The Earned Income Tax Credit (EITC): A Brief Legislative ...

The Earned Income Tax Credit (EITC): A Brief Legislative History

Margot L. Crandall-Hollick Specialist in Public Finance March 20, 2018

Congressional Research Service 7-5700

R44825

The Earned Income Tax Credit (EITC): A Brief Legislative History

Summary

The earned income tax credit (EITC), when first enacted on a temporary basis in 1975, was a modest tax credit that provided financial assistance to low-income, working families with children. After various legislative changes over the past 40 years, the credit is now one of the federal government's largest antipoverty programs. Since the EITC's enactment, Congress has shown increasing interest in using refundable tax credits for a variety of purposes, from reducing the tax burdens of families with children (the child tax credit), to helping families afford higher education (the American opportunity tax credit), to subsidizing health insurance premiums (the premium assistance tax credit). The legislative history of the EITC may provide context to current and future debates about these refundable tax credits.

The origins of the EITC can be found in the debate in the late 1960s and 1970s over how to reform welfare--known at the time as Aid to Families with Dependent Children (AFDC). During this time, there was increasing concern over growing welfare rolls. Senator Russell Long proposed a "work bonus" plan that would supplement the wages of poor workers. The intent of the plan was to encourage the working poor to enter the labor force and thus reduce the number of families needing AFDC.

This "work bonus" plan, renamed the earned income tax credit, was enacted on a temporary basis as part of the Tax Reduction Act of 1975 (P.L. 94-12). As originally enacted, the credit was equal to 10% of the first $4,000 in earnings. Hence, the maximum credit amount was $400. The credit phased out between incomes of $4,000 and $8,000. The credit was also viewed as a means to encourage economic growth in the face of the 1974 recession and rising food and energy prices.

Over the subsequent 40 years, numerous legislative changes have been made to this credit. Some changes increased the amount of the credit by changing the credit formula. Major laws that increased the amount of the credit include the following:

P.L. 101-508, which adjusted the credit amount for family size and created a credit for workers with no qualifying children;

P.L. 103-66, which increased the maximum credit for tax filers with children and created a new credit formula for certain low-income, childless tax filers;

P.L. 107-16, which increased the income level at which the credit phased out for married tax filers in comparison to unmarried tax filers (referred to as "marriage penalty relief"); and

P.L. 111-5, which increased the credit amount for families with three or more children and expanded the marriage penalty relief enacted as part of P.L. 107-16.

Other legislative changes changed the eligibility rules for the credit. Major laws that changed the eligibility rules of the credit include the following:

P.L. 103-66, which expanded the definition of an eligible EITC claimant to include certain individuals who had no qualifying children;

P.L. 104-193, which required tax filers to provide valid Social Security numbers (SSNs) for work purposes for themselves, spouses if married filing jointly, and any qualifying children, in order to be eligible for the credit; and

P.L. 105-34, which introduced additional compliance rules to reduce improper claims of the credit.

Together, these changes reflect congressional intent to expand this benefit while also better targeting it to certain recipients.

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The Earned Income Tax Credit (EITC): A Brief Legislative History

Contents

Introduction ..................................................................................................................................... 1 Did P.L. 115-97 Modify the EITC?..................................................................................... 1

An Overview of the History of the EITC ........................................................................................ 1 Before Enactment...................................................................................................................... 2 1975-1986: An Earnings-Based Credit for Workers with Children .......................................... 3 1990s: Expanding the Credit Amount While Limiting Eligibility ............................................ 4 Adjusting the Credit for Family Size and Expanding Availability to Childless Workers ............................................................................................................................ 5 Targeting the Credit ............................................................................................................ 7 2000s: Adjusting the Credit for Marital Status and Family Size............................................... 9 Reducing the "Marriage Penalty" ....................................................................................... 9 Expanding the EITC for Families with Three or More Children ...................................... 10 2010s: Addressing Some of the Administrative and Compliance Challenges with the EITC..................................................................................................................................... 10 Reducing Improper Payments of Refundable Credits........................................................11

Figures

Figure 1. Growth in EITC Dollar Amounts and Recipients Over Time, 1975-2015....................... 6

Figure A-1. Amount of the EITC for an Unmarried Taxpayer with One Child, 2018................... 13

Tables

Table 1. Key Characteristics of the EITC Under Selected Laws, 1975-2009 ................................. 3

Table A-1. EITC Tax Parameters by Marital Status and Number of Qualifying Children for 2018 ...................................................................................................................................... 12

Appendixes

Appendix A. Current Structure of the EITC.................................................................................. 12

Contacts

Author Contact Information .......................................................................................................... 13

Congressional Research Service

The Earned Income Tax Credit (EITC): A Brief Legislative History

Introduction

The earned income tax credit (EITC), when

first enacted in 1975, was a modest tax credit providing financial assistance to low-income working families with children. (It was also initially a temporary tax provision.) Today, the EITC is one of the federal government's

Did P.L. 115-97 Modify the EITC?

