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Congress Must Help Struggling Families — as It Helped Highly Indebted Companies

December 4, 2020 at 2:30 PM

COVID-19 and natural disasters from wildfires to hurricanes this year have hit people in low-paying jobs especially hard, with many of them suffering massive job and wage losses. Now, many of these same people face the risk of losing some or all of their Earned Income Tax Credit (EITC) and Child Tax Credit unless policymakers enact — before the next tax filing season — a “lookback” to let workers use their previous-year earnings to calculate their tax credit amounts.

In the CARES Act of March, the President and Congress provided a similar lookback for highly indebted companies, boosting the deductions they can take on their debt when they file their taxes. Many of these companies are owned by private equity or leveraged buyout firms. If policymakers can provide a lookback for leveraged buyout firms, they surely can provide a lookback for many families who are struggling to eat and pay their rent.

Policymakers have enacted a lookback provision for struggling families many times in the past, most recently just last year. In response to Hurricane Dorian, floods in the Midwest, and other natural disasters, policymakers enacted an EITC and Child Tax Credit lookback late last December as part of year-end appropriations legislation, and the IRS implemented it as part of the filing season that began on January 27, 2020.

Here is what policymakers need to know:

The problem: Tens of millions of people do important jobs but are paid very low wages. The EITC and Child Tax Credit boost their incomes and lift millions of them and their families out of poverty. Many of these people will have lower-than-normal earnings this year, and those lower earnings will be used to determine the size of their tax credits; generally, the amounts of a person’s credits rise as that person’s earnings rise, up to the maximum credit amounts. As a result, millions will likely lose additional income because their EITC and Child Tax Credit will be much smaller than usual.

For example:

  • A single mother with two children whose earnings fall from $15,000 in 2019 to $5,000 in 2020 would see her EITC fall from $5,920 to $2,010 and her Child Tax Credit fall from $1,875 to $375. That’s a loss of $5,410 in tax credits on top of her $10,000 loss in wages.

The solution: The legislative solution is simple. A lookback would give people the option to use their 2019 earnings to calculate their EITC and Child Tax Credit instead of their lower 2020 earnings.

  • If, then, the same single mom could use her 2019 earnings to calculate her EITC and Child Tax Credit, she could eliminate that $5,410 loss and would receive the same credit she received last year.

The lookback has bipartisan, bicameral support. The COVID-19 Earned Income Act, in the Senate from Democrat Sherrod Brown and Republican Bill Cassidy and in the House from Democrat Brian Higgins and Republican Mike Kelly, shows how to do this for the EITC — and the Child Tax Credit lookback would work the same way.

The President and Congress, along with the IRS, have enacted and implemented a lookback many times. Dating back to Hurricane Katrina in 2005, policymakers have on several occasions provided an EITC and Child Tax Credit lookback to provide tax relief to people affected by natural disasters. The IRS has the experience and institutional knowledge to quickly and effectively administer EITC and Child Tax Credit lookbacks.

Policymakers provided a lookback for highly indebted companies in the CARES Act. Highly indebted companies can reduce their taxes by deducting the interest payments they make on what they borrow, up to a limit based on their income. In general, the more they make, the more they can deduct. That includes many companies that are owned by private equity or leveraged buyout firms. The CARES Act let these companies use either their pre-pandemic 2019 income or their 2020 income — whichever is greater — to maximize this tax deduction for debt. As one prominent law firm summed, “The increased availability of interest deductions is expected to provide significant relief to highly leveraged businesses and private equity funds by reducing cash taxes payable.”

Policymakers should do the same for millions of struggling families. The year 2020 has been a brutal one, especially for many people who do important jobs for low pay. Many put themselves at grave risk to make sure that others have food to eat. Millions of others have lost their jobs in restaurants, hotels, and stores or been forced to stop working to care for a sick family member or a child whose school has closed. Too many can’t afford basic expenses such as food, rent or mortgage, car payments, or medical expenses. Many expect, as in other years, that a tax refund will give them a bit of a financial bridge. Their families could be in for another income shock unless policymakers act. Congress should not adjourn this year without providing the EITC and Child Tax Credit lookback.


chuck_marr-500x500.jpg

Senior Director of Federal Tax Policy

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