When the Republican-controlled Congress crafted its massive tax-cut bill in 2017, President Donald Trump routinely claimed it would cut levies for the middle class. But one tax relief proposal that many economists felt could bring bigger benefits to these Americans was conspicuously absent — an expansion of the Earned Income Tax Credit.
The EITC, which dates to 1975, is a tax credit claimed by low- and moderate-income families and individuals that in many cases wipes out any federal taxes owed, with any leftover credit refundable for cash. When it was expanded in the last big tax reform law in 1986, President Ronald Reagan described the law in general as “the best anti-poverty bill, the best pro-family measure, and the best job-creation program ever to come out of the Congress.” Democrats like it because it reduces income inequality; Republicans like it because it promotes work rather than a reliance on welfare. Republicans and Democrats have frequently proposed increasing EITC benefits and expanding the program to workers who aren’t currently eligible, mostly childless working poor.
(Ronald Reagan Presidential Library)
Oddly, an expansion of the credit would mostly benefit those states that voted for Trump. Of the 15 states that had the largest percentage of tax returns claiming the EITC, only one — New Mexico — didn’t go for Trump in 2016. Most of those states, 13, are in the South: Louisiana, Alabama and Georgia among them.
The rejection of EITC expansion in the tax law may be rooted in heated debates over immigration in the waning years of the Obama administration. Republicans feared the credit would be expanded to undocumented immigrants.
But EITC experts have been left scratching their heads over why an expansion of the EITC was left out of the tax law. Theories and historical clues are all they have.
“It’s a mystery why they didn’t address this in the tax plan,” said Elaine Maag, a principal research associate at the Urban-Brookings Tax Policy Center, a nonpartisan think tank in Washington, D.C. “Our policy is built on the notion that people should be working, and this is a program that has effectively demonstrated it puts people into the labor force.”
“Our policy is built on the notion that people should be working, and this is a program that has effectively demonstrated it puts people into the labor force.”
ELAINE MAAG, PRINCIPAL RESEARCH ASSOCIATE AT THE URBAN-BROOKINGS TAX POLICY CENTER
Democrats tried. In November 2017, when the House was marking up the tax bill, Rep. Judy Chu, D-Calif., offered an amendment that would have expanded EITC benefits to more low-income individuals, at a cost of about $100 billion over 10 years, according to Maag at the Tax Policy Center. “We can help those in need by expanding the EITC to childless workers,” Chu said at the time. “This Republican plan ignores this idea entirely.”
Republican committee members argued against the expansion. Rep. David Reichert, R-Wash., said absent fathers were a more pressing problem than childless workers. Rep. Adrian Smith, R-Neb., asserted the best way to help low-income families was to expand the economy and create more jobs. Rep. Tom Rice, R-S.C., suggested the tax bill would increase the standard deduction enough so expanding the credit would not be necessary. Rep. Jackie Walorski, R-Ind., said she supported the EITC but added that what the working poor really needed was more compassion, before voting against the amendment.
Chu’s amendment was defeated on a party-line vote.
The EITC issue hasn’t died, however. Earlier this month at a hearing on the 2017 tax law, new Democratic House Ways and Means Committee Chairman Richard Neal, D-Mass., said he believed the 2017 vote was a mistake.
“For years, Republicans had touted an agenda of opportunity, including an increase in the earned income tax credit, especially for those workers without children” Neal said. “But when it came time to pass their tax bill, Republicans actually shrank the EITC.”
A PERCEIVED FRAUD PROBLEM
The EITC has been one anti-poverty program that both parties have supported for years. It was created in 1975 during President Richard Nixon’s Republican administration to prevent low-income wage earners from being pushed below the poverty line when they paid their taxes. It’s since been expanded multiple times. Reagan indexed the benefit to inflation in 1986, and President George W. Bush simplified the EITC filing process in 2005. Former House Speaker Paul Ryan, R-Wis., proposed to expand the EITC in 2014 to cover more single people, but Congress didn’t act on it. Even the conservative American Enterprise Institute has posted papers supporting the expansion of the program.
About 27 million families and individual workers claimed the EITC in 2017, receiving about $65 billion in credits, most of it in cash refunds. The program, which requires recipients to have a job, lifts about 6.2 million people, half of them children, out of poverty each year. It’s also been credited with improving health, children’s educational achievement and promoting work, especially in households headed by poor single mothers, according to academic and government studies.
But when Republicans began discussing tax reform in 2016, the EITC was barely brought up. One of the only mentions of the EITC by Republicans was in Ryan’s “A Better Way” policy agenda, which he unveiled in June 2016 and became the starting point for tax reform the next year. But the blueprint didn’t suggest expanding EITC; rather it called on the House “to reduce fraud, waste and abuse” in the program.
Former House Speaker Paul Ryan of Wis., takes questions from reporters as he discusses his “A Better Way” legislative agenda, during a news conference following the Republican caucus meeting at the Capitol in Washington, Tuesday, July 12, 2016. (AP Photo/J. Scott Applewhite)
The IRS reported in 2014 that 25 percent to 29 percent of EITC payments —$15.6 billion to $19 billion a year — are made in error, most often because taxpayers and tax preparers misunderstand what children qualify for the credit, according to the Center for Budget and Policy Priorities, and National Taxpayer Advocate Nina E. Olson.
But others label those improper payments fraud; they represent about 6 percent of the $485 billion annual tax gap, the amount by which the tax paid to the IRS falls short of the total estimated tax owed each year.
“The Internal Revenue Service’s current process of relying on an applicant’s self-attested income and paying out the EITC before that income is confirmed is not working,” a group of lawmakers wrote in a statement issued in 2016.
