Extending the EITC to noncustodial parents: Potential impacts and design considerations

This paper examines the noncustodial parent earned income tax credit (NCP EITC), a new type of credit recently enacted in New York and Washington, D.C., and proposed by Senator Bayh and then‐Senator Obama in 2007. The NCP EITC offers an earned income tax credit to low‐income noncustodial parents who work and pay their full child support. This paper provides background information about the policy and presents national estimates of eligibility and benefits for an NCP EITC under three alternative policy scenarios. It also discusses several key design and implementation issues. © 2010 by the Association for Public Policy Analysis and Management.     

Tax Code Knowledge and Behavioral Responses Among EITC Recipients: Policy Insights from Qualitative Data

We build on the robust quantitative literature on behavioral responses to the Earned Income Tax Credit (EITC) by using in‐depth qualitative interviews with 115 EITC recipients to examine how they understand and respond to its incentive structures regarding earnings, marriage, and childbearing. We find that respondents consider their tax refund as a whole, without differentiating the portion from the EITC; as a result, they cannot predict how their EITC refund would change if they altered their labor supply or marital status. Incentives for childbearing are better understood, but are not specific to the EITC; rather, parents respond to a combination of tax deductions and credits as a whole. Respondents would like to maximize their refunds, but most cannot or would not alter their behavior due to structural constraints they face in the labor and marriage markets. Rather than adjust work hours, defer marriage, or have additional children, respondents exhibit a different type of behavioral response to the incentive structure of the EITC: They alter their tax filing status in order to maximize their refunds. They routinely claim zero exemptions and deductions on their W‐4s, file their tax returns as head of household rather than as married, and divide children among the tax returns of multiple caregivers. Although some of these behaviors qualify as tax noncompliance, they emerge because the intricacies of the tax code conflict with the complexity and fluidity of finances and family life in low‐income households.     

The Impact of the Earned Income Tax Credit on Household Finances

Using a simulated instrument strategy, we analyze how expansions to the federal and state Earned Income Tax Credits (EITC) affected household finances over the past two decades. Using data from the Survey of Income and Program Participation wealth topical modules, we also test whether responses differ over time, as well as whether there are different responses to the federal and state expansions, and how responses vary by educational attainment. A $1,000 policy‐induced increase in the average household EITC leads to a 3 percentage point increase in the likelihood of holding money in a savings or checking account, and approximately $700 more held in savings balances. These results are coupled with large increases in pre‐tax family earnings. We also find some evidence of decreases in unsecured debt holdings. We interpret these results as further evidence that the EITC increases the financial stability of low‐income single mothers.     

Welfare transitions in the 1990s: The economy,welfare policy,and the EITC

The rapid decline in the welfare caseload remains a subject of keen interest to both policymakers and researchers. In this paper, I use data from the Survey of Income and Program Participation spanning the period from 1986 to 1999 to analyze how the economy, welfare reform, the earned income tax credit (EITC), and other factors influence welfare entries and exits, which in turn affect the caseload. I find that the decline in the welfare caseload resulted from both increases in exits and decreases in entries. Entries were most significantly affected by the economy, the decline in the real value of welfare benefits, and the expansion of the EITC. Exits were most significantly affected by the economy and federal welfare reform. Federal reform had its greatest effects on longer‐term spells of the type generally experienced by more disadvantaged recipients. Some out‐of‐sample predictions help explain the otherwise puzzling observation that, despite substantial increases in the unemployment rate since 2000, caseloads have remained roughly constant. © 2004 by the Association for Public Policy Analysis and Management     

The Blizzard of 1987: A Year of Tax Reform Activity in the States

The year 1987 was the most active one in terms of state taxreform activity within recent memory. Most states respondedto federal tax reform not only by conforming their income taxesto the new federal provisions but also by such actions as increasingtheir personal exemptions or credits, raising their standarddeductions, and/or reducing marginal tax rates. The net resultof these changes was to increase the progressivity of stateincome taxes. The most important development affecting othertaxes was Florida's ultimately failed attempt to expand thesales tax to a broad range of services. Most states did notreform their corporation income tax, but that tax may receivemore attention in the next few years. Despite the high levelof activity 1987 and the formidable obstacles to accomplishingsignificant tax reform, 1987 will probably be seen in retrospectas the beginning of a major period of state tax reform extendinginto the early 1990s.     

Incentives,challenges, and dilemmas of TANF: A case study

This paper compares the incentives inherent in TANF (Temporary Assistance for Needy Families), the U.S. welfare system in place after the 1996 reforms, with those of TANF's predecessor, AFDC (Aid to Families with Dependent Children), using the experience in one state, Wisconsin, as an example. Is the new program successful in avoiding the “poverty trap” of the old welfare system, in which the marginal tax rates imposed on earnings and benefits were so high that they discouraged work effort outside a narrow earnings range? As women receiving assistance begin working more hours and earning more, income‐conditioned benefits (Food Stamps, EITC, Medicaid, and subsidies for child care) are reduced and withdrawn, in effect constituting a “tax” on earnings. Under TANF, there is more support for these families, at least in Wisconsin, and so economic well‐being should be higher for most women with earning in this range than it was under AFDC. But marginal tax rates under TANF remain high, and in some income ranges they are higher than under AFDC. Once in the work force, former TANF recipients have earnings over the long run that expose them to very high marginal tax rates, which decrease the benefits of working harder and make it very difficult to gain full eonomic independence. Evidence from other sources suggest that most low‐skilled women have earnings in the same range and so are likely to face similar reductions in benefits such as child care subsidies or the EITC as their earnings increase, even if they are not receiving welfare‐related benefits. © 2002 by the Association for Public Policy Analysis and Management.     

