The New Safety Net: How the Tax Code Helped Low-Income Working Families During the Early 2000s

Findings

An analysis of IRS data on low-income working families who received the Earned Income Tax Credit (EITC) between tax years 2000 and 2003 reveals that:

• The number of taxpayers receiving the EITC rose to 21.4 million in 2003, up 14 percent from 2000. Changing economic conditions helped fuel a rise in the proportion of all taxpayers receiving the EITC, from 15 percent to 17 percent. Of 122 large cities studied, 113 experienced at least a one-half percentage point rise in the share of their taxpayers earning the credit.

• In 2003, the average EITC recipient earned a credit of $1,788, and EITC dollars accounted for 68 percent of recipients’ net tax refunds. The extension of a portion of the Child Tax Credit to lower-income working families beginning in 2001 increased total tax refunds for EITC recipients. Among cities, the average EITC ranged from just over $1,200 in Cambridge, MA, to nearly $2,300 in McAllen, TX.

• The proportion of EITC recipients who filed their returns through paid tax preparers increased from 65 percent in 2000 to 71 percent in 2003. Cities and suburbs in the New York area experienced a dramatic 15 percentage point rise in the average share of their EITC earners using paid preparers. By contrast, fewer than 2 percent of EITC recipients nationwide accessed a free volunteer return preparation program to file their taxes in 2003, although programs in Tulsa, OK; Albuquerque, NM; Minneapolis-St. Paul, MN; and other cities reached higher proportions of recipients.

• Fewer than 8 percent of EITC recipients with qualifying children in 2003 received the Child and Dependent Care Tax Credit (CDCTC) to offset their child care costs. Despite research suggesting that 20 percent of EITC-eligible families with children pay for child care, most miss out on the benefits of the CDCTC because it is nonrefundable. Similarly, just 2.7 percent of EITC earners accessed either the Hope or Lifetime Learner credits to help pay for postsecondary education expenses.

Although the magnitude of these trends varied among U.S. cities and suburbs, the broader picture emerging from 2000 to 2003 points to three opportunities for policymakers to assist low-income working families: preserving and expanding the EITC at the federal and state levels; increasing the still-limited reach of volunteer income tax preparation programs; and making the CDCTC refundable to help low-income taxpayers pay for quality child care.