February 2010 U.S. Poverty Action
Anti-Poverty Programs Are Good for the Economy
Over the last few months, RESULTS staff and volunteers have been gearing up for our major 2010 campaign focusing on expanding low-income tax credits and asset development opportunities for low-income individuals and families. This switch was predicated on health reform being completed in late 2009/early 2010. However, recent events have pushed that timeline back. Because of our or your unwavering commitment to health reform, RESULTS staff and regional coordinators have decided to include health reform as a major 2010 campaign alongside our work on tax credits. We will continue to push the president and our members of Congress to get meaningful health care reform done, while also focusing on changes to the tax code that benefit low-income people. Some months will include actions on one or other of the campaigns and in some cases, both. For example, this month's action talks about the benefits that both health reform and low-income tax credits have on our economy. In addition, the action is an opportunity to introduce yourself to congressional staff members who handle tax matters. We will discuss our Health Care for All campaign and our Low-Income Tax Credits: Creating Economic Opportunity campaign (with guest speaker Monica Mills from Bread for the World) on the February National Conference Call - Saturday, February 13, at 12:30 pm. To participate, call (888) 409-6709 with your group by 12:25 pm ET.
An Introduction to Low-income Tax Credits
The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for low-income working individuals and families. EITC is designed to "make work pay" by decreasing the impact of taxes that low-wage workers pay on their earnings and supplementing their wages. The intention is to move a family with a full-time minimum-wage worker above the poverty line, so as to avoid raising children in poverty. The EITC is the largest poverty-reduction program in the U.S. The Center on Budget and Policy Priorities estimates that in 2009, the EITC lifted 6.6 million people out of poverty, half of them children.
The key to the EITC is its refundability. A refundable tax credit allows taxpayers to receive a refund if their credit it greater than their tax bill. Since many low-income workers have little or no income tax liability (however, they do pay payroll, sales, property, and other state and local taxes), the EITC can be a significant boost to their income. For tax year 2008, approximately 24 million taxpayers received over $49 billion in EITC benefits and the average net EITC was $2,068.
In February 2009, the House and Senate passed the American Recovery and Reinvestment Act of 2009 (ARRA), which included several EITC improvements for tax years 2009 and 2010. First, Congress addressed the issue of the "marriage penalty" in the EITC. Before ARRA, if an EITC-eligible single parent chose to marry another low-income worker, they both could lose some or all of their EITC because the couple must combine their incomes for EITC purposes. Since the EITC phases out at higher incomes, they risked reducing their credit or losing their eligibility altogether. ARRA raised the income levels for married couples thus allowing them to have a higher combined income without losing their EITC. Congress also expanded the EITC benefit for larger families. Because of ARRA, families with three or more children can now receive an EITC benefit of up to 45 percent of their earned income, as compared to 40 percent for families with two children. These much-needed changes have benefitted 7 million people, keeping 3 million out of poverty.
The Child Tax Credit (CTC) is a partially-refundable tax credit designed to lessen the impact of income taxes for families raising children. The CTC is the largest tax code provision benefiting families with children, distributing about $45 billion to 31 million families in 2007. Persons with at least one qualifying child who file federal tax returns can get a CTC of up to $1,000 for each child. To qualify for the CTC, the tax filer's earned income must be above a certain threshold ($3,000 in 2009). The credit is phased in as earned income goes above the threshold, until the maximum $1,000 credit is reached. The credit is then gradually phased out at very high income levels, and there is no credit available to those with incomes above $75,000 for single persons ($110,000 for married couples).
The ARRA lowered the CTC threshold to $3,000 for tax years 2009 and 2010. The Center on Budget and Policy Priorities estimates this will open up the CTC to nearly 6 million new children and expand the credit for 20 million more, as compared to 2007 law. The current CTC, while a vast improvement over previous law, still excludes America's poorest families (those who earn less than $3,000 per year). Also, the credit is only partially refundable thus requiring low-income families to earn more to receive the full $1,000 credit as a refund. Finally, because the ARRA changes are temporary, the income eligibility threshold will jump to well over $12,000 in 2011 if Congress does not act this year.
Investing in Anti-Poverty Programs is Good Economics
The purpose of programs like Medicaid, the Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamps), and the Earned Income Tax Credit is to help people living in poverty. However, the benefits of these programs are not limited to those who enrolled in them. As seen in this diagram from the Kaiser Family Foundation, state and federal investments in Medicaid produce a ripple throughout the local economy. This results in new jobs, higher incomes, and higher tax revenues (to help with state and federal budget deficits). For example, a study from the Center for American Progress shows that passing health reform will help create 250,000 to 400,000 new jobs each year for the next ten years.
These investments also produce what is called a "multiplier effect." Essentially, the multiplier effect means that for every dollar invested in a program, an effect is created throughout the local or national economy. Spending on anti-poverty programs tend to have the greatest multiplier effect. For example, a recent study from Michigan shows that for every $1 of federal Earned Income Tax Credit (EITC) spent generated $1.67 in new income. In other words, when we invest in these programs, we get a great return on that investment.
But why do new investments in low-income programs have the most stimulative effect? In a struggling economy, the key to recovery is to get people to spend quickly and spend more because the money spent creates a similar economic ripple shown above. Because people living in poverty have trouble providing basic necessities for themselves and their families, a new benefit to help purchase those necessities is likely to be spent quickly. On the other hand, a benefit like a tax cut for the wealthy is more likely to be saved - they already have their necessities met - which does little to help the economy during a recession. Therefore, investing more in anti-poverty programs not helps those most in need during the economic downturn; it benefits all of us by helping revive the economy.