Polishing the EITC on its 40th Birthday

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The Earned Income Tax Credit is a critical lifeline that lifts some 9 million low-income Americans out of poverty – half of them children.

But the federal tax refund program isn’t perfect. The large refunds come just once a year, in the spring tax filing season. A cash crunch is a year-round problem for working families with low or erratic incomes who can’t always pay their bills.

A new study by the Center for Economic Progress identified additional financial benefits from the Earned Income Tax Credit (EITC) when participants in a Chicago pilot project received smaller, regular EITC payments throughout the year.

For example, workers who received the quarterly payments – in May, August, October, and December – were much less likely to have high-rate payday loans than people whose EITCs came all at once, helping program participants to avoid expensive late fees on payday loans. There was also evidence that workers in the EITC pilot accumulated less total debt, though the sample size was small.

Photo of Shirley Floyd
Shirley Floyd

The participants surveyed overwhelmingly said they preferred the periodic payments, and they reported lower stress levels than the control group. Shirley Floyd explained why in a previous blog post:

When Floyd receives a one-time tax refund in February, “the entire thing is gone” by March. But each payment she received in the pilot program, she said, allowed her “to do what you need to do.”

The program was run by the Center for Economic Progress, which provides financial services to low-income families. David Marzahl, president, was disappointed that about one-third dropped out of the research pilot, leaving only 217 participants who saw it through to the end. Nevertheless, he feels the pilot confirmed the concept’s potential to help low-income working persons with children and would like to see it expanded into a nationwide program, administered by the IRS.

Participants were drawn from Chicago Housing Authority residents and had at least one child. They received half of their estimated 2014 EITC refund – up to $2,000 in total – in four quarterly payments. At tax time, when the workers’ true EITCs could be calculated, the prior payments were deducted from the final IRS refund amount.

The full research paper on the study is forthcoming, Marzahl said.

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Larry Littlefield

I expected this blog to be one place to find the opposite view: one time payments are more likely to be saved.

Payday loans are like crack and heroin, pushed by those looking to make money. [The wisest course for people is to] carefully husband the refunds they received from then on, getting the money first and then spending it.

Ellen Bruce

The EITC needs to be updated in other ways as well. The credit is very low for people without children and that should be raised. Also, the credit stops at age 65 for people without children. The age limit should be eliminated, especially since the NRA for Social Security is increasing.

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