The 2010 Hunger Report

Percentage Distribution of Total Federal Benefits from Child and Dependent Care Tax Credit (CDCTC), 2006

Refundable tax credits are a way to provide assistance to people with little or no tax liability. Almost half of all children live in homes with no tax liability, of whom 80 percent are in single-parent households.¹ Here is how refundable tax credits work: Suppose someone owes $500 in income taxes and is eligible for a $1,000 tax credit. If the tax credit is refundable, it will reduce the person’s tax liability to $0 and the remaining $500 will be refunded. If the tax credit were nonrefundable, it would reduce the person’s tax liability to $0, but she would not be refunded the additional $500.

The Earned Income Tax Credit (EITC) is an example of a refundable tax credit. In 2005, the benefits delivered through the EITC lifted 5 million people, including 2.6 million children, out of poverty.² The EITC was designed to bridge the gap between low-wage earnings and the cost of meeting basic needs. This tax credit is essential to help low-wage workers meet the costs of basic needs; these costs have risen while wages remained largely stagnant.

In a 2006 report by the Brookings Institution, co-authored by Peter Orzag, now the director of the Office of Management and Budget, the case for refundable tax credits could not be stated any more strongly: “If policymakers want to create incentives through the individual income tax for all or most tax units to engage in certain behavior every year, such as saving or obtaining education for themselves or their children, refundability should not only be considered an acceptable instrument of tax policy—it is imperative.”³

For low-income families with children, the lack of affordable child care makes it much more difficult to hold a job. The Child and Dependent Care Tax Credit (CDCTC) helps families pay for child care. In 2006, only 8 percent of CDCTC benefits went to families with incomes below $30,000—some 700,000 families. If the CDCTC were refundable, however, benefits would be available to 2.2 million low-income households instead of 700,000.⁴ Not only would this help low-wage-earning parents to work, it would allow them to keep more of their income, which would reduce child poverty.

Refundable tax credits would also help more low-income children attend college. A college education is one of the best ways to break the cycle of poverty in families—finishing college means having average lifetime earnings that are $1 million more than a person with only a high school education.⁵ But the average tuition cost at a four-year public university has increased by more than 300 percent in the last 10 years alone and by almost 1,000 percent since 1977. When adjusted for inflation, tuition has risen from $655 to $6,185.⁶ The current tax credits that subsidize the cost of college, the Hope Credit and the Lifetime Learning Credit, are not refundable. A new, temporary refundable tax credit, the American Opportunity Tax Credit, was created in the American Recovery and Reinvestment Act of 2009. It extends eligibility to 3.8 million low- and moderate-income students.  It is the only tax credit for college that is available to low-income students, but it will expire in 2010 if Congress does not act to make it permanent.

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