacts, especially for mothers and infants.
Strengthening the EITC and CTC
The EITC and CTC bring greater economic security to millions each year and with much needed improvements, these programs could further increase economic security for people who are currently excluded from the programs’ benefits. The newly introduced Working Families Tax Relief Act (WFTRA) proposes significant improvements to both of these programs, increasing access for working people with low to moderate incomes.
Currently, the EITC provides a substantial credit for those with children but fails to include working adults who do not have children, therefore failing to support a significant number of workers with low-incomes. Childless workers may include those without children, non-custodial parents, parents of children who are over the age limit, and young workers under the age of 25. Many of these workers hold low-wage, service industry jobs, and are disproportionately women and people of color. A single person working full time, year round for minimum wage is only eligible for a federal EITC of about $57. If this person is under 25, they are not eligible for the EITC at all. As currently structured, the EITC does not allow childless workers to benefit fully from the tax credit and taxes this demographic into poverty due to an increased tax burden through employee payroll taxes. In response to the EITC’s shortfalls, the WFTRA increases the EITC for childless workers to $2,100 and increases the income limit for a single person to $25,000. Additionally, the Act adjusts the programs’ age requirement to include workers who are ages 19 – 67.
The WFTRA also amends CTC, making the program more responsive to the needs of all families raising children and the expenses accompanying raising young children under six. First, the Act makes the CTC fully refundable. Currently, families with incomes too low to owe federal taxes at the end of the year do not benefit from the CTC. With changes proposed to the CTC through the WFTRA, families with the lowest incomes would be eligible to receive $2,000 per child. Secondly, the Act creates a young child tax credit. Families with children below age six would receive an additional $1,000 per child, offering added support to children and parents during the critical years of child development. Extra income allows parents to access resources needed for healthy development, more nutritious meals, and higher quality childcare.
Forty-six million households and 114 million people could benefit from the WFTRA’s changes to the EITC and CTC. Of this population, 49 million are children. Poverty in the United States is expansive and detrimental to health and well-being. Economic mobility is often out of reach for communities most impacted by America’s legacy of systemic racism and racial inequities. The EITC and CTC should not be the lone programs offering supports to communities, but they are powerful anti-poverty tools that provide people earning low to moderate incomes some financial relief and greater prospects towards financial stability. If enacted, the Working Families Tax Relief Act allows both the EITC and CTC to provide even more working people with greater economic support.
Maya Pendleton is a Policy Analyst at CSSP.