Advocates Make the Case for Permanent ARPA Earned Income Tax Credit Changes

WASHINGTON — Some temporary tax changes are in effect as a result of President Biden’s ‘American Rescue Plan.’ The Earned Income Tax Credit is a tax benefit aimed at helping low- and moderate-income earners, but ARPA expands both the eligibility and the amount of potential EITC credit earners could gain through 2021. And these changes are so wildly popular that some are calling for the temporary enhancements to become permanent. 

“These changes help 17 million workers in this country with an extra cushion to cover expenses… and maybe give them a little bit to put aside for retirement,” said Sen. Michael Bennet, D-Colo, whose suggested proposal for expanding EITC was largely incorporated into the ARPA. 

“It’s a margin of error to… keep from going over the edge… that reflects the commonsense notion that our tax system should reward work,” said Bennet at a Brookings Institution event to discuss EITC expansion.

The EITC is a refundable credit that is regarded as an effective tool for lifting families out of poverty, but taxpayers don’t have to have children to qualify. Under the regular EITC rules before ARPA changes, workers without qualifying children between ages 25 and 64 would receive a credit equal to a percentage of their earnings up to a maximum credit.

But for 2021, the ARPA changes EITC by lowering the age of eligibility from 25 to 19 while at the same time eliminating the upper bound. It increases the salary cap for childless workers, and it triples the tax credit for workers without children from $500 to $1500.

“Lowering the age is to get people going sooner with a higher income to put them on a better trajectory for the rest of their lives,” explained Bennet. “Eliminating age limits is because people aren’t able to retire the way they were able to historically… I can’t think of anything more at war with the American Dream than someone working so hard for their entire life and unable to save for retirement.”

“Ideally what you want is an economy that when it grows, everybody benefits. It makes sense that if you can make work pay enough to be rewarding, that will have the effect of improving workforce participation rates,” said Bennet. “People do want to work, they just need help to stay at work.”

EITC generally has bipartisan appeal because its benefits phase out gradually. Former House Speaker Paul Ryan even said the “one thing the government does that’s most effective at fighting poverty is the EITC… It accomplishes the intended effect and does so without reducing workforce participation.”

Even so, the EITC does have some detractors. Some challenge the efficacy of the EITC stating that it penalizes marriage by offering more money if children’s parents remain unmarried and that it has poor program integrity with high rates of improper payments.

“It’s incredibly challenging to design a tax system that [achieves] marriage neutrality,” said Bennet, admitting that he’s not convinced that taxes influence marriage decisions anyway. He also countered that “IRS studies show that the majority of EITC errors are unintentional… driven by complexity, not fraud.”

Bennet believes the EITC expansions in ARPA are so beneficial that they should become permanent. “There’s a spirit that the White House wants to do it, but whether in the end they’re going to be able to [make them permanent], I don’t know,” he said. “This is a once-in-a-lifetime opportunity for us to say we’re not going to accept the poverty rates in our country with pro-work policies.”

“There are less important things that could be cut to pay for this,” agreed Ryan, who believes making EITC expansion permanent could make a difference in poverty in general, and offering it in periodic payments instead of one lump sum at tax time could make a psychological difference as well.

Ryan suggested, “You should see it atop where you see your wage. Embed it in the paycheck at the pay period so you can see that work pays every time you do it.”