Revised July 9, 1998
The Consequences of Eliminating
the EITC for Childless Workers
by Robert Greenstein and Isaac Shapiro
The House budget resolution assumes $101 billion in budget cuts to pay for an equivalent amount of tax cuts. One of the budget cuts the House budget resolution assumes, however, turns out to be a tax increase on some of the nation's poorest workers.
The House budget assumes elimination of the small Earned Income Tax Credit for childless workers with incomes below $10,000. This modest credit provides tax relief for a group of poor workers who receive little aid from other government assistance programs, who experienced a sharper increase in their tax burdens between 1980 and 1993 (when the EITC for these workers became law) than any other group in the country, and who still pay an unusually high percentage of their small incomes in federal taxes.
If the EITC for these poor workers is terminated, these workers will face a substantial increase in their federal tax burdens.
If the EITC for workers without children is repealed, 3.5 million poor workers will face an average tax increase of a little over $200, with households who qualify for the maximum credit experiencing a tax increase of $341. Every dollar of reduction in the EITC that a childless worker receives would translate into a dollar increase in taxes; this is the case because this tax credit simply offsets part or all of the employee share of the payroll tax that an affected worker pays.
If Congress eliminates the EITC for workers without children, the combination of the tax cuts in the IRS bill and the elimination of the EITC for these workers would mean Congress had reduced taxes on investors and retirees with high incomes at the same time that it raised taxes on some of the nation's poorest workers.
Poor single workers with incomes at the poverty line would see their already-high federal tax liability climb still higher. A single worker at the poverty line, which is projected to be $8,534 in 1998, must pay nearly $1,430 in income and payroll tax. If the EITC for these workers is eliminated, this worker's tax liability will rise $114 to approximately $1,545.(1)
If taxes are raised on poor workers without children, this step would come at the same time that taxes on a substantial number of the nation's wealthiest individuals are being reduced. The IRS bill, which will soon become law, includes two tax cuts that primarily benefit high-income households. In addition, a Congressional decision in June to decline to correct a significant drafting error in the estate tax provisions of last year's tax legislation will grant large tax breaks to the heirs of estates worth more than $17 million. Further, if cigarette taxes are raised this year to help achieve the important goal of reducing smoking, especially among teenagers, the average tax burdens of low-income workers would already be rising.(2) Termination of the EITC for childless workers would then raise the overall taxes these workers pay to still higher levels.
Earned Income Credit Claims for Tax Year 1996
by Workers Without a Qualifying Child
Alabama 54,204 $11,648,797 Alaska 6,069 $1,131,601 Arizona 56,994 $12,153,706 Arkansas 33,805 $6,935,618 California 435,977 $98,224,755 Colorado 51,525 $10,378,621 Connecticut 32,615 $6,484,851 Delaware 8,050 $1,668,687 District of Columbia 9,116 $1,962,939 Florida 245,844 $51,901,662 Georgia 91,774 $19,542,343 Hawaii 14,880 $3,006,476 Idaho 13,564 $2,797,111 Illinois 127,906 $26,197,004 Indiana 66,366 $13,168,748 Iowa 30,592 $5,865,605 Kansas 26,529 $5,239,416 Kentucky 57,435 $11,488,858 Louisiana 57,312 $12,455,073 Maine 18,352 $3,563,741 Maryland 54,336 $11,500,244 Massachusetts 71,221 $14,407,702 Michigan 107,143 $22,153,540 Minnesota 48,686 $9,700,584 Mississippi 33,378 $7,183,262 Missouri 67,158 $13,387,781 Montana 14,431 $2,860,703 Nebraska 17,714 $3,462,370 Nevada 22,915 $4,623,930 New Hampshire 13,252 $2,590,408 New Jersey 78,484 $16,671,236 New Mexico 33,310 $6,909,686 New York 256,863 $56,060,199 North Carolina 96,640 $20,062,327 North Dakota 7,979 $1,522,202 Ohio 132,557 $26,528,308 Oklahoma 48,523 $9,814,805 Oregon 42,687 $8,707,799 Pennsylvania 143,069 $28,170,819 Rhode Island 13,035 $2,589,863 South Carolina 53,755 $11,023,633 South Dakota 9,234 $1,790,204 Tennessee 78,570 $15,750,541 Texas 252,671 $53,428,384 Utah 16,551 $3,430,503 Vermont 9,208 $1,815,109 Virginia 79,159 $16,234,389 Washington 65,223 $13,169,213 West Virginia 28,245 $5,528,059 Wisconsin 52,533 $10,399,231 Wyoming 7,116 $1,387,791 National 3,394,552 $708,680,437 Source: IRS Supplemental Earned Income Report May 30, 1998
The small EITC for childless workers is a tax credit for poor workers between the ages of 25 and 64 who do not live with children. In 1998, the EITC for which these workers can qualify equals 7.65 percent of their first $4,460 in earnings, resulting in a maximum credit of $341. The 7.65 percent credit rate equals the percentage of earnings an employee pays in payroll taxes. The credit begins to phase out at a 7.65 percent rate once a worker's income surpasses $5,570. The credit falls to zero when income reaches $10,030. The EITC for childless workers accounts for just two percent of EITC costs.