Earned income credit utilization by welfare recipients: A case study of Minnesota's earned income credit program

This paper examines utilization of a state earned income credit by AFDC and TANF recipients. Although utilization percentages are increasing, we find that among TANF recipients in 1999, 45.7 percent of all households and 34.8 percent of eligible households did not receive the state earned income credit. Moreover, we find that utilization may depend upon TANF requirements and incentives, information resources, and barriers to work and filing of income tax returns. Finally, we investigate whether low utilization is because of little or no benefit from the state earned income credit and find this may be true for some with barriers or less incentive to work under TANF. © 2006 by the Association for Public Policy Analysis and Management.     

The power not to tax: A search for effective controls

Although the primary purpose of the Congressional Budget and Impoundment Control Act of 1974 was to gain greater congressional control over federal spending, the act also represented a small but significant step toward controlling the substantial financial commitments made through the numerous exclusions, deductions, and credits in the federal income tax. In the Budget Act Congress, for the first time, recognized and defined these “tax expenditures” and adopted procedures for reviewing them. But tax expenditure budgeting has not had the beneficial effect that some had hoped, mainly because the 1974 effort failed to take adequate account of the organizational structure of Congress and of the political character of its decision-making. But these weaknesses can be overcome.     

The Fiscal Impact of Federal and State Aid to Large U.S. Cities: An Empirical Analysis of Budgetary Response

This article examines four types of aid programs to thirty-nine large U.S. cities federal revenue sharing, federal categorical aid, state general aid, and state categorical aid. The central finding is that there is significant variation in the magnitude of property tax reduction resulting from different types of state general aid. Property tax credits and exemptions are less effective approaches in reducing local property taxes than are state lump-sum aid or city use of piggybacked taxes Categorical state and federal aid mostly fund additional city spending and have small but important stimulative effects on the revenue side These results suggest that differences in the design of aid programs have important implications for their fiscal impact and their effectiveness in reducing property taxes.     

Repairing the safety net: Is the EITC the right patch?

Using data from the Michigan Panel Study of Income Dynamics, this article estimates the impact of the Earned Income Tax Credit (EITC) on economic risk. Risk is measured through the variance of full income (income holding labor supply constant). The results show that the EITC significantly reduces economic risk, but its effects are weaker dollar for dollar than traditional means-tested programs like Food Stamps. The difference is not statistically significant, however. Moreover, for many middle-class people, the risk-reduction benefits of the EITC exceed the tax burden it imposes. This is less true of means-tested transfers. These results are significant for the politics of antipoverty policy. They show that a real-world antipoverty program can generate enough middle-class economic security to build for itself a solid base of political support.     

Federal tax reform and the financing of state and local governments

Although the Reagan Administration tax reform proposals would reduce federal income tax liabilities for most taxpayers, federal tax reform would also create strong pressures on state and local governments to cut taxes and public services. These pressures would arise primarily because itemizers would no longer be able to deduct state and local taxes in determining their federal income tax liabilities. In New York City and Boston, it is likely that the Administration's tax reform would induce cuts in spending that range from 2.5 to 7.5 percent. While the elimination of state and local tax deductibility may promote allocative efficiency in the provision of local public goods, the cost would be a decline in the degree of redistribution through the state and local public sector, and a reduction in local public services for the poor.     

State and federal tax equity: Estimates before and after the Tax Reform Act of 1986

The progressivity and equity of both state and federal individual income taxes, as well as the combined system of both taxes, are examined before and after the federal Tax Reform Act of 1986 using a variety of measures applied to federal Statistics of Income individual income tax data; state taxes are calculated using TAXSIM. Our findings are as follows: First, in both 1985 and 1987, state personal income taxes were generally less progressive and more horizontally equitable than the federal system. Second, in moving from 1985 to 1987, state personal income tax systems generally displayed decreased progressivity and horizontal inequity. The combination of the two systems displayed generally lower progressivity and horizontal equity scores when we compare 1987 to 1985. Last, the after-tax income distribution became more unequal when we compared 1987 to 1985.     

