Measures for low-income workers aim to offset 2017 tax law’s tilt toward wealthy

More than a million people in Wisconsin could benefit from proposed changes in two federal tax credits for low- and moderate-income families, according to a new report.

New federal legislation expanding the federal Earned Income Tax Credit would help 394,000 childless adults in Wisconsin, while a companion bill expanding the Child Care Tax Credit would help families of 676,400 children in the state, the Center on Budget and Policy Priorities in Washington, D.C., calculated in the report released this month.

The measures, which passed the House Ways and Means committee in June, are part of a package of legislation aimed at reshaping the Republicans’ 2017 tax revisions that heavily favored wealthy households over low- and moderate-income families. The Center on Budget and Policy Priorities report calculated the impact that H.R. 3300, The Economic Mobility Act of 2019, would have in each state.

In addition to expanding the reach of the Earned Income Tax Credit, the measure includes a provision that would grant lower-income working families the same Child Tax Credit increase that higher-income Americans got in the 2017 tax law.

A refundable credit

Eligible taxpayers file for the Earned Income Tax Credit when they submit their income tax returns. Under the current rules, working families with children and whose incomes are less than anywhere from $41,100 to $56,000 (depending on whether they’re married and how many children they have) may be eligible for the credit.

The EITC also is “refundable” in that taxpayers whose total tax liability is less than what they qualify for under the credit receive the remaining balance of the tax credit in a check from the IRS.

“It’s amazingly effective across a whole range of areas in people’s lives,” said Tamarine Cornelius, analyst for the Wisconsin Budget Project, sponsored by Kids Forward, an advocacy group for children and families. “It gives families a boost that is unlike some other forms of assistance, because it’s cash.”

The CBPP has a calculator showing how qualifying taxpayers’ taxes are reduced under various scenarios.

Wisconsin has a separate EITC based on a percentage of the federal credit. Gov. Tony Evers’ budget proposal included a provision to increase the state’s EITC; Republican lawmakers removed it, however. 

Research on families using the EITC has shown that their children have better outcomes in school and in health, and that when they reach working age, they work more hours, Cornelius said.

Making ends meet

Sarah Halpern-Meekin, a sociologist at the University of Wisconsin Institute for Research on Poverty, studied EITC recipients as one of four coauthors of the book “It’s Not Like I’m Poor: How Working Families Make Ends Meet in a Post-Welfare World” (University of California Press, 2015).

“What we saw for those folks was that getting this refund at tax time was an enormously important part of the way they made ends meet at the end of the year,” Halpern-Meekin told the Wisconsin Examiner. “Tax time was the time to get caught up in getting bills paid on time, paying back bills and paying ahead on some things.”

Families that her team interviewed said they were able to use the credit to do things like buy a used car and pay for it in full instead of taking on debt. “So many working poor families have fluctuating income, so eliminating the need for future payments can be an important financial strategy.”

As it’s currently structured, however, the EITC “does relatively little for ‘childless adults,’ ” the CBPP report says, “because their tax credit is extremely limited, especially compared to the credit for families with children. The lack of a meaningful EITC for this group means that the federal tax code taxes more than five million childless adults aged 19-65 into poverty or deeper into poverty.”

Yet, the label “childless adults” is often “a misnomer,” Halpern-Meekin pointed out. “There are a lot of parents who can’t claim their children on their taxes.”

Only married couples filing jointly can both claim their dependent children. In couples who are cohabiting but not married, as well as among divorced or separated parents, for example, only one parent can claim the child on their income tax return — “even if both parents are financially supporting a child,” she said. “This EITC expansion is not just going to affect childless adults but a lot of parents who can’t claim their children.”

Boosting the EITC appears to encourage low-wage workers to work more and ultimately boost their work-related income. That is one finding from a 2013 test in New York City in which half of a 6,000 group of low-income people without dependent children were given a $2,000 annual bonus at tax time, simulating an increase in the EITC for those individuals. (The other half of the group were controls.)

Full access to child tax credit 

The Child Tax Credit provision in the bill would offer lower-income working families full access to an increase in the credit that had excluded 26 million children in lower-income working families, according to the CBPP report. 

Like the EITC, the Child Tax Credit is refundable: If the value of the credit is more than a family owes in taxes, they receive the difference back in cash. 

The 2017 tax law doubled the value of the credit to $2,000 from $1,000. It also extended the credit to families with incomes up to $480,000 for a married couple with two children, the CBPP report says. (The prior income cap was $150,000.) At the same time, it limited the refundable portion of the credit for lower-income taxpayers to $1,400.

The new federal legislation would remove that refundability cap.

Because of how the 2017 law was written, the CBPP report says, “Some 11 million children saw a token increase in the credit of $75 or less because their families’ earnings were too low. As an example, a single mother with two children who works full time as a cashier and earns $14,500 received a $75 Child Tax Credit increase, or $37.50 per child.” 

Because of the refundability cap, “millions of children in low- or moderate-income working families received a tax credit increase of no more than $400 per child and often much less.” Meanwhile, “a family with two children that makes $400,000 a year received a Child Tax Credit increase of $4,000, or 53 times the $75 increase that a single mother with two children working full time at the federal minimum wage received.”