Just Taxes Blog by ITEP

Census Data Shows Importance of Refundable Tax Credits in Reducing Poverty, But Lawmakers Move to Restrict Them

September 12, 2017

Steve Wamhoff
Steve Wamhoff
Federal Policy Director

The annual poverty data released by the Census Bureau today continues to show that federal refundable tax credits are the second most important anti-poverty program after Social Security. But this could change if the House Republicans have their way. The budget resolution approved by Republicans on the House Budget Committee in July would place new restrictions on one of those tax credits that might reduce its effect without saving the federal government any money.

According to the new Census data, the combined effect of the Earned Income Tax Credit and the refundable portion of the Child Tax Credit lifted 8.2 million people out of poverty in 2016. The “supplemental poverty measure,” which takes into account costs of living, taxes and government supports, was 13.9 percent in 2016 but would have been 16.5 percent if not for the refundable tax credits.

The EITC is a tax credit equal to a percentage of earnings up to a maximum amount. The EITC is refundable, meaning someone whose income is so low that they would not otherwise have income tax liability can nonetheless claim the credit and, in some cases, receive a refund check from the I.R.S. A portion of the Child Tax Credit is also refundable in an amount equal to a certain percentage of earnings up to a maximum. These credits have a very progressive impact that counter the many regressive taxes that Americans pay including federal payroll and state sales taxes, leading to a tax system that overall is just slightly progressive.

Unfortunately, some lawmakers have pushed to restrict the refundable tax credits in ways that they claim are necessary to combat fraud. The most recent example is the House Budget Resolution’s inclusion of new rules to verify EITC eligibility. There are already extensive filing requirements for the EITC, but the Republican proposal would, in addition, subject all EITC claimants to something like an audit and delay payment of the credit for months.

The Center on Budget and Policy Priorities explains that the EITC accounts for just 4 to 7 percent of the “tax gap” in the tax code for individuals. The tax gap is the I.R.S.’s estimate of the difference between taxes owed and taxes paid. The Center explains that, “Moreover, while EITC audits already constitute 39 percent of all individual income tax audits that the IRS conducts, they result in only 7 percent of the additional tax that audits find to be owed.”

Rather than restricting access to the EITC, lawmakers should expand it. For example, both President Obama and House Speaker Paul Ryan spoke of expanding the EITC for childless adults who are not raising children, since this group receives relatively little from the credit under the current rules. One proposal to address this is the Working Families Tax Relief Act, introduced in the Senate by Sherrod Brown of Ohio. Today’s Census data shows that the refundable tax credits are among the most effective programs we have to fight poverty and Congress should respond by strengthening them.


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