Periodic Payment of the Earned Income Tax Credit

A Background Paper prepared for the Brookings Institution Metropolitan Policy Program in support of Metro Raise: Boosting the Earned Income Tax Credit to Help Metropolitan Workers and Families.

Introduction

There has been a shift over the last two decades in public policies designed to provide income support to impoverished households. A focus on encouraging and supporting work has guided this shift, and the tax system has become as important as the welfare office. Emblematic is the nation’s largest anti-poverty program: the Earned Income Tax Credit (EITC).

The EITC supplements earnings and is targeted at households with children. In 2008, a person with two or more children at home who works full-time for $6.00 to $7.50 an hour qualifies for the maximum benefit of $4,824 from the federal government. If she resides in one of the several states or localities with its own version of the EITC, she might qualify for even more. Many workers able to claim a large EITC can also receive additional support through other tax code features such as the federal Child Tax Credit (CTC).

Although the EITC is an income tax credit, it functions for many of its recipients as a transfer payment to offset payroll taxes and provide additional cash. The EITC is fully refundable, meaning that its size is not determined by a person’s income tax liability. The worker with two children eligible for the largest EITC has no federal income tax liability and but can nonetheless receive the full credit. At higher earnings, the EITC can offset both income and payroll taxes and provide an additional benefit.

A key difference between the EITC and other forms of income support is timing. The norm for programs such as cash assistance, Food Stamps, and Social Security is monthly payment. There is a reasonably close association in time between financial need and receipt of funds to meet that need. In contrast, almost all EITC households receive no benefit until a few months after the end of the year for which they qualify. Very few utilize the advance payment option to receive a portion of the credit with each paycheck.

This research paper considers the problems with almost exclusive reliance on year-end (“lump sum”) payment, and the value of providing a viable periodic payment method. After reviewing the currently available advance payment option, its low utilization, and evidence of its limited potential, the paper suggests a design framework for an alternative system that would provide eligible workers and families with a portion of their EITC throughout the year.