Rethinking the EITC
The Earned Income Tax Credit (EITC) is our nation's largest federal anti-poverty program for families with children, reaching one in five workers, or 28 million households. In Illinois, more than one million households claimed the EITC in 2014, generating $2.5 billion in refunds. Under current law, the EITC – worth up to $6,143 per household - is available only as a lump-sum credit payable after a tax return is filed - a few months after the end of the year in which the credit was earned.
For many working families, their EITC refund is larger than their regular paycheck, and their overall tax refund can be between 20% and 40% of their annual take-home pay.
Living paycheck to paycheck for most of the year, most families have spent their refund within several months, however they continue to experience financial instability the rest of the year. These constraints can cause families to often rely on short-term, high cost credit – payday and auto title loans and high interest credit cards – or even forego paying bills which can result in expensive late fees and penalties.
Recognizing these limitations of the EITC as a once-a-year, lump-sum refund payment, CEP proposes a periodic payment option that allows taxpayers with children to claim a portion of the EITC during the year it is earned.
By having up to 50% of the federal EITC paid out in four installments in the year it is earned rather than in the subsequent year when a tax return is filed, CEP believes that recipients will be able to better address income volatility, reduce reliance on high-cost credit and save for the future.
CEP tested this hypothesis in Chicago through its Chicago Periodic EITC Payment Pilot. This pilot was a research collaboration with the City of Chicago, Chicago Housing Authority and the University of Illinois at Urbana Champaign conducted in 2014 and 2015.
Early results from the pilot are now available and are overwhelmingly positive. Participants, when compared to a control group, relied less on credit cards and payday loans, experienced less stress, invested more funds in their children and saved more. Most significantly, 90% indicated that they prefer a periodic payment EITC versus the current lump sum refund.