September 29, 1999
The House Leadership's Proposal to Delay EITC Payments
by Robert Greenstein
House Majority Leader Dick Armey disclosed September 28 that the House Leadership intends to insert a provision into the Labor-HHS-Education appropriation bill that would delay billions of dollars in Earned Income Tax Credit refund payments that working poor families will be due next spring. This proposal is expected to be added to the Labor-HHS-Education appropriation bill when the House Appropriations Committee considers the bill September 30.
The proposal is designed to shift about $9 billion in EITC payments from fiscal year 2000 to fiscal year 2001, as one of the maneuvers being employed to make the non-Social Security budget appear to be in balance. Under this proposal, the IRS would delay the bulk of the EITC payments these families are owed, stretching the EITC payments these families would otherwise receive next spring over the following 12 months instead. It is not clear whether the EITC payments would be made on a monthly or a quarterly basis.
EITC payments that working families are due based on their earnings in 1999 consequently would not be fully paid until the first part of 2001. This proposal would hold up refunds for most of the 20 million low- and moderate-income working households that receive the EITC.
No other group of households besides low-income working families would be subject to a delay in their tax refunds. Thus, the taxpayers likely to have the most urgent needs for their tax refunds would be made to wait the longest. As explained below, the lengthy delays in EITC would effectively take money out of the pockets of working families and cause difficulties for a number of these families. At this late date in IRS preparations for the handling of 1999 tax returns, the proposal also appears extremely difficult, if not impossible, for the IRS to administer.
Proposal Would Adversely Affect Families and
Essentially Constitutes a Tax Increase
Inflation erodes the value of money over time. A dollar today buys more than a dollar will buy a year from now. As a result, this proposal essentially constitutes a tax increase that would be imposed on low- and moderate-income working families. Because of the "time value" of money, payments deferred are payments reduced.
If proposals were being advanced to delay for up to a year various government payments owed to other groups such as payments to defense contractors, for example those groups surely would demand interest. This proposal would single out low-income working families, the politically weakest group, for delay of payment.
To see how this proposal would adversely offset low- and moderate-income families, consider the following. Findings from recent research on how low-income working families use their EITC payments(1) show some EITC families save a portion of their EITC refund. Under this proposal, these families would lose interest payments they otherwise would earn. The research also finds some families use some or all of their EITC to pay off debt, such as credit card debt. Under the proposal, these families would be able to pay off less debt next spring, and they would incur higher interest charges as a result. Furthermore, the research finds that substantial numbers of families use their EITC refunds for significant expenditures they have deferred, such as making major repairs on an old car so they can continue commuting to work or acquiring a used car if their previous car is no longer operable, fixing a leaking roof that threatens damage to their home, paying off arrearages in utility bills so their service is not shut off, and the like.
These families either would not be able to make these purchases or repairs or would have to take out loans (or larger loans) to finance these items, thereby incurring higher interest costs. Making these families wait up to a year for their full EITC thus is likely to cause significant hardship for some of these families.
In a sense, this proposal entails requiring families due EITC payments based on the low wages they earned in the previous calendar year to lend the federal government most of the EITC they are due. To the degree that some of these families have urgent needs that cannot be postponed, they, in turn, may have to turn to private lenders and borrow money at hefty interest rates.
In short, no matter how one slices it, the proposal would take money out of the pockets of working-poor and near-poor families with children. Moreover, about 80 percent of EITC payments offset other federal taxes that low- and moderate-income working families pay, including payroll and excise taxes. Delaying payments reduces their value as an offset to other taxes. For many families, the net tax bill would rise next year.
This proposal also could have another deleterious effect it might weaken welfare reform efforts. The EITC is designed to reward work and help make low-wage jobs pay more than welfare. If the EITC that a worker is due for wages earned in 1999 is not fully paid until 2001, it may be harder to see the linkage between work and the EITC, and the work incentive effects of the EITC could weaken.
Proposal Inconsistent with Other Republican Policy Thrusts
The proposal to delay EITC refunds and stretch them over 12 months is inconsistent with two other types of policy changes the Congressional majority has pursued streamlining the IRS and making it more friendly to tax filers, and encouraging families to reduce debt overloads that can lead some families to declare bankruptcy. By requiring low- and moderate-income working families with incomes below $30,000 to wait a year to get their full tax refunds and having EITC refunds cut into as many as 12 separate checks, along with additional difficulties for some families that move during the year the proposal would complicate the financial picture of many working families. The proposal also would make it harder for many low-income working families to pay down their debts in a timely fashion; research has found that one of the principal uses that many families make of the lump-sum EITC refunds they now receive is to reduce or eliminate arrearages and debts that have accumulated.
Finally, some low-income working families would be subject to even longer delays in receiving EITC payments. Low-income working families move more frequently than higher-income households do; Census data suggest that nearly one in five households with incomes below $30,000 moves in any given year. Because EITC payments would be stretched out over such a long period after a family's tax return is filed, the IRS would inevitably send a number of EITC refund checks to what, by then, had become wrong addresses. The IRS would incur additional expenses trying to track down families, and some families likely would likely encounter significant additional delays in receiving EITC payments they were due.
Proposal Appears Administratively Infeasible and
Would Create Serious Problems for the IRS
The proposal also is highly problematic for another set of reasons. The IRS does not now divide any refund payments into 12 monthly or four quarterly checks, so the procedure involved would be a new one that would add administrative complexity. The Treasury has explained that at this late date, the proposal would be extremely difficult, and probably impossible, for the IRS to implement.
The IRS has largely completed work on its electronic returns processing system and related computer systems for the coming tax filing season. Requiring the adjustments this proposal would entail would be a major challenge for the IRS.
The presence of various other tax credits for which these families may qualify complicates this matter further, making the separation of refunds into EITC and non-EITC components a still-more difficult undertaking. Requiring the IRS to overhaul its systems at this late date to implement this proposal would be difficult in an ordinary year. It would be highly problematic now, coming at a time that the IRS is immersed in getting its systems ready for Y2K.
1. See Timothy M. Smeeding and Katherin E. Ross (Center for Policy Research, Syracuse University), and Michael O'Conner and Michael Simon (Center for Law and Human Services, Chicago), "The Economic Impact of the Earned Income Tax Credit (EITC)," paper presented at Population Association of America 1999 Annual Meeting.