President Obama’s new budget included a proposal to extend the Earned Income Tax Credit to adults with no children. The Treasury Department, along with the Council of Economic Advisers, the National Economic Council, and the Office of Management and Budget, has prepared a report which explains the planned changes and their likely effects.
The Earned Income Tax Credit, or EITC, is a tax credit that reduces the income tax burden for people who work but who are still low income. It currently affects about 16 million families, with 30 million children. It is widely recognized for its effectiveness but does not apply to Puerto Rico, which has a higher child poverty rate than any state in the nation.
The EITC is a refundable credit. This means that if a family owes nothing on their taxes but the credit would have given them a reduction of $1,000 off a larger tax bill, they receive a refund check from the IRS for the $1,000. Even if you have no tax liability, you can still get a check.
For American families living in poverty, that payment can mean that a family member can better afford college, a car can be repaired, or the family can afford the security deposit that will allow them to move to a neighborhood with public transportation to work. As a result of these opportunities, families receiving the credit are better able to overcome the obstacles poor Americans face in getting and keeping jobs.
The EITC rewards work. While research shows that Americans who take and keep a job –even a minimum wage job — can expect to get out of poverty within five years, people who work hard and yet continue to live in poverty can easily become discouraged and question the value of their efforts.
The combination of these effects has been shown to increase workforce participation — by 10%, according to the report.
However, workers without children are usually not eligible for the EITC. Currently, age restrictions and very low income caps make most single people ineligible for this credit. The proposed changes would divert funds from current tax loopholes favoring the wealthy to a program with potential to move more people into the workforce and lift people out of poverty.
The House Budget Committee Chairman Paul Ryan (R-WI) also supports the EITC, describing it as “an effective tool for encouraging and rewarding work among lower-income individuals.” Since increased earnings (up to a point) lead to a higher credit, the EITC rewards successful efforts to increase earning capacity and provides the connection between actions and rewards that Republicans see as key to bringing people out of poverty.
Puerto Rico is excluded from the EITC presumably because Puerto Ricans do not pay income tax on income earned in Puerto Rico. However, many recipients of the EITC on the mainland also do not pay income taxes; in fact, they receive money from the federal government in the form of this refundable credit.
While the federal government considers expanding the EITC to childless workers, attention should also be given to helping the children of Puerto Rico.