Spotlight Exclusives

April 13, 2009: The Stimulus and Poverty: Tax and Transfer Programs in the Stimulus Bill, By Daniel R. Meyer, Professor of Social Work and affiliate of the Institute for Research on Poverty at the University of Wisconsin-Madison

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Over the coming weeks, Spotlight is running a special series that examines how the American Recovery and Reinvestment Act affects low-income Americans.

Economist Timothy Smeeding opened the series with the piece “First Steps toward a Strong Antipoverty Policy: New Attention to a Growing Problem.” Professor Daniel R. Meyer of the University of Wisconsin-Madison continues the series with an analysis of the bill۪s tax and transfer programs and how they will affect those in need.

The stimulus bill, which has been called a “new revolution in American social policy,” will throw a lifeline to many low-income individuals and families in this time of diminished opportunity and growing need. This commentary describes the central features of the bill۪s main tax and transfer programs (with the exception of education and health programs), focusing on its likely effects on low-income families. Many other features of the bill will also have substantial effects on low-income families, including, for example, spending on infrastructure development and fiscal support for states, but they will not be the focus here. After describing the main features of the American Recovery and Reinvestment Act (ARRA), I step back to assess whether the features of the bill signal a new direction for social policy.

Changes to taxes

President Obama۪s stimulus bill establishes a new “Making Work Pay” tax credit, which is designed to offset payroll taxes by providing a refundable credit to low-wage workers. The credit provides 6.2 percent of earned income, up to a maximum of $400 per year for single taxpayers and $800 for married couples filing jointly, and it is refundable, so even those without tax liability will receive it if they file a tax return.

In general, tax credits are worth the same amount to those across the income distribution because they are administered after the tax rate is established, whereas deductions from income are advantageous to upper-income families because they can subtract money from income that would be taxed at a higher percentage. In addition to tax credits being more beneficial to low-income families than deductions, tax credits that are refundable are particularly helpful to low-income families because they can provide cash, not merely be used to offset tax liabilities. This new work credit for low-income families will be implemented through lowering the income tax withholding schedule, so it will immediately increase take-home pay. On the other hand, this new tax credit is available to those with incomes up to $75,000 ($150,000 for married couples filing a joint return), so it also provides a benefit to the middle class, and, as such, is relatively expensive ($116 billion over ten years).

The ARRA provides another important work-support tax benefit by expanding the Earned Income Tax Credit (EITC) to provide a new benefit to low-income working families with three or more children. The previous EITC was the same for families with two children and those with three or more children. The stimulus bill leaves the current levels for up to two children, but splits out those with three or more, giving them a higher total credit and providing a subsidy of 45 percent of earnings for those in the lowest-earning range. The targeted group is relatively small (8.2 million families with three or more children), but nearly one-fourth of these families had incomes below the poverty level in 2007. Moreover, depending on the ages of the children, these families can face very high childcare costs, so incentives to work (or offsets to the costs of working) may be particularly important. Like the current EITC, payments can go to families throughout the year, but nearly all families choose to receive the credit in an annual lump sum. Because few people are affected, this change is estimated to cost much less ($5 billion) than the Making Work Pay tax credit.

A third key tax change increases the refundability of the Child Tax Credit (CTC). The CTC has not been refundable for the lowest-income workers, with the rationale that the lowest-income families with children were in a range in which the EITC was refundablethey were already receiving a benefit even if they had no tax liability. The stimulus bill lowers the threshold for which the CTC is refundable; some lower-income families will now be able to receive both the CTC and the EITC if they have no tax liability. This change breaks an explicit linkage between the two programs, and, to some extent, increases the complexity of the tax code. Moreover, it does not help the lowest-income families because there is still a range in which the CTC is not refundable. The change will, however, provide a significant new benefit to some lower-income families with children.

