By Kriston Capps (04/15/19)
For the millions of Americans who claim the Earned Income Tax Credit, April 15 is just another day. Taxpayers who get this credit, which gives a refund to low- and moderate-income households (and more to those with children), are often among the first to file their federal income taxes, meaning that many or most of them got this chore over with back in late January, at the start of tax season.
That’s because the Earned Income Tax Credit isn’t merely a bonus. It’s part of the social safety net. Many families rely on the refund for critical household planning. More than 25 million tax filers claimed the Earned Income Tax Credit last year, getting an average refund of $2,488. That cash goes toward overdue utilities, vehicle repairs, and other essentials. Research from the Federal Reserve shows that taxpayers who get this credit see a non-trivial boost in their household spending on food after they receive their refunds. The EITC helps Americans replenish their larders after winter.
“The EITC is incredibly powerful at lifting people out of poverty,” says Adam Ruben, campaigns director for the Economic Security Project, an organization that supports cash handouts and guaranteed income. But while the credit is an established, if unsung, part of the safety net, it could stand to be improved. “For all its success,” says Ruben, “it’s a 40-year-old policy that leaves a lot of people behind.”
The organization aims to modernize and reframe the EITC as a Cost-of-Living Refund. This means increasing the number of people who are eligible for this credit, expanding the definition of work that qualifies people for the credit, and perhaps most importantly, making it pay out monthly instead of annually. This proposal would make almost half of Americans eligible for the credit.
“We need to focus on the one-in-seven Americans who live in poverty today,” Ruben says. “But [poverty] is not the only problem. We also need to look at the folks who are doing just a little bit better than that, but with no safety net.”
While the Earned Income Tax Credit is the nation’s largest anti-poverty program, it has certain regressive features. It doesn’t do enough to help workers who don’t have children in their home. Only those with traditional jobs can get it; caregivers or stay-at-home parents need not apply. And many households who are eligible for this credit (especially complex families) don’t always claim the credit.
Those are all features that the Economic Security Project would like to iron out. A more progressive tax policy, Ruben says, would pin this benefit to adults rather than children, allow caregivers and students to claim the credit, and give households an option to receive the credit on a monthly basis (in the form of an advance). Instead of one large spike in income that comes once a year, the Cost-of-Living Refund would provide a “regular drumbeat of financial security,” Ruben says.
The Cost-of-Living Refund proposal would cut poverty by nearly a third, doubling the reach of the current credit, according to an analysis from the Urban-Brookings Tax Policy Center. The credit would apply to workers: $4,000 for single filers or $8,000 for joint filers. Single households with incomes up to $50,000 would be eligible for the credit, while married households making up to $90,000 could claim it. The Urban Institute has pegged the cost at $2.5 trillion over 10 years, which the government would pay for by raising taxes on the wealthy and corporations. How these pay-fors should be applied is less clear in the Economic Security Project’s proposal than the benefits of doing so.
Senator Cory Booker is on board. Today, the 2020 hopeful unveiled an expanded version of the Earned Income Tax Credit that he calls the Rise Credit, with features similar to the Economic Security Project proposal. Senator Kamala Harris has her own version of a monthly tax credit in the LIFT Act, which would give slightly less to tax filers ($6,000 for families, $3,000 for individuals) but raise the income ceiling to $100,000.
Making tax refunds monthly is an idea that is picking up steam in progressive circles. Last week, Harris introduced a bill to create a refundable tax credit to support cost-burdened renters that would pay out monthly; Booker supports a similar credit for renters. The plausibility of those credits may depend on how successfully they can be implemented by the IRS. The EITC would be a useful proof-of-concept for issuing refunds on a monthly basis: Since 18 percent of all tax returns include this credit, the IRS would simply have to get it right.
Rethinking the Earned Income Tax Credit is one way that Democrats would like to own taxes as an issue—as in the process, not revenues. While the Trump administration pledged last year to shrink the standard 1040 income tax form to the size of a postcard, the new form requires taxpayers to consult worksheets for several popular deductions, including student loan interest and childcare expenses, while also shifting business income and capital gains to other pages. Taxpayers waiting for the federal government to fulfill its evergreen promise to simplify the tax code—or even have the IRS calculate what taxpayers owe—may need to wait for Democrats to control the White House and Congress.
Progressives are already eyeing reforms that would make filing taxes simpler, period. Senator Elizabeth Warren just introduced a bill that would radically simplify filing for taxpayers. But the status quo has powerful defenders in the for-profit tax-preparing industry: A bill that would permanently bar the Internal Revenue Service from launching a free electronic tax filing system that would compete with TurboTax passed the Democratic-controlled House by a voice vote, despite opposition from Representative Alexandria Ocasio-Cortezand other progressives.
Still other Democrats are looking to expand the scope of the Earned Income Tax Credit. Last week, Ohio Senator Sherrod Brown introduced the Working Families Tax Relief Act, a bill that would expand the credit for families with children by 25 percent. The policy would enable 46 million households to claim the credit, make the Child Tax Credit fully refundable, and allow these taxpayers to draw a $500 advance on their tax refund.
Both Brown and the Economic Security Project’s proposals are certain to draw the ire of the payday loan industry, which has been reinvigorated by the Trump administration’s rollback of consumer protections on lending. Enabling eligible taxpayers to take a small-dollar advance on their credit-enhanced tax refunds, or to receive installments all year long, could undercut the market for their product—short-term, high-interest loans. Short-circuiting this $90 billion industry could be a progressive goal in itself: The average payday loan customer pays $520 in fees to borrow $325 in credit, per Bloomberg.
Brown’s bill now has the support of 46 Democratic senators and more than 80 national organizations, including the Center on Budget and Policy Priorities and Economic Security Project Action, the lobbyist arm of the group behind the Cost-of-Living Refund. (Ruben serves as its director.) This plan represents an incremental approach to improving the Earned Income Tax Credit.
The Cost-of-Living Refund is a bigger-picture concept, closer in kind to the Green New Deal or Medicare for All proposals, Ruben says. It serves as an umbrella for a number of related policies and reforms. And he thinks that a monthly, expanded tax credit could be the next litmus adopted by the Democratic Party.
“You can’t run for president as a Democrat today if you’re not in favor of $15 an hour minimum wage,” Ruben says. (That’s probably true of many if not all the current declared candidates.) “I think we’re going to be in that place over the next few months where everybody has some version of an income policy like a Cost-of-Living Refund.”