Tax Policy Fellow
A Senate Finance Committee hearing tomorrow will examine taxpayers’ experiences during the 2017 tax filing season. A major new policy that has affected millions of taxpayers requires the IRS to delay refunds for taxpayers filing early in the tax season who claim the Earned Income Tax Credit (EITC) and low-income part of the Child Tax Credit (CTC). As a result, the number and amount of refunds were sharply lower in early February compared to last year (see graph), and millions of low- and moderate-income working families faced strained budgets while waiting for their refunds. These changes should be at the forefront of policymakers’ minds as they consider taxpayer experiences this tax season.
The EITC and low-income part of the CTC encourage work and boost incomes for more than 30 million families each year. They represent a significant share of many working families’ budgets: the EITC is worth more than $2,400, on average, and the CTC is worth up to $1,000 per child.
The refund delay is one of many provisions in the bipartisan tax deal reached at the end of 2015 that were intended to reduce errors in the tax credits — provisions that Senate Finance Chairman Orrin Hatch called “the most robust” such changes enacted in nearly 20 years. It requires the IRS, beginning this year, to automatically hold returns claiming the EITC and low-income part of the CTC through at least February 15th, regardless of whether there were any errors or issues with the returns. The purpose of the change is to give the IRS additional time to verify the information on the returns and combat false refund claims and identity theft.
As a result, taxpayers claiming the credits didn’t begin receiving refunds until the week of February 27th, more than a month after some had filed their taxes. This is in stark contrast to higher-income taxpayers claiming tax benefits, whose refunds were processed and released without delays.
Although the refund delays may sound like a minor inconvenience to some, they likely weren’t minor for many low- and moderate-income families. Research finds many families receiving the EITC are cash-strapped and rely on their refunds to meet ongoing expenses, pay down debt, and build assets. That’s likely why many families receiving the EITC and CTC file their taxes near the beginning of the tax season to receive their refunds as soon as possible. Delaying their refunds could make it harder for these families to pay bills on time. It also could delay investments in items such as car purchases or repairs for commuting to work.
Indeed, the refund delays could have reduced total consumer spending in February by roughly $20 billion, Goldman Sachs’ Economic Research division estimates. And more than 1.5 million taxpayers turned to short-term, no-cost loans from tax preparation firms to fill the gap while waiting for their refunds. Not all filers qualified for those loans, meaning some may have had to turn to costly “payday” loans to cover critical immediate expenses they had expected their tax refund to pay.
Policymakers should consider the consequences of this additional burden on low-income taxpayers who receive the EITC and CTC as they review the first filing season with this change in effect and consider ways to improve the tax-filing process.