One in six of America’s children are threatened by hunger and food insecurity.1 Recognizing the urgency of the problem, President Obama has pledged to end child hunger by 2015. Achieving this goal will require a committed and sustained federal effort to support children and families. It will also require a willingness to look for novel policy solutions.
Box 1: Provisions in the American Recovery and Reinvestment Act of 2009 (ARRA) lessen the burden for low- and moderate-income families
- The Making Work Pay Credit provides a refund of up to $400 (or $800 for couples) in Social Security payroll taxes for taxpayers earning up to $95,000 a year ($190,000 for couples). Millions of low- and moderate-income families pay more in payroll taxes than income taxes, and this measure provides them with important relief.
- The expansions to the Earned Income Tax Credit (EITC) allow families with three or more children to receive a somewhat larger credit; they also reduce the marriage penalty by increasing the income limit for married filers. The EITC has long been recognized as one of the country’s most effective anti-poverty programs, both encouraging employment and putting money back in the hands of families who are struggling despite their hard work. These measures build on this successful program.
- The expansion of the Child Tax Credit extends the credit to more low-income families. Families with children can now qualify for a portion of this credit once their income exceeds $3,000 a year, as opposed to $12,550 under prior law.
An end to hunger can start with a change in tax policy. Families struggling to provide for their children need to maximize their earnings—a task not easily accomplished under current tax policy.
While many tax credits and deductions are available to lower tax burdens, low-income filers often find themselves excluded from the best and biggest credits. Unfortunately, American tax policy imposes a heavy burden on those who struggle to make ends meet.
Current Tax Policy
The American Recovery and Reinvestment Act of 2009 (ARRA) has ushered in valuable short-term measures that increase tax breaks for low- and moderate-income families: one new credit—the Making Work Pay Credit—and expansions of two existing credits—the Earned Income Tax Credit (EITC) and the Child Tax Credit. A key feature of all three credits is that they are at least partially refundable, so low-income families have access to them (see Box 1).
But even with these changes, tax breaks remain heavily weighted towards wealthy people. For example, the mortgage interest tax deduction is the largest tax deduction, costing the federal government about $70 billion as compared to only $40 billion spent on the EITC.2 To qualify for the mortgage interest deduction, families must be homeowners and must itemize their deductions—criteria that completely exclude many lower-income families from benefits. Even among homeowners, wealthier families can claim larger deductions because they have more expensive homes (the mortgage interest tax deduction may be claimed on up to $1 million in debt for up to two homes). Finally, the actual dollar value of a tax deduction depends in part on the filer’s tax bracket, with larger benefits going to those in higher brackets (see Box 2).
Other examples of tax breaks that benefit wealthier taxpayers far more than their less wealthy counterparts include exemptions for retirement savings and employer-based health insurance costs, as well as lower tax rates on capital gains than on earnings. In all, the federal government spends roughly $750 billion a year in tax expenditures, with the vast majority benefiting families at the higher end of the income scale.3
As a result, tax expenditures raise the after-tax income of the wealthiest families—those in the top 20 percent of the income range—by 13 percent. Families at the bottom and middle of the income range, on the other hand, see an increase in after-tax income of just 7 percent as a result of tax breaks.4
Box 2: Structuring Tax Breaks: Deductions versus Credits
Deductions are subtracted from income before taxes are calculated. Their value depends in part on the filer’s tax bracket. For example, a $100 deduction is worth $10 to someone in a 10 percent tax bracket and $20 to someone in a 20 percent tax bracket. Deductions do not provide any benefits to those whose income is too low to owe taxes.
Credits are subtracted from filers’ tax liability after taxes are calculated. Thus their value does not automatically vary based on tax bracket.
- Nonrefundable credits provide benefits only up to the level of a filer’s tax liability. No benefits are provided when income is too low to owe taxes.
- Refundable credits offset families’ tax liability and provide a refund to those whose income is too low to owe taxes.
