The November election and shifts in the American economy have Congress engaged in a debate over "how much tax relief and to whom?" Two proposals to change current tax laws could specifically help low income families. Increasing the Child Tax Credit and making it refundable, and expanding the Earned Income Tax Credit (EITC) have the potential to move many families out of poverty and to make work pay.
Option I: Increase the current Child Tax Credit and make it refundable.
The child tax credit, which was enacted in 1997 with support from the U.S. Catholic Conference, enables most taxpayers with children younger than 17 to reduce their taxes by $500 per qualifying child. However, the credit is generally "non refundable." This means that most families who are too poor to owe federal income tax get nothing. The credit phases out for the wealthiest families: starting at $110,000 for couples and $75,000 for single parents, it declines $50 for every additional $1,000 in income. The credit is not adjusted for inflation.
President Bush proposes to double the credit to $1,000 per child but would keep it non refundable. His proposal would also raise the income levels at which the credit begins to phase out to $200,000 for couples, $100,000 for individuals and slows the phase-out rate. An estimated 26 million families with children would pay less in taxes than they do now if the Bush proposal is adopted.
However, the proposed credit expansion, because it is non refundable, would provide no help to more than 16 million children in moderate and low-income families or one out of every four U.S. children younger than 17. Over two-thirds of these children live in working families. Although these families pay taxes (such as payroll tax and sales tax), they are too poor to owe federal income tax, so do not benefit from a non refundable credit.
We can make the tax credit fair for low-income working families with children by enacting a $1,000 fully refundable child tax credit that would:
- Reach virtually all 66 million American children younger than 17 including the one in four (16.6 million children) who would be left behind by a non refundable credit.
- Support work by reaching 11.5 million children in moderate and low income working families who would be left behind by a non refundable credit.
- Largely avoid marriage penalties because, for the vast majority of families, benefits are based solely on the number of children, not the marital status or income of the family.
- Reduce by an estimated one-sixth to one-fourth the number of children in poverty making it one of the most effective anti poverty strategies in decades.
First created in 1975 and signed into law by President Ford, the EITC was described by President Reagan as "the best anti poverty, the best pro-family, the best job creation measure to come out of Congress." An expansion of the program in 1990 was enacted with strong support from President Bush and Congressional leaders from both parties. The EITC was last expanded in 1993.
New congressional efforts will seek to increase the Earned Income Tax Credit for two or more qualifying children, and simplify the eligibility. The EITC should provide more money to larger families since 60 percent of all poor children7.7 million childrenlive in families with three or more children. Adding a third tier to the EITC would provide a tax break for 2.1 million low- and moderate-income working families.
The EITC needs to be simplified. Under current law, nontaxable earned income such as 401(k) contributions are counted as income in computing the EITC-- which for many families means that increased savings results in a reduced EITC. The tax code should encourage savings by eliminating nontaxable earned income from the calculation of the EITC. Additionally, this step will simplify the EITC.
The Catholic bishops were early supporters of changes in the tax code to assist low-income families, particularly the Earned Income Tax Credit. In their 1991 pastoral statement, Putting Children and Families First, the bishops asserted: "We welcome proposals to reform the tax code to help families cope with the high cost of raising children. These proposals, which have drawn bipartisan support, would allow middle income families with children to keep more of what they earn and would help lift low income families out of poverty.... We continue to support an expanded earned income tax credit to assist poor, working families. This pro-work, pro-family provision needs to be enhanced and supported as an important contribution to tax fairness."
While both of these tax credit proposals receive bipartisan support, some Members of Congress attack them as new forms of welfare, other Members support addressing the "marriage penalty" or just increasing the size of the credit as part of a much larger tax reduction bill.
Any tax cuts passed by Congress should include the poorest families in America. Senators and Representatives need to hear how low-income families can share more fully in the American economy. They need to know that some working families are struggling to provide for their children. Stories and experiences with families who utilize either the child tax credit or the EITC should be shared with Members of Congress.
See the Hill Notes and message for additional information.
National Conference of Catholic Bishops, Economic Justice for All. Washington, D.C., 1984
National Conference of Catholic Bishops, Putting Children and Families First. Washington, D.C., 1991
More Information: Thom Shellabarger at the U.S. Catholic Conference, 202.541.3189 or
Sharon Daly at Catholic Charities USA, 703.549.1390 x.139 or