The Avenue

EITC Receipt Continues to Rise in Recession's Wake

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Today, as we mark the close of another tax filing season, an article in this morning’s New York Times reminds us just how important this time of year is to millions of low-income working families struggling to make ends meet. That’s because each year, tax time provides a window of opportunity for low-income workers to connect with one of the country’s most effective poverty alleviation and work support programs--the Earned Income Tax Credit (EITC). And over the last few years--in the wake of the worst recession since the Great Depression--the EITC has played a particularly important role in providing a buffer for families working to weather the downturn and slow recovery that has followed.

While it will be some time yet before we know the extent of the EITC’s reach this tax season, we do know that the 2010 tax year marked the highest claim rate since the EITC was enacted in the 1970s. Last tax season, almost one in every five tax filers claimed the EITC, boosting the paychecks of low-income workers by a total of roughly $60 billion, and bringing an infusion of economic activity into their communities as recipients used those funds to purchase necessities and catch up on rent and bills.

This level of EITC receipt represents an increase of almost three million tax filers (a 12 percent gain) since the start of the recession in 2008, and a 20 percent jump (almost $10 billion) in dollars claimed. Every state and the District of Columbia saw upticks in the EITC over this time period, ranging from a 12 percent boost in federal dollars coming into Alabama through the credit to a more than 40 percent increase in EITC dollars in Nevada and Alaska. The Sun Belt and Intermountain West states hit hardest by the housing-led downturn saw some of the steepest gains in EITC dollars claimed since 2008. (See map here).

Much of this growth occurred in the first year of the downturn as unemployment and underemployment climbed between 2008 and 2009. The number of EITC recipients rose by 11 percent in that year, while the dollars claimed grew by 19 percent. As the following year brought somewhat better news on national unemployment rates, levels of EITC receipt largely held steady, though there was a modest increase in both filers (0.8 percent) and dollars claimed (1.3 percent).

In part, these increases in EITC receipt likely reflect families falling into eligibility as spells of unemployment and cuts in both hours worked and wages reduced their incomes, even as some families may have fallen out of eligibility as the number of long-term unemployed grew. This growth also reflects important expansions to the credit enacted in the American Recovery and Reinvestment Act that benefitted married couples and families with three or more children, further increasing the pool of eligible filers.

As the challenges of tax reform and closing budget gaps loom, more than ever it’s important this Tax Day to remember and recognize what our current system gets right. The reach and impact of a strengthened EITC amid one of the most economically tumultuous periods in recent history underscores the program’s continued importance and effectiveness as a poverty alleviation tool, a work incentive, and as a buffer for working families navigating the ups and downs of the economic cycle.

 

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