Proposed Reforms
Tax breaks for low-income filers without (custodial) children are especially limited. To qualify for the EITC under 2009 provisions, for example, single filers not claiming children must have income below $13,000 a year, and maximum annual benefits are limited to $457. For families with two or more children, on the other hand, the income limit is about $43,279 and the maximum benefit $5,028. Proposals to expand the EITC for workers without children have gained momentum in policy discussions but have not yet been enacted.
Increasing the income limit and doubling or tripling the benefit for childless tax filers would provide important support to millions of low-wage workers, many of whom are noncustodial parents with financial obligations to their children. Based on the effects of the expansion of the EITC for families with children, there is evidence that such an increase would be a powerful work incentive for this important population. Past expansions of the EITC have contributed to an increase in employment and a decrease in poverty. In fact, research has shown that the EITC lifts more children out of poverty than any other government program.5
Changes instituted under ARRA represent an impressive step in equitable tax reform, and while they are temporary under ARRA, President Obama’s 2010 budget proposes making them permanent. This would improve families’ bottom line, but to have an even greater impact, we propose three additional changes: 1) make the Child and Dependent Care Tax Credit (CDCTC) refundable, 2) make the Child Tax Credit (CTC) fully refundable, and 3) substantially increase EITC eligibility limits and benefit levels for filers not claiming children.
Value of Federal Tax Credits
These changes could provide substantial assistance to struggling families. Figure 1 shows the potential impact of the first two proposals for a single parent working full-time at the minimum wage; it also illustrates the value of the temporary reforms adopted under ARRA. The first column shows the family’s tax benefits under federal rules in effect for tax year 2008, the second shows benefits under rules in effect in 2009 (with the ARRA reforms), and the third shows benefits if the CDCTC and CTC were made fully refundable. The CDCTC alone could provide about $2,000 to offset the cost of child care, depending on the family’s child care expenses.6 Coupled with the EITC, a fully refundable CTC, and the Making Work Pay Credit, the total value of the family’s tax credits could exceed $9,000.
Moreover, while these reforms would augment the resources of a full-time minimum wage worker, they would have an even greater impact on those struggling to reach full-time status. Figure 2 shows the impact of the same reforms on a single parent with two children working half-time at the federal minimum wage. For this family, the proposed changes nearly double the value of available tax credits. When the CTC is fully refundable, its value jumps from nearly $700 to $2,000. Additionally, the currently non-refundable CDCTC adds up to $2,100 when made refundable.
Improving upon the ARRA by making its temporary changes permanent and enacting the additional reforms proposed above would benefit all Americans. Tax policies that support families and encourage work help reduce child hunger by providing families with more resources. Improved policies also bring benefits to the country as a whole—thriving families are better equipped to contribute positively to the workforce and economy.
Jodie Briggs is a policy associate and Michelle Chau a research analyst with the National Center for Children in Poverty (NCCP). They contribute to NCCP’s Making Work Supports Work initiative, which analyzes the current patchwork of federal and state programs that assist low-income working families and explores policy alternatives.
Footnotes
- In 2008, 1.08 million children experienced Very Low Food Security and 15.96 million Low Food Security. [back]
- Estimates are for Fiscal Year 2008. Estimates of Federal Tax Expenditures for Fiscal Years 2008-2012. The Joint Committee on Taxation. [back]
- For more on these provisions, see Huang, Chye-Ching; Shaw, Hannah. 2009. New Analysis Shows “Tax Expenditures” Overall Are Costly and Regressive: Findings Highlight Need to Restrain Tax Subsidies As Part of Solution to Long-Term Budget Problems. Washington, DC: Center on Budget and Policy Priorities. [back]
- Ibid. [back]
- Nancy K. Cauthen (2007), Improving Work Supports: Closing the Financial Gap for Low-Wage Workers and Their Families. Washington, DC: Agenda for Shared Prosperity, Economic Policy Institute. [back]
- The federal CDCTC allows families to claim up to $6,000 a year in child care expenses for two or more children ($3,000 for one child). The credit then equals 20-35% of those expenses, with the percent varying by household income. This example assumes total annual child care expenses of at least $6,000, allowing the family to claim the maximum credit for their income level. Note that expenses must be documented with the taxpayer identification number or social security number of the child care provider. [back]
Issues
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