At the end of 2017, President Trump signed into law P.L. 115-971 which made numerous changes to the federal income tax for individuals and businesses.2 However, the final law did not make any direct changes to the EITC.

largest antipoverty programs, having evolved The law did however indirectly affect the credit's value in through a series of legislative changes over the future years. Parameters of the EITC (see Table A-1)

past 40 years. Since the EITC's enactment, Congress has shown increasing interest in using refundable tax credits for a variety of purposes, from reducing the tax burdens of

are indexed to inflation. Prior to P.L. 115-97, this measure of inflation was based on the consumer price index for urban consumers (CPI-U). P.L. 115-97 changed this inflation measure to be permanently based on the chained CPI-U3 (C-CPI-U). In comparison to CPI-U,

families with children (the child tax credit), to helping families afford higher education (the American opportunity tax credit), to subsidizing health insurance premiums (the

chained CPI-U tends to grow more slowly. Hence, over time, the monetary parameters of the EITC will increase more slowly in comparison to what they would have been if P.L. 115-97 had not been enacted.

premium assistance tax credit). The legislative

history of the EITC may provide context to current and future debates about refundable tax

credits.

The report first provides a general overview of the current credit. The report then summarizes the key legislative changes to the credit and provides analysis of some of the congressional intentions behind these changes. An overview of the current structure of the EITC can be found in Appendix A at the end of this report. For more information about the EITC, see CRS Report R43805, The Earned Income Tax Credit (EITC): An Overview.

An Overview of the History of the EITC

Major legislative changes to the EITC over the past 40 years can generally be categorized in one of two ways: Those that increased the amount of the credit by changing the credit formula or those that changed eligibility rules for the credit, either expanding eligibility to certain workers (for example, certain servicemembers) or denying the credit to others (for example, workers not authorized to work in the United States). Together, these changes reflect congressional intent to expand this benefit while also better targeting it to certain recipients. A summary of some of the major changes to the EITC can be found in Table 1. A summary of the growth in the EITC in

1 The original title of the law, the Tax Cuts and Jobs Act, was stricken before final passage because it violated what is known as the Byrd rule, a procedural rule that can be raised in the Senate when bills, like the tax bill, are considered under the process of reconciliation. The actual title of the law is "To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018." For more information on the Byrd rule, see CRS Report RL30862, The Budget Reconciliation Process: The Senate's "Byrd Rule", by Bill Heniff Jr.

2 For more information on the changes made to the tax code by P.L. 115-97 see CRS Report R45092, The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law, coordinated by Molly F. Sherlock and Donald J. Marples.

3 For more information, see Michael Ng and David Wessel, Up Front | The Hutchins Center Explains: The Chained CPI, The Brookings Institution, December 7, 2017, .

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The Earned Income Tax Credit (EITC): A Brief Legislative History

terms of both the amount of the credit and the number of claimants over time can be found in Figure 1, which includes the dates of key legislative changes to the credit.

Before Enactment

The origins of the EITC can be found in the debate in the late 1960s and 1970s over how to reform welfare--known at the time as Aid to Families with Dependent Children (AFDC).4 During this time, there was increasing concern over the growing numbers of individuals and families receiving welfare.5 In 1964, fewer than 1 million families received AFDC. By 1973, the AFDC rolls had increased to 3.1 million families. Some policymakers were interested in alternatives to cash welfare for the poor. Some welfare reform proposals relied on the "negative income tax" (NIT) concept. The NIT proposals would have provided a guaranteed income to families who had no earnings (the "income guarantee" that was part of these proposals). For families with earnings, the NIT would have been gradually reduced as earnings increased.6 Influenced by the idea of a NIT, President Nixon proposed in 1971 the "family assistance plan" (FAP)7 that "would have helped working-poor families with children by means of a federal minimum cash guarantee."8

Senator Russell Long, then chairman of the Senate Finance Committee, did not support FAP because it provided "its largest benefits to those without earnings"9 and would, in his opinion, discourage people from working. Instead, Senator Long proposed a "work bonus" plan that would supplement the wages of poor workers. Senator Long stated that his proposed "work bonus plan" was "a dignified way" to help poor Americans "whereby the more he [or she] works the more he [or she] gets."10 Senator Long also believed his "work bonus plan" would "prevent the social security tax from taking away from the poor and low-income earners the money they need for support of their families."11

4 For more information on the legislative history of welfare in the United States, see CRS Report R44668, The Temporary Assistance for Needy Families (TANF) Block Grant: A Legislative History, by Gene Falk.