Republicans’ reluctance to expand the EITC may go back to 2015. They feared President Barack Obama’s 2014 order allowing undocumented immigrants to seek work authorization would allow them to obtain a Social Security number, which would open the way for them to claim an EITC credit, according to The Hill newspaper.
Other lawmakers — including former Rep. Peter Roskam, R-Ill., who would later become chairman of the now-inactive Tax Policy Subcommittee, one of the primary assemblers of the tax bill — latched on to a 2015 report by the Social Security Administration’s Office of Inspector General that concluded the agency didn’t properly report dubious self-employment income to the IRS, leading to individuals obtaining illegal EITC payments.
Roskam didn’t respond to a request for comment.
A SHRINKING EITC
Not only did the 2017 Tax Cuts and Jobs Act fail to expand the EITC, it actually will cut the value of the credit over time. The tax law marginally decreases the amount of all benefits and credits, including the EITC, by changing how they are adjusted for inflation.
Before the tax law, tax brackets and various credits were adjusted for inflation every year using the Consumer Price Index. But the 2017 tax law changed the index the IRS uses to adjust for inflation from the CPI to something called the Chained Consumer Price Index. The Chained-CPI is a measure based on a basket of goods that accounts for consumers’ tendency to buy cheaper substitutes in the face of rising prices. As a result, the Chained-CPI will make credits rise more slowly.
Using the Chained-CPI has been supported by Democrats, including President Barack Obama in 2013. For the tax law, it allowed lawmakers to claim they had maintained the tax credit, while simultaneously using the savings form the slower growth in credits to help offset the bill’s $1.5 trillion cost, according to Chuck Marr, director of federal tax policy at the Center for Budget and Policy Priorities, a liberal think tank in Washington, D.C.
A married couple earning $40,000 a year, with three or more children, for instance, will have $341 less on their credit by 2027 than they would have had had the law not changed. Marr said the change also inflates tax brackets at a slower rate, which results in taxpayers moving into a higher tax bracket more quickly and was adopted to help compensate for the law’s cut in corporate taxes.
“It just adds insult to injury that at a time when incomes in the lowest quintile are stagnating, the value of the credit was reduced when it would have been a great opportunity to boost the value of the credit,” Marr said. “There were lots of plans to expand the EITC, but suddenly when it came time to write the law they were nowhere to be found. It just goes to show the law didn’t do what it said it was doing.”
“There were lots of plans to expand the EITC, but suddenly when it came time to write the law they were nowhere to be found. It just goes to show the law didn’t do what it said it was doing.”
CHUCK MARR, DIRECTOR OF FEDERAL TAX POLICY AT THE CENTER FOR BUDGET AND POLICY PRIORITIES
Rep. Kevin Brady, R-Texas, who as chairman of the Ways and Means Committee managed the creation of the tax bill in the House, did not respond to a request for comment.
SOME STATES MORE GENEROUS
States have picked up some of the slack. Twenty nine states, as well as the District of Columbia and Puerto Rico, have legislated additional percentages on top of federal rates. Some are nonrefundable, which means if the credit is more than an individual owes in state taxes, the recipient cannot receive the difference in a cash refund, unlike the federal EITC.
Rural areas with high poverty rates have the largest percentage of taxpayers claiming the EITC, such as Buffalo County, South Dakota, where 59 percent of tax filers claim the credit, the highest in the nation. States with higher poverty rates such as Louisiana, Mississippi, Alabama and Georgia, have a relatively large number of claimants. Of those, just Louisiana has a state credit — but offers the second-lowest bump among the states that have increased in EITC.
The District of Columbia has one of the more generous EITC credits. In 2014, the district expanded eligibility to childless workers as young as 18. The federal age eligibility is 25. The following year at least 10,000 additional workers claimed the EITC. The plan was paid for by spending cuts and by expanding the scope of the sales tax.
California’s EITC was piloted in 2015 and has been expanded to an additional 45 percent of the federal credit. Most notably this year, for the first time, it includes 18-year-olds. In 2018, nearly 1 in 7 filers , 1.4 million Californians, claimed $2 billion in federal EITC and $342 million in state credits. California estimates it added 1 million eligible filers last year, and could add anywhere from 400,000 to 600,000 filers for the 2018 tax year, according to the Institute for Taxation and Economic Policy.
To expand and increase benefits to childless workers aged 21 and up would cost the federal tax system more than $10 billion a year.
ABSENT IN PRESIDENTIAL CAMPAIGNS
Expansion of the EITC hasn’t gained much traction among the burgeoning Democratic field of presidential candidates.
The exception is Sen. Kamala Harris, D-Calif., who re-introduced a bill this year that would provide up to $6,000 to married couples making up to $100,000 a year. It would give a credit to families on top of the federal EITC. It would extend the income limit phase-out from $39,000 to $49,000 per year for childless singles, increasing their benefits to up to $3,000 compared with the $513 available to that group in 2018. Harris would lower EITC eligibility to 18 years old regardless of marital status or dependents.
The liberal Center on Budget and Policy Priorities estimated Harris’ plan would lift 9 million people out of poverty. But the Tax Policy Center estimated the plan would cost $3 trillion in its first 10 years and noted Harris has offered no proposal to pay for the plan. The conservative Tax Foundation forecast Harris’ plan would contract the economy by 0.7 percent.
“The plan is costly, and there is nothing wrong with helping the middle class” said Robert Paul Hartley, a research scientist at the Columbia University’s Center on Poverty and Social Policy. “But there are other plans that direct more money at the poorest of the poor.”
Sen. Michael Bennet, D-Colo., who is said to be close to announcing he will run for president, introduced in 2017 with Sen. Sherrod Brown, D-Ohio, the American Family Act, which would triple the child tax credit, but not expand the EITC.
Democratic presidential candidates Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vermont, have proposed tax plans that would increase taxes on the wealthy but not expand the EITC.