Revisiting the Income Tax Effects of Legalizing Same‐Sex Marriages

In this paper we estimate the impacts on income tax collections of legalizing same‐sex marriage. We utilize new individual‐level data sources to estimate the federal income tax consequences of legalizing same‐sex marriages. These data sources also allow us to estimate the impact of legalization on state income tax collections. We find that 23 states would realize a net fiscal benefit from legalization, while 21 states would experience a decline in revenue. The potential (annual) changes in state tax revenue range from negative $29 million in California to positive $16 million in New York. At the federal level, our estimates suggest an overall reduction in revenues, ranging from a potential loss of $187 million to $580 million. Overall, we find that the federal and state impacts are quite modest. We also find that our estimates are only marginally affected by alternative assumptions about how many same‐sex couples will choose to marry and which partner will claim any children for tax deduction purposes.     

Measuring Municipal Borrowing Costs: How Missing Cost Information Biases Interest Rate Calculations

A substantial literature exists on federal tax expenditures, but almost no empirical research has been done on state tax expenditures. This article examines Michigan tax expenditures, with an emphasis on comparison to findings from the federal level. Three major topics are addressed: (1) allocation of resources by policy area, (2) distribution of tax expenditure benefits by income class, and (3) tax expenditure growth over time. Only the findings on resource allocation are consistent with findings from the federal level, suggesting that simple theories may be insufficient to systematically describe tax expenditures.     

Spreading the Wealth

The new American president promoted the value of “spreading the wealth around” as an election theme, providing low-income families with tax breaks, rebates, and credits. The practice of using federal income taxes to re-distribute wealth, which sometimes reflects the noblest of goals, frequently generates significant unintended harm. Prominent among those unplanned casualties is a reduction in charitable giving: American voluntary wealth transfers (e.g., charitable contributions) are in danger of being crowded out by mandatory transfers (e.g., federal taxes) used to redistribute wealth. This paper considers the social and economic costs of raising taxes that crowd out charity.     

The Evolution of Low‐Income Housing Policy, 1949 to 1999

Abstract

The evolution of low‐income housing policy during the past 50 years can be divided roughly into two segments: the first running from 1949 to the 1973 Nixon moratorium on subsidized production programs and the second from 1973 to the present, marked by a diminished federal leadership role and an increased state and local role. After tracing the rise of the federal leadership role represented in the Housing Acts of 1949 and 1968, this article focuses on the development of three important policy instruments that mark the devolution of housing policy: housing vouchers, housing block grants, and the Low‐Income Housing Tax Credit.

The three‐pronged strategy of vouchers, block grants, and tax credits has achieved reasonably good results and attracted an unusual degree of political consensus. A steady expansion of all three offers the most promising path to the “realization as soon as feasible” of the national housing goal.     

Public Opinion on U.S. Federal and Intergovernmental Issues in 2006: Continuity and Change

A 2006 trend survey found that Americans most often select localgovernment as giving them the most for their money, followedby the federal and state governments. African Americans aremost supportive of the federal government as giving them themost for their money; Hispanics are most supportive of localgovernment. As in many previous years, the local property taxwas viewed as the worst tax, followed by the federal incometax, state sales tax, and state income tax. Americans displayedreduced trust and confidence in the federal government; however,trust in all three spheres of government—federal, state,and local—dropped between 2004 and 2006, possibly reflectiveof the poor response of all governments to Hurricane Katrina.Analysis of surveys since 1972 reveals that there has been along-term decline in the public's support for the federal governmentand a corresponding increase in support of state and especiallylocal governments.     

Parental schooling choice: A case study of minnesota

Public support of nonpublic elementary and secondary education has become one of the most controversial issues in American educational policy, with tuition tax credits and deductions subjects of ongoing debate at both the state and federal level. This article presents the results of one of the first empirical investigations of how a tax subsidy for tuition costs actually influences parents' school choices using data from Minnesota, the first state to have a tuition subsidy pass judicial review at all levels. It should be uyseful to policy makers, researchers, adn practitioners who are concerned with how parents make schooling decisions on behalf of their children, and how tax subsidies for educational expenses might affect those choices.     

Tax exporting,federal deductibility,and state tax structure

This paper studies the interaction between the federal and state tax systems during the 1980s and, in particular, considers how the Tax Reform Act of 1986 affected state tax structure. Using a panel data set on state governments over a nine-year period, I estimate tax share equations for six categories of taxes. I find that the state personal income tax is sensitive to changes in its tax price, but find a much smaller sensitivity to changes in tax prices for the general sales tax. I then consider various reasons why the sales tax does not exhibit a sensitivity to changes in tax price and consider the implications of these results for policymakers. The regression results suggest that different income groups are concerned with different tax instruments. Moreover, the results motivate a possible benefit approach to taxation at the state level. Linking taxes, about which a particular income group is most concerned, to services received by that group might generate additional political support for state tax systems during a time when many states are facing fiscal crisis.     

The real costs of tuition tax credits

Calculations of the costs of tuition tax credits should include estimates of the induced migration from public to private schools. The estimate by the President's advisors that his 1983 tax credit proposal would cost up to $800 million by 1986 neglected the migration factor. It is demonstrated that a migration from public to private schools of about from 1 to 1.4% of the present public school enrollment is all that is necessary to secure savings from migrants that just offset the loss in federal tax revenue from tax credits granted to incumbent private school families. Greater migration will generate net revenue gains to governments as a whole.