5 According to Ventry, "In 1960, before President Johnson deployed his forces for a war on poverty, 3.1 million received [Aid to Families with Dependent Children] AFDC. By 1969, that number had risen to 6.7 million, and would jump again to 9.0 million by 1970." Dennis J. Ventry, "The Collision of Tax and Welfare Politics: The Political History of the Earned Income Tax Credit, 1969-1999," National Tax Journal, vol. 53, no. 4 (December 2000), p. 988.

6 In a negative income tax system, the amount of income below a given threshold is refunded to the taxpayer at a given rate. For example, if a threshold was set at $10,000 for an individual, with a tax or refund rate of 10%, a taxpayer with $11,000 of income would pay $10 in tax ($1,000 of income x 10%). A taxpayer with $9,000 in income would receive a $10 refund ($1,000 of "negative income" x 10%). Hence, at taxpayer with zero income would receive a $1,000 refund ($10,000 of negative income x 10%). For more information on negative income tax, see Robert A. Moffitt, "The Negative Income Tax and the Evolution of U.S. Welfare Policy," NBER Working Paper Series | Working Paper 9751, June 2003.

7 Robert J. Lampman, "Nixon's Family Assistance Plan," Institute for Research on Poverty Discussion Paper, November 1969, .

8 CRS Report 95-542, The Earned Income Tax Credit: A Growing Form of Aid to Low-Income Workers, by James R. Storey, p. 2, available upon request. While the Nixon plan never became law, it was twice approved by the House.

9 V. Joseph Hotz and John Karl Scholz, "The Earned Income Tax Credit," in Means-Tested Transfer Programs in the United States, ed. Robert A. Moffitt, (University of Chicago Press, 2003), , p. 142.

10 Congressional Record, Senate, in remarks by Mr. Long. September 30, 1972, pp. 33010-33011.

11 Congressional Record, Senate, in remarks by Mr. Long. September 30, 1972, p. 33010.

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The Earned Income Tax Credit (EITC): A Brief Legislative History

1975-1986: An Earnings-Based Credit for Workers with Children

The "work bonus plan" proposal was passed by the Senate in 1972, 1973, and 1974, but the House did not pass it until 1975. The "work bonus plan" was renamed the earned income tax credit and was enacted on a temporary basis as part of the Tax Reduction Act of 1975 (P.L. 9412). As originally enacted, the credit was equal to 10% of the first $4,000 in earnings. Hence, the maximum credit amount was $400. The credit phased out between incomes of $4,000 and $8,000. The credit was originally a temporary provision that was only in effect for one year, 1975.

In addition to encouraging work and reducing dependence on cash welfare, the credit was also viewed as a means to encourage economic growth in the face of the 1974 recession and rising food and energy prices. As the Finance Committee Report on the Tax Reduction Act of 1975 stated:12

This new refundable credit will provide relief to families who currently pay little or no income tax. These people have been hurt the most by rising food and energy costs. Also, in almost all cases, they are subject to the social security payroll tax on their earnings. Because it will increase their after-tax earnings, the new credit, in effect, provides an added bonus or incentive for low-income people to work, and therefore, should be of importance in inducing individuals with families receiving Federal assistance to support themselves. Moreover, the refundable credit is expected to be effective in stimulating the economy because the low-income people are expected to spend a large fraction of their disposable incomes.

Table 1. Key Characteristics of the EITC Under Selected Laws, 1975-2009

P.L. 9412

1975

P.L. 95-600 1978

P.L. 98-369 1984

P.L. 99-514 1986

P.L. 101-508

1990

P.L. 103-66 1993

P.L. 107-16 2001

P.L. 111-5 2009

Maximum statutory credit for eligible taxpayers including variation based on the number of qualifying childrena

Credit Formula Based on:

Earnings

$400

Enacting legislation

$500

X

X

$550 X

$800 X

one, $1,057

two or more, $1,114

none, $323

one, $2,152

two or more, $3,556

X

X

same

0-2, same

3 or more, $4,001

X

X

Number of Children (i.e., credit based in part on family size)

Marital Status

X

X

X

X

X

X

Credit Available to Childless Workers

Credit Adjusted Annually for Inflation

X

X

X

X

X

X

X

X

12 Senate Committee on Finance, Tax Reduction Act of 1975, Report to Accompany H.R. 2166, 94th Cong., 1st sess., March 17, 1975, S. Report 94-36, p. 11.

