Brookings has suggested that taxpayers who receive a refund under the Earned Income Tax Credit might be better off with multiple refund dates. EITC gives credits primarily for working parents with children at home, and many families get an additional refund because of EITC, even if their income is too low for them to have paid taxes. EITC recipients may get a tax refund that is equal to two or three months of their wages.
In a study of EITC recipients in Boston, researchers found that families used the funds to pay off debt, but also treated it as a “windfall” which allowed them to make purchases they otherwise could not afford, such as a meal out or a special present for a child. Not surprisingly, families enjoyed the “windfall” aspect of the refund.
Previous studies have shown that the EITC funds are also used to make large expenditures that poor families would find very hard to save for: a car or college tuition, for example. These investments in employability are probably a big part of the benefit for the nation as a whole in the EITC, which is widely considered one of the most valuable anti-poverty efforts we have.
However, Brookings author Alan Berube wonders whether distributing the refund out in quarterly payments might be a better solution. With smaller but more frequent payments, families could avoid using debt to help with the gap between their wages and their cost of living. “It’s time,” he says, “to try making the EITC more than an annual boom in a bust-filled financial cycle for low-income families.”
EITC is not available to people living in Puerto Rico. Even though nearly half of Americans living on the mainland do not pay federal taxes, the fact that Puerto Ricans do not pay federal taxes on income earned in Puerto Rico has been used as an argument to keep the EITC credit from applying in Puerto Rico. The Government Accountability Office concluded in a 1996 analysis that some 59% of households in Puerto Rico would be eligible if the EITC were extended to Puerto Rico.