The Problem with the Earned Income Tax Credit

Cross-posted from the New America Foundation's 2012 Campaign Blog, Delve into '12.

Today, the New York Times highlights the shortcomings of the Earned Income Tax Credit (EITC).  The EITC, a tax refund that’s  distributed to low-income households, is “the country’s largest antipoverty program.” But, as the story points out, the money is a temporary financial jolt – and generally not a long-term solution to lift families out of poverty.  The EITC pulls several million Americans up from below the poverty line each year.  But that number is deceiving, according to the Times:
 
“…the boost is often temporary. Many people who receive the credit fall back into poverty over the course of the year, caught in the same cycle of low-wage work and reliance on credit that put them there in the first place.”
 
There’s at least one way to stop the crippling poverty cycle: Low-income families could put some of their refund into a savings account. With money in the bank, they’ll be better prepared to face fiscal turmoil in the future. But the current system’s once-a-year lump sum allowance isn’t structured to promote savings, explains Rachel Black, a policy analyst in New America’s Asset Building Program.
 
Black argues that the EITC would be more effective if it was dispensed more regularly, and closer to the times each year when families actually need it. Food stamps, for example, are distributed monthly. “Savings is a way to replicate that function -- being able to draw down resources at the time of need -- but most low-income households have few ways to save that meet their needs,” she explains.

 Black points to one program - $aveNYC – as a potential legislative answer to this perennial problem. She describes it in a recent Mother Jones op-ed:

"Since 2008, the City of New York has offered a pilot program called $aveNYC. The initiative offers a match to low income tax filers who save a portion of their refund money. By the conclusion of the third year, 2,200 very low-income people had saved an average of $560, and evidence suggests that savings is becoming a habit: Almost three-quarters of participants continued saving a year after opening their account. Three more cities, Newark, Tulsa, and San Antonio, are currently replicating the program with federal dollars. The Saver’s Bonus Act, originally introduced by Senator Robert Menendez (D-NJ) would make this program a permanent part of the tax code."

$aveNYC  does three crucial things, Black says. It makes opening a savings account easy, valuable (with a direct match on dollars), and relevant: The program offers each family multiple savings options to choose from.

“Not only does current policy distribute savings incentives in a way that have exactly no benefit for low-income savers, it doesn’t provide any support for emergency savings,” Black says. “The Saver’s Bonus legislative proposal would fill that gap.”

To learn more about the EITC and how it can be improved, check out a speech delivered by the Asset Building Program's David Rothstein at a policy briefing in honor of EITC Awareness Day 2012.