Changes to transfer programs

In addition to its substantial changes in taxes, the ARRA provides key changes to several transfer programs. In the state-based Unemployment Insurance (UI) program, the federal government will provide an additional $25 per week through December 2009 for all receiving benefits, a provision projected to cost $36 billion. In addition to this important benefit to those receiving UI, many of whom have low incomes, the federal government is providing $7 billion in incentives to states to make changes in UI program rules that would be targeted to recent labor force entrants, part-time workers, those with less stable work histories, those who leave employment for compelling family reasons, and those in approved training programs. These changes are somewhat controversial because the incentive dollars are essentially available once, while the obligations would be ongoing. Over the last decades, the UI program has provided benefits to fewer and fewer unemployed individuals, particularly those in the low-wage labor market. If states take up the changes, this should be particularly beneficial to low-income workers, who will have new access to this important program at a time when the U.S. Bureau of Labor Statistics recently announced a national unemployment rate of 8.5 percent.

The stimulus bill also provides a one-time $250 payment for recipients of certain programs, including Social Security, veteran۪s benefits, and the Supplemental Security Income program. This feature of the bill, projected to cost $15 billion, is targeted to provide immediate help to some low-income individuals. Note that the tax provisions described above are primarily targeted to workers; this provision primarily helps those not working. Another feature of the bill provides a temporary 14 percent increase in benefits in the SNAP (Food Stamp) program. This is projected to cost $20 billion, and will also provide immediate assistance to some of the lowest-income families, both working and not working. The bill also provides relatively inexpensive changes in the TANF program, public housing, and administrative costs for the child support enforcement program.

A fundamental change in direction?

President Obama۪s bill does contain unprecedented changes, with one new tax credit, a new one-time cash payment to selected families, and a variety of changes to other tax and transfer programs. Are these changes consistent with longer-term trends, or do they represent a new direction in social policy?

There is no clear answer yet. The trends in tax and transfer programs in the U.S. have been documented by several researchers[1] and are fairly clear: the U.S. has been emphasizing tax expenditures over “direct” programs, in-kind benefits rather than cash for low-income families, and work supports instead of assistance to non-workers. On each of these dimensions, this bill both follows the long-term trend in some features while going against it in others. On the status quo side, a large portion of the ARRA۪s expenditures are tax expenditures, especially in the new Making Work Pay tax credit; on the other hand, there are expenditures for direct programs, including increases in benefits in UI and SNAP, which reverse many years of stagnant levels of aid. Second, the ARRA continues a longtime emphasis on in-kind benefits, with increases in food stamps and significant expenditures for health care and education; on the other hand, there are also departures, such as new cash expenditures (the increase in UI and a one-time $250 cash payment primarily to elders). Finally, the bill does continue a substantial focus on work supports (Making Work Pay, EITC), but also includes other aid for those not necessarily working (SNAP, the CTC). However, the relative size of the Making Work Pay tax credit tilts the balance in this package towards tax credits and work supports.

Thus, while it is still too early to tell definitively whether the stimulus bill signals a new, Obama era, the main features of the President۪s American Recovery and Reinvestment Act suggest continuity even in the face of change.

This summary draws from an IRP seminar held on March 5thin response to the need to know how the stimulus bill provisions change the social policy playing field. IRP Director Timothy Smeeding moderated the presentation; IRP Faculty Affiliates Daniel R. Meyer, Professor of Social Work, commented on the bill۪s cash and non-cash transfer programs; Sara Goldrick-Rab, Assistant Professor of Education Policy Studies and Sociology and Scholar at the Wisconsin Center for Advancement of Postsecondary Education, commented on aid to education; Pamela Herd, Assistant Professor of Public Affairs and Sociology, commented on health and health care support; and Andrew Reschovsky, Professor of Public Affairs and Applied Economics and Affiliate of the Wisconsin Center for Advancement of Postsecondary Education, presented a synopsis of how federal stimulus funding influenced the State of Wisconsin۪s education budget.

[1]See, for example, John Karl Scholz, Robert Moffitt, and Benjamin Cowan. 2008. “Trends in income Support.” Institute for Research on Poverty Discussion Paper 1350-08.

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