Our Policy Work: Income

The Issue

The Earned Income Tax Credit (EITC) is a powerful tool for helping low-income working New Yorkers and their families make ends meet, yet it is not accessed by many of those who are eligible for it.

Our Position

To alleviate poverty and help low-wage workers and lower-income families meet the rising costs of living, the Federal, State and City governments should expand the scope and functionality of the EITC.

Background

Federal, state and local EITCs are refundable credits that can return up to $7,354 to qualifying families and individuals.  Because it reduces poverty while promoting work, the EITC is widely acknowledged as a social policy success. Still, there are a number of obstacles that prevent many people who are eligible from accessing it.  The Federal, State and City governments can increase accessibility to the EITC by addressing some of these barriers:

• There's no one standard policy for documenting cash income for cash earners.  The EITC is available only to those who earn income.  Documenting income for cash earners is difficult due to the nature of their work, the intense fluctuations in income that occur over time, and the amount of advance planning that is required.  Currently tax forms and instructions do not state that income documentation is required to claim the EITC or instruct cash earners on how to document their income.  Even for those who submit documentation, the legal standard for sufficient income documentation is ambiguous and can be interpreted differently from worker to worker.  All of these factors combine to significantly suppress the number of low-income individuals and families receiving this valuable benefit.
   
• Few EITC recipients know that they can opt to get their EITC payments periodically instead of in one lump-sum refund.  The benefits of the EITC are not timed to coincide with household needs.  The overwhelming majority of recipients receive the credit via annual tax refund, but research suggests that they use the bulk of their EITC refunds to cover ongoing expenses like paying rent and utilities.  Most other nations that provide so-called “in-work” tax credits like the EITC deliver a significant portion of their credits to recipients periodically.

• Low-income childless workers are eligible for only a very small EITC.  At a maximum value of $438, the EITC for childless workers provides a very modest boost to the wages of those earning the least.  Many of these workers, particularly men, already face significant labor market challenges yet do not benefit from the incentives and support that single mothers receive through the tax code.  As a result, low-income, childless workers face much higher tax burdens than low-income families with children, and those at the poverty line are taxed deeper into poverty by federal income and payroll taxes, even after accounting for the EITC.

Taking Action

To increase access to the EITC among low-income people in New York City, United Way of New York City (UWNYC) proposes the following:

1. Create a standard and clear policy for income documentation for cash earners that would empower them to obtain and complete the documentation needed by established deadlines to qualify for the EITC.
   
   The State Department of Finance should create a clear and specific legal standard for minimum documentation needed by cash earners to file their taxes and qualify for the EITC.  This standard should specify documentation time frames and formats that can be used by different sectors.  It is critical that these standards be informed by and reflect the common business practices of cash earners.
    
2. Create a new, streamlined periodic payment option that will provide eligible tax filers with a portion of their EITC proceeds throughout the year, as other countries with similar tax credits do.
   
   The periodic payment option for the EITC should be featured more prominently on tax forms, and an opt-in option should be added to boost enrollment.  By providing the refund at monthly intervals throughout the year, a periodic payment system could enable more EITC recipients to use their refunds for ongoing household expenses.  Additionally, refunds should be directly deposited into recipients' accounts, which would promote the use of bank accounts to many unbanked families—a critical first step to financial stability.
    
3. Increase the EITC for childless workers to more closely align it with workers who have children.
   
   Currently, low-income workers who do not have children are eligible for only a very small EITC.  Extend the tax benefits of work to everyone by increasing the EITC for childless workers to more closely align it with that of workers with children.