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The Earned Income Tax Credit (EITC): A Brief Legislative History

Source: CRS analysis of Internal Revenue Code (IRC) ? 32, P.L. 94-12, P.L. 95-600, P.L. 98-369, P.L. 99-514, P.L. 101-508, P.L. 103-66, P.L. 107-16, P.L. 111-5. a. Statutory amounts do not reflect annual adjustments for inflation.

The same report also emphasized that the EITC's prime objective should be "to assist in encouraging people to obtain employment, reducing the unemployment rate, and reducing the welfare rolls."13 One indication of the extent to which this credit was meant to replace cash welfare was that the bill had originally included a provision that would have required states to reduce cash welfare by an amount equal to the aggregate EITC benefits received by their residents. This provision was ultimately dropped in the conference committee.14 In addition, since the EITC was viewed in part as an alternative to cash welfare, it was generally targeted to the same recipients--single mothers with children.15 (Childless low-income adults would not receive the EITC until the 1990s, discussed subsequently.)

The credit was extended several times before being made permanent by the Revenue Act of 1978 (P.L. 95-600).16 This law also increased the maximum amount of the credit to $500.17 In summary materials of that bill, the Joint Committee on Taxation (JCT) stated that the credit was made permanent because "Congress believed that the earned income credit is an effective way to provide work incentives and relief from income and Social Security taxes to low-income families who might otherwise need large welfare payments."18 The modest increase in the amount of the credit in 1978 was seen as a way to take into account the increase in the cost of living since 1975 (the credit was not adjusted for inflation). Subsequent increases in the amount of the credit in 1984 (P.L. 98-369) and 1986 (P.L. 99-514) were also viewed as a way to adjust the credit for costof-living increases, as well as increases that had occurred to Social Security taxes.19 (The 1986 law also permanently adjusted the credit annually for inflation going forward.)

1990s: Expanding the Credit Amount While Limiting Eligibility

In the early 1990s, legislative changes again increased the amount of the EITC. Eligibility for the credit was also expanded to include childless workers. Several years later, in light of concerns related to the increasing cost of the EITC, as well as concerns surrounding noncompliance, additional changes were made to the credit with the intention of reducing fraudulent claims, better targeting benefits, and improving administration.

13 Senate Committee on Finance, S. Rept. 94-36, p. 33. 14 CRS Report 95-542, The Earned Income Tax Credit: A Growing Form of Aid to Low-Income Workers, by James R. Storey, available upon request. 15 For more information, see "Brief History of Cash Assistance" in CRS Report R43187, Temporary Assistance for Needy Families (TANF): Size and Characteristics of the Cash Assistance Caseload, by Gene Falk. 16 The credit was extended through 1976 by P.L. 94-164; through 1977 by P.L. 94-455; and through 1978 by P.L. 9530. 17 Under the 1978 law, the EITC was set at 10% of the first $5,000 of earnings (including net earnings from selfemployment). The maximum credit of $500 was received for earnings between $5,000 and $6,000. For each dollar of AGI above $6,000, the EITC was reduced by 12.5 cents, reaching $0 at an AGI of $10,000. 18 Joint Committee on Taxation, General Explanation of the Revenue Act of 1978, March 12, 1979, JCS-7-79, p. 51. 19 Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, May 4, 1987, JCS-10-87, p. 27.

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The Earned Income Tax Credit (EITC): A Brief Legislative History

Adjusting the Credit for Family Size and Expanding Availability to Childless Workers

Over time, policymakers began to turn to the EITC as a tool to achieve another goal: poverty reduction. A 1989 Wall Street Journal article described the EITC as "emerging as the antipoverty tool of choice among poverty experts and politicians as ideologically far apart as Vice President Dan Quayle and Rep. Tom Downey, a liberal New York Democrat."20 Unlike other policies targeted to low-income workers, like the minimum wage, the EITC was viewed by some as better targeted to the working poor with children.21 In addition, unlike creating a new means-tested benefit program, the EITC was administered by the IRS. This may have appealed to some policymakers who did not wish to create additional bureaucracy when administering poverty programs.22

20 David Wessel, "Expanded Earned-Income Tax Credit Emerges As the Anti-Poverty Program of Choice for Many," The Wall Street Journal, July 13, 1989, p. A16.

21 In a 1989 floor statement, Rep. Petri stated implored his colleagues to "Reform the earned income tax credit! Target the aid directly to poor workers who are supporting families." Thomas Petri, "Working Poor Would Benefit by Earned Income Tax Credit Reform," Congressional Record, daily edition, vol. 135, part 26 (March 13, 1989), p. H585.

22 David Wessel, "Expanded Earned-Income Tax Credit Emerges As the Anti-Poverty Program of Choice for Many," The Wall Street Journal, July 13, 1989, p. A16.

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