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Changes to EITC in Proposed Budget

The president’s proposed budget for FY2011 contains a few key provisions that will mean good news for low-income working families at tax time, even after the American Recovery and Reinvestment Act (ARRA/stimulus bill) runs its course. It also proposes to terminate an ineffective program for these families, but stops short of advancing a much-needed replacement.

Top 10 States and Metro Areas for Increases in EITC Dollars due to ARRA Changes in Eligibility

First, ARRA temporarily expanded two important tax credits for working families that the Administration now proposes to make permanent. It expanded the Earned Income Tax Credit (EITC)--a refundable federal tax credit for workers with low-incomes--by:

  • Allowing married couples making up to $5,000 more than their unmarried counterparts to claim the credit (an increase over 2008, when the amount was $3,000)
  • Increasing the maximum amount of EITC for families with three or more children by more than $600

ARRA also expanded the refundable Child Tax Credit (CTC) for lower-income workers by dropping the earnings “floor.” In 2008, only families with incomes above $8,500 could receive the credit through their refunds, but ARRA lowered that threshold to $3,000.

These expansions make a lot of sense (and had been proposed in different forms long before ARRA came about), and shouldn’t expire with ARRA.  They eliminate some of the “marriage penalty” implicit in the EITC’s structure; help alleviate the greater poverty experienced by larger families; enhance the economic and racial/ethnic equity of the CTC; and do it all in a way that continues to emphasize the importance of work. These changes will provide a real boost to the take home pay of these families.

Over seven million filers stand to benefit from the EITC expansions, with Western states and metro areas likely to see the biggest increases in EITC dollars, including Utah, California, and Nevada and Salt Lake City, Boise, and Bakersfield. The CTC expansion also stands to benefit seven million working families, with states like Mississippi, Montana, and Louisiana and metro areas like Jackson, El Paso, and Buffalo seeing the largest upticks in CTC dollars to be claimed.

Again, making these expansions permanent means good news for low-income working families at tax time. But only at tax time.

That’s because the budget also proposes the elimination of the Advanced Earned Income Tax Credit (AEITC). The AEITC allows some filers to get a portion of their EITC in their paychecks throughout the year.  Efforts to get low-income workers tax credits periodically throughout the year, instead of in one lump sum, are a response to how most recipients use the proceeds--to pay bills.  But the execution--at least in its current incarnation--has been a challenge. At best, 3 percent of EITC filers use the AEITC option, and it can be a cumbersome process prone to error. Some have argued for keeping the AEITC, but making it work better and for more people. Another idea is to design something new. Refundable tax credits are playing a bigger part in our tax code and policy process--whether for working families, education, health care, or a whole host of other policy areas (like climate change) where they’ve been proposed.

While the AEITC may not be the way forward, we can’t just “cut and run.” If Washington intends to build on the successes of the EITC and CTC, it ought to put some new energy into making these programs more effective year-round supports for the nation’s low-income working families.