Balancing the tradeoffs: Options for expanding the childless worker earned income tax credit

Key Points

• Proposals for an earned income tax credit (EITC) expansion for childless workers vary in terms of the size of the credit, the earnings limits for eligibility, and eligibility exclusions. These variations have important implications for who benefits and the associated costs.
• An expansion of the EITC for childless workers could reach 8–14 million workers and cost $5–8 billion in new spending, depending on whether students are excluded and work requirements are adopted. A more generous option could reach 21 million workers but would require as much as $22 billion in new spending.
• Young people (ages 21–24) are the primary beneficiaries of proposed expansions, as are men, who would receive approximately 55–60 percent of benefits from any expansion. Women, older workers, and married couples also benefit, but to a lesser extent.
• Student exclusions and work requirements would lower costs but may be difficult to administer.

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Expanding the earned income tax credit (EITC) for workers without qualifying children (“childless workers”[1]) has received a great deal of attention in recent years. Most recently, versions of an expansion were included in President Barack Obama’s fiscal year 2016 budget and in House Ways and Means Committee Chairman Paul Ryan’s (R-WI) antipoverty blueprint.[2] But various proposals for expanding the credit for childless workers have been around for years.

This paper provides background on the childless worker EITC, analyzes various options for an expansion, and discusses the potential reach and estimated costs of these options. It is intended to inform a policy discussion about expansions to the childless worker EITC.[3]

Three options were considered for this analysis: (1) a baseline option modeled after the proposal in Obama’s FY 2016 budget and Ryan’s antipoverty blueprint, (2) a moderately more generous option modeled after several congressional proposals, and (3) a generous option that is loosely based on various other proposals.[4] The analysis is straightforward: it applies the different expansion options to current behavior as reflected in the 2013 Current Population Survey (CPS). It does not attempt to simulate behavior changes that might occur as a result of the expansion options.

The results suggest that a childless worker EITC expansion could reach 8–14 million workers and cost $5–8 billion in new spending (depending on student exclusions and work requirements). The most generous option could reach 17–21 million workers and cost $15–22 billion in new spending. To put this into context, EITC total expenditures (including the family EITC) in FY 2014 (for the 2013 tax year) were $65.2 billion. At the high end, a baseline option would represent a 12 percent increase in spending on the EITC, a moderate option a 16 percent increase, and a generous option a 34 percent increase.

What Is the Childless Worker EITC, and How Does It Work?

The creation of the original family EITC stemmed from the political debates in the 1960s and 1970s over a negative income tax and universal guaranteed income.[5] Although efforts to establish these were never realized, Congress created the EITC for working families in 1975 on an 18-month trial basis. By its link to work, the first EITC addressed concerns about work disincentives associated with the negative income tax and universal guaranteed income and was highlighted as a way to offset payroll tax increases for low-income families in the 1970s. The family credit was made permanent in 1978, was increased and indexed to inflation in 1986, and was part of a package in 1990 that increased it and established a larger credit for families with two children. However, in the early versions of the EITC, workers without dependent children were not eligible for a credit.

In 1993, the EITC was further expanded because, according to President Bill Clinton, “Full time work at the minimum wage plus the EITC should be enough to raise the family’s net-of-payroll-tax income above the poverty line.”[6] Using this same justification, a small EITC was created for workers without dependent children. The childless worker EITC was established to offset the employee’s share of payroll taxes for workers with earnings up to full-time work at the minimum wage. Although the maximum credit was small, it provided the first support to childless workers and has remained part of US tax policy ever since.

The EITC is a refundable credit to tax filers based on their earnings, adjusted gross income, and number of qualifying children. Beneficiaries must have employment income and meet certain eligibility criteria, including filing their taxes with the Internal Revenue Service (IRS). The credit is most generous for families with qualifying children, defined as a child who lived with the claimant for more than half of the year. If parents are unmarried, a child can be claimed by only one parent, and the other can claim the childless worker credit if their individual earnings are low enough and they have no other qualifying children. This includes unmarried, cohabitating parents.

