Spotlight Exclusives

The Importance of Tax Policy in the Fight against Poverty

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Tax filing season can be a source of endless frustration as Americans struggle to complete their returns. But for millions of working families there is an important silver lining. Federal tax refunds, including through the Earned Income Tax Credit (EITC), provide needed assistance to low-income households. These tax credits are among our most important, and often underused, tools in the fight against poverty.

The effectiveness of these programs is remarkable. The EITC alone does more to reduce poverty than any other form of cash or near-cash assistance. And when the EITC is coupled with other anti-poverty tax code provisions, such as the Child Tax Credit (CTC), the benefit is even greater. Together, these two programs decreased the overall poverty rate by close to 3 percentage points and lowered the child poverty rate by more than 6 percentage points in 2011, according to research by the Brookings Institution. And the benefits last a lifetime. The children of these tax credit recipients perform better on standardized tests, have lower rates of teenage pregnancy and can expect higher future earnings.

While these results are impressive, there is still much more that federal, state and local governments can be doing to improve the effectiveness and reach of the EITC and other similar programs.

This past year in Colorado, we passed the Working Families Economic Opportunity Act, creating a state EITC and CTC targeted at low-income families. These tax rebates are automatically triggered when there is a Colorado Taxpayer Bill of Rights surplus, defined as the point at which “revenues grow faster than the rate of inflation and population growth.” The next surplus after the law takes effect is expected to occur in fiscal year 2015-16, and the tax credits will boost the incomes of 400,000 working families. The Colorado Fiscal Institute was excited by the chance to implement proven, effective, efficient tax policy in the state, and it seemed like the legislation would be an easy win for Colorado families.

But when discussing the bill with lawmakers, we frequently received pushback about the cost and relative benefits: why would we spend money on these tax provisions when our schools lack resources or when we rank last in funding for higher education? Luckily, thanks to new research showing the immense immediate and long-term benefits of increasing a low-income family۪s income through these types of tax credits, we were able to demonstrate that the EITC and CTC had a high return on investment, including through improved educational outcomes.

Fortunately, the days of unusually tough tradeoffs may be diminishing. The economy is rebounding and revenue is increasing in states around the country. In the coming years, lawmakers may even have the opportunity to develop and implement new anti-poverty measures.

This is certainly the case in Colorado. Revenue is increasing, and interest is growing in new policies that will work to improve the lives of our most vulnerable citizens. As such, we see passage of the state EITC and the CTC as just the beginning.  
There are many other ways the tax code can be used to help struggling families. For example, when the original version of the aforementioned Working Families Economic Opportunity Act was introduced, it included an expansion of our state-level Child and Dependent Care Tax Credit.  

The augmentation of such programs is badly needed. In conversations with members of the Colorado Fiscal Institute, low-income advocates, seniors, and the disabled community all stressed the shortcomings of the current child and dependent care tax provision in Colorado. Most notably, the current program is only for families with children under the age of 13 (thus excluding older children and dependent seniors and disabled adults). And unlike the EITC and CTC, which are fully refundable, the state child care credit can only reduce taxes, severely limiting its value as a subsidy to those with incomes too low to face significant income tax liability. Our research concluded that making the credit equally available to all could help up to 35,000 disabled adults and 80,000 low-income taxpayers with children.

Although this portion of the bill was later removed because of the expense, it remains a promising tax policy we will work to have enacted in the future.   

Policies that target poverty and lift up low-income families are critical to the success of our communities and our economic well-being. Lawmakers have already developed an arsenal of programs that help provide aid to the families that need it the most, including efficient and effective programs like the EITC and the CTC. We hope these credits and other similar policies become a more recognized and utilized component of the anti-poverty agenda.  

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Ali Mickelson is a Tax Attorney with the Colorado Fiscal Institute.

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