This modest EITC was extended to these workers in significant part because their federal tax burdens had escalated sharply since 1980 as a consequence of a series of regressive payroll and excise tax increases. A Congressional Budget Office analysis showed that between 1980 and 1993, the average federal tax burden of the poorest fifth of non-elderly households rose 38 percent. This dwarfed the increase in tax burdens borne by any other group of households in any income category (see Table 2). By 1993, the percentage of income that the poorest fifth of non-elderly households without children was paying in federal taxes was double the percentage of income paid by the poorest fifth of families with children and more than five times the percentage paid by the poorest fifth of elderly households.
The sharp increase in the tax burdens borne by these households occurred primarily because of a series of increases in Social Security, gasoline, and other excise taxes. For low-income families with children, these regressive tax increases were generally offset through EITC expansions. For poor workers without children, no offsetting actions were taken before 1993. Accordingly, legislation enacted in 1993 established a modest EITC that offsets some or all of the employee share of the payroll tax that these workers pay.
In addition to offsetting a portion of these tax increases, the EITC for poor workers without children also nearly completed a piece of unfinished business from the 1986 Tax Reform Act. One of that Act's goals, often espoused by President Reagan,
was to eliminate income tax burdens on workers below the poverty line so they would not be taxed deeper into poverty. The 1986 Act accomplished this goal for all tax filers except non-elderly single individuals; prior to extension of the EITC to these workers, a single non-elderly worker still began to owe federal income tax when his or her income was well below the poverty line. The EITC raised the income level at which these workers begin owing income tax closer to, although not all the way to, the poverty line.
Today, single working individuals remain the one group of workers in America who begin to owe federal income tax while still in poverty. Elimination of the small EITC they receive would enlarge this problem and tax them deeper into poverty. It also bears mentioning that these households received virtually no benefit from the tax cuts enacted in 1997.
Changes in Federal Tax Burdens, 1980-1993
Household Category Change in the Percentage of Income Consumed
by Federal Taxes
Non-elderly households without children
Source: Congressional Budget Office data published in House Committee on Ways and Means, 1992 Green Book, pp. 1526-7.
Even with EITC, Childless Workers Still Face Large Tax Burdens
A recent Congressional Budget Office analysis shows that even with the EITC, poor households without children face tax burdens that are unusually high given their low-income status.(3) The CBO study estimates that the poorest fifth of non-elderly married couples without children will pay an average of 11 percent of their income in federal taxes in 1999 and the poorest fifth of non-elderly individuals living alone will pay 17.1 percent. These figures far surpass the percentage of income that poor elderly individuals and poor families with children pay. In fact, the 17.1 percent-of-income that the poorest fifth of non-elderly individuals pay in federal taxes is nearly as large as the average tax burden that the middle fifth of families with children bear. The percentage of income that these poor individuals and couples without children must pay in federal taxes will climb to still higher levels if the EITC for poor workers without children is abolished.
EITC for Poor Workers Without Children Accounts for a Tiny Fraction
of EITC Errors and is Not Rising Much in Cost
In 1997, the Internal Revenue Service issued the results of a study of errors in the Earned Income Tax Credit. The IRS study found little revenue loss due to errors in the EITC for workers without children. It found that errors in the EITC for poor workers without children account for less than two percent of EITC overpayments and that the error rate in the EITC for these workers is about equal to the average error rate for the income tax code as a whole.*
Recent budget data from the Treasury Department and the Office of Management and Budget also indicate that the EITC for childless workers is growing very slowly and is actually declining in cost when measured as a share of the Gross Domestic Product or adjusted for inflation and population growth. The Treasury and OMB project that costs for the EITC for childless workers will grow at a rate of about two percent per year over the next five years, less than half the rate at which the U.S. economy is expected to grow. The Treasury/OMB forecast also shows that the cost of the EITC for childless workers will decline significantly between fiscal year 1997 and fiscal year 1998 and that the cost of the credit is expected to be lower in each of the next five years than it was in 1997. (The credit cost a little over $700 million in fiscal year 1997; it is expected to cost between $608 million and $674 million in each year from fiscal year 1998 through fiscal year 2003.)