Married tax filers (with and without qualifying children) can also claim the EITC, but the earnings of both are considered and the maximum earnings level is only slightly higher than the levels for unmarried filers, which means most EITC benefits go to unmarried families. Approximately 75 percent of EITC benefits go to unmarried tax filers.[7]

When a tax return is filed with an EITC claim, the filer receives the credit less any tax liabilities. Because most EITC-eligible tax filers owe little to no income tax, most beneficiaries receive the credit as a refund. According to IRS data, $1.29 billion (or 70 percent) of the $1.8 billion in EITC benefits for childless workers in 2012 was issued as refunds to single (or married filing jointly) tax filers.[8] The average credit for childless workers was $267 in 2012.

The EITC for childless workers currently provides a maximum credit of $503 (in tax year 2015) for workers with earnings up to $14,820 (or $20,330 if married filing jointly), which is roughly the annual earnings of someone working full time, full year at the federal minimum wage of $7.25 per hour.[9] The EITC phases in at 7.65 percent up to $6,600, then phases out starting at $8,220 at the same rate until the credit reaches zero. The proposals for an expanding the childless worker EITC include variations on the phase-in rate, maximum benefit, phase-out rate, and level of earnings where the credit equals zero.

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Notes

1. The term “childless workers” is used for simplicity, but these workers may have nonresident children. A qualifying child for EITC purposes means the child lived with the parent for more than half of the year.
2. Chairman Paul Ryan, Expanding Opportunity in America: A Discussion Draft from the House Budget Committee, July 2014, http://ift.tt/1rOB3op; and Executive Office of the President and US Treasury Department, The President’s Proposal to Expand the Earned Income Tax Credit, March 2014.
3. Some have also proposed a more narrow expansion of the EITC to non-custodial parents only. See Ronald B. Mincy, Policies to Require and Enable Less-Educated Noncustodial Parents to Work and Provide Financial Support for Their Children, Brookings Institution, August 2008, http://ift.tt/1KEJtY7. New York State and Washington, DC, have implemented such programs, which are not covered in this report but have been evaluated elsewhere; see Laura Wheaton and Elaine Sorensen, Extending the EITC to Noncustodial Parents: Potential Impacts and Design Considerations, Urban Institute, 2009, http://ift.tt/1Kam02K.
4. The generous option was loosely modeled after Isabel Sawhill and Quentin Karpilow, Raising the Minimum Wage and Redesigning the EITC, Brookings Institution, January 30, 2014 (although it does not cap eligibility at 200 percent of the federal poverty line); a demonstration project in New York City that is evaluating an expanded childless worker EITC; and proposals by Daniel P. Gitterman, Lucy S. Gorham, and Jessica L. Dorrance, Expanding the EITC for Single Workers and Couples without Children (aka Tax Relief for Low-Wage Workers), University of Chapel Hill Center on Poverty, Work and Opportunity, January 2007, http://ift.tt/1Kam02M and Gordon Berlin, “Transforming the EITC to Reduce Poverty and Increase Opportunity,” Pathways (Winter 2009), http://ift.tt/1KEJuLI.
5. V. Joseph Hotz and John Scholz. “The Earned Income Tax Credit” (working paper 8048, National Bureau of Economic Review, Cambridge, MA, 2001), 4–5, http://ift.tt/1Kam1no.
6. Ibid., 8.
7. Brookings Institution Tax Policy Center, “EITC Distribution by Filing Status, 2000, 2003,” http://ift.tt/1KEJtY9.
8. Internal Revenue Service, “SOI Tax Stats—Individual Statistical Tables by Size of Adjusted Gross Income, Table 2.5—Returns with Earned Income Credit, by Size of Adjusted Gross Income, Tax Year 2012,” http://ift.tt/1Kam1ns.
9. For income limits and maximum credits, see Internal Revenue Service, “2014 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates,” http://ift.tt/1Kam02S.

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