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A New Look at How the Tax Code Works for Working Families

As the clock ticks down to January 1, and lawmakers try to hash out a deal to avoid the fiscal cliff and address the expiration of the Bush tax cuts, new data on taxpayers in the United States--collected from federal tax returns and available down to the ZIP code level through Brookings’ EITC Interactive--provide an important perspective on the impact of the tax code on families and communities across the country.

For instance, the latest EITC Interactive data--which represent tax returns filed in January through June of 2011--show that key provisions in the tax code proved responsive to the Great Recession, helping working families to weather the downturn.

Roughly one in five tax filers claimed the Earned Income Tax Credit (EITC) in TY2010--a tax break for workers with low incomes--compared to 16 percent of filers in TY2007. In part the increase in EITC receipt reflects rising unemployment and falling incomes that may have led more workers to become eligible for the credit, but it also reflects targeted expansions to the credit made through the American Recovery and Reinvestment Act (ARRA) to help strengthen the safety net and stimulate local economies.

  • In TY2010, nine states saw anywhere from one quarter to one third of their taxpayers claim the EITC, led by Mississippi, Louisiana, Alabama, Georgia, and Arkansas. (See this map.) And 10 states experienced an uptick in the rate of EITC receipt of 5 percentage points or more over the course of the recession, led by Mississippi, Georgia, Arizona, Idaho, and Tennessee. No state experienced a decrease in EITC receipt during the downturn.
  • More than half (60 percent) of EITC filers also benefitted from the refundable portion of the Child Tax Credit (ACTC) in TY2010--a tax benefit for low- and moderate-income working families with children that was also expanded temporarily through ARRA—compared to 45 percent in TY2007.
  • All together, EITC filers claimed an average credit of $2,247 in TY2010, and for those EITC filers who who received it, the ACTC boosted the average refund by $1,234.

The release of the Census Bureau’s Supplemental Poverty Measure (SPM) last week underscores the importance of these tax credits for low-income working families. If it weren’t for the EITC and ACTC, the Census Bureau estimates that the U.S. poverty rate in 2011 would have been 2.8 percentage points higher, at 18.9 percent. The impact on child poverty would have been even greater: without these credits the child poverty rate would have reached 24.4 percent rather than 18.1 percent under the SPM definition.

Though the SPM is not available for smaller, sub-state geographies, through Brookings’ EITC Interactive policymakers and other stakeholders can find estimates of the number of filers benefitting from these credits--and the dollar amounts claimed--for every congressional and state legislative district in the country, and for every ZIP code, municipality, county, metro area, and state.

Contrary to Mitt Romney’s narrative about the 47 percent “takers” and giveaways to the Democratic base, these data show that the impact of these credits is far-reaching and broadly shared (as the list of “red” states above suggests)--crossing party and geographic lines to reach struggling working families at tax time. And that phrase bears repeating: These are taxpayers who are working.

Part of welfare reform in the late 1990s was an explicit decision to do less via traditional cash assistance and do more through the tax code to encourage work. Years’ worth of research illustrates the success of the EITC as a policy to promote work and better economic outcomes for low-income families. Updated profiles of the EITC-eligible population in TY2010 give greater insight into who these taxpayers are. More than three-quarters of these taxpayers live in family units; more than 54 percent are white; and almost half (46 percent) have some higher education. The typical EITC-eligible taxpayer has an adjusted gross income of just $13,905, and is most likely to have earned that income working in the retail, health care, accommodation and food service, construction, and manufacturing industries. These are workers filling the increasing number of low-wage service sector jobs the economy has been churning out in recent years, and in industries that bore the brunt of the latest downturn.

Discussions over the fiscal cliff and longer-term tax reform will inevitably include calls for more taxpayers to have “skin in the game.” But that’s not only a distraction from the real issues, it’s a distortion of reality. We made a choice in the 1980s and the 1990s to support work and alleviate poverty through the federal income tax. And all the evidence--federal, state, and local--shows that it’s working, for a broad base of Americans. Taxing hard-working families deeper into poverty is no fix for our short- or long-run budget problems.