* See Robert Greenstein, "The Earned Income Tax Credit and Error Rates," Center on Budget and Policy Priorities, February 25, 1998.
Eliminating EITC for Childless Workers Would Contrast Sharply With Other Congressional Tax Policies
The proposal to eliminate the EITC for poor childless workers and thereby increase their tax burden stands in sharp contrast to other steps Congress has taken in recent weeks to reduce taxes for certain groups of households at high income levels. Two new tax cuts tucked into the IRS reform bill will benefit high-income households either exclusively or primarily. In addition, Congress has decided not to correct an egregious drafting error in last year's tax legislation that will provide windfalls to some of the nation's wealthiest individuals. The IRS bill reflects the following provisions and decisions:
- Maintenance of an unintended tax cut for estates worth more than $17 million. Due to a drafting error, the tax cut legislation enacted last year failed to include a provision agreed to by the House, the Senate, and the White House to phase out for estates valued at more than $17 million the benefits of the legislation's estate tax cuts. Reflecting standard practice, the Senate and the White House agreed to correct this mistake by including a technical change in the IRS bill. But this technical correction was dropped in conference committee, reportedly at the behest of House Speaker Newt Gingrich and House Ways and Means Committee chairman Bill Archer.(4) The result is a revenue loss of approximately $880 million over the next 10 years.
- New IRA tax break for elderly households with incomes over $100,000. The IRS reform bill includes a new tax break that affects only the five percent to seven percent of elderly households with the highest incomes those with incomes above $100,000. The new provision gives many of these households access to the Roth IRA accounts enacted in the 1997 tax bill, allowing them to gain tax free earnings, amass tax-free funds from which large untaxed bequests can be made, and reduce their estate taxes.(5) This provision would be costly once it is fully in effect, reducing revenues by approximately $13 billion in the 10 years from 2008 through 2017.
- New capital gains tax cut. The IRS bill also includes a reduction in capital gains taxes. It shortens from 18 months to 12 months the period of time that an investor must hold a stock or bond for the investor to take advantage of the tax break that last year's tax legislation provides for "long-term" capital gains. This new capital gains tax reduction was added during the conference committee on the IRS bill despite the fact that neither the House nor the Senate IRS bill included it. More than three-fifths of the benefits from this tax cut will go to the richest one percent of taxpayers, those with incomes exceeding $200,000.(6)
If Congress eliminates the EITC for workers without children, the combination of the tax cuts in the IRS bill and the elimination of the EITC for these workers would mean Congress had reduced taxes on investors and retirees with quite high incomes at the same time that it raised taxes on some of the nation's poorest workers.
1. In accordance with standard economic analysis, these figures include the employee and the employer share of the payroll tax. The Congressional Budget Office data used for Figure 1 also include both the employee and the employer share of the payroll tax.
2. Analysis by the Joint Committee on Taxation and the Congressional Research Service show that an increase in taxes on tobacco products would extract a significantly larger percentage of income from households with incomes below $10,000 than from other households. The CRS analysis found that in 1990, cigarette taxes consumed .08 percent of the income of the typical household with income above $50,000 while consuming 1.6 percent of the income of the typical household with income below $10,000, a percentage 20 times larger. Among those who smoked, cigarette taxes consumed 0.4 percent of the income of households with incomes above $50,000 compared to five percent of income for those below $10,000. See Jane G. Gravelle, "Burning Issues in the Tobacco Settlement Payments: An Economic Perspective," Congressional Research Service, May, 1998. This does not mean cigarette taxes should not be raised to deter smoking. It does mean that if possible, offsetting measures should be considered to lower other tax burdens that low-income households bear and, at a minimum, other taxes should not also be raised on these households at the same time.
3. CBO Memorandum, "Estimates of Federal Tax Liabilities for Individuals and Families by Income Category and Family Type for 1995 and 1999," May 1998, pp. 28-9.
4. David E. Rosenbaum, "A Mistake Prevails, as Certainly as Death and Taxes," The New York Times, June 24, 1998.
5. Elderly households with incomes under $100,000 were made eligible for this tax cut last year.
6. This figure is based on the estimate of the Congressional Budget Office that more than 60 percent of all capital gains taxes are paid by richest one percent of families. Congressional Budget Office, Perspectives on the Ownership of Capital Assets and the Realization of Capital Gains, May 1997.