PART I
The Earned Income Tax Credit -
A Prime Opportunity for Cities
Introduction
A city thrives when its residents thrive. Yet many families, even though they are employed full-time, continue to struggle to meet their families’ basic needs.
Local elected officials across the country have discovered a way to strengthen working families while bringing more federal dollars into the local economy: by connecting eligible workers to the Earned Income Tax Credit (EITC). The EITC provides a financial boost to these families by reducing their tax burden and, in many cases, giving them a tax refund when they file their annual income tax return.
Recognizing that each city is unique, this toolkit highlights the diverse roles that local governments can play in helping families claim this important resource. To assist municipalities in developing an EITC campaign, the guide offers concrete steps, advice from existing campaigns, specific roles for elected leaders, city examples, and links to important resources.
| What is the Federal Earned Income Tax Credit (EITC)? |
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The federal Earned Income Tax Credit (EITC) is a tax benefit for low- to moderate-income working families, as well as a small benefit for some workers without children. Workers who qualify for the EITC and file a federal income tax return can receive a refund, even if no taxes were taken out of their pay during the year.1 While most EITC recipients claim the credit in a lump sum at the end of the tax year, workers with children may be eligible to receive a portion of the credit in their paychecks throughout the year as Advance EITC In 2006, the credit provided up to $2,747 for a parent with one child earning less than $32,001. Working parents who were raising more than one child and earning less than $36,348 qualified for up to $4,536.2 Also, there is a small benefit to very low-income workers who are not raising children in their home and are between the ages of 25 and 64. The EITC is often referred to as one of the most successful federal anti-poverty programs ever developed. The program is administered by the Internal Revenue Service (IRS) and since the credit’s inception in 1975, the EITC has grown to become one of the United State’s largest programs to support low-income families. In tax year 2005, the EITC was worth $42.6 billion — worth more to working families than any other federal program. Approximately 22.7 million families claimed the credit for 2005 with an average refund of $1,874 — the credit for families with children averaged more than $2,280. For more information on the EITC, including state-specific data, go to http://www.irs-eitc.info/SPEC/ and look at EITC Statistics at a Glance. Example: Mr. and Mrs. Smith are raising two children, ages 7 and 9. They both work and earned $25,000 in wages in 2006. They had $500 withheld for federal income taxes during the year. They are eligible for an EITC of $2,811. They also qualify for a Child Tax Credit (CTC) worth $2,000. Their income tax liability for the year is $150. The Child Tax Credit pays their income tax, with $1,850 left over as an additional refund. Mr. and Mrs. Smith will receive all of their income tax withholding ($500) back, their EITC ($2,811), and the rest of their CTC ($1,850). Their total federal refund is $5,161. |
Cities can reap a variety of benefits by initiating campaigns that raise awareness of the EITC, provide tax assistance to eligible families, and in come cases, promote additional work supports and help families leverage this credit into longer-term assets.
- Promote Family Economic Success: EITC campaigns raise incomes for local families. According to U.S. Census Data, the EITC in 2002 lifted 4.9 million people above the federal poverty line, including 2.7 million children - more than any other federal aid program. Moreover, those campaigns that help families retain and leverage their EITC refunds make families more financially secure and boost key indicators of self-sufficiency, such as homeownership.3
- Combat Predatory Practices by Paid Tax Preparers and Lenders: More than 68 percent of low-wage earners who claim the EITC use commercial tax preparation agencies,4 which frequently charge exorbitant fees and aggressively market "rapid refund" loans with triple-digit interest rates. To preserve the value of the credit for local families, EITC campaigns often support free or low-cost tax preparation, financial education, and partnerships with financial institutions to offer low-interest refund loans as an alternative to predatory products.
- Inject Federal (and State) Funds into Local Economies: Efforts to connect workers to the EITC bring millions of federal-and in some cases state tax credit-dollars into the community, which then circulate through the local economy creating a ripple effect many times the size of the original refund. As a result, this new money strengthens neighborhoods, assists small businesses, and spurs local economic development.
- Strengthen the Local Workforce: Employers are always looking for new strategies to recruit and retain qualified employees. By supporting EITC campaigns, cities can help employers put together a package of wages and tax benefits that make families more financially secure. Through the Advance EITC, employers can essentially provide a raise of $1 to $2 per hour at no cost.
Mayors and other city officials can-and in many cases do-play a key role in launching or supporting EITC campaigns. In addition to the substantial benefits noted above, political leaders who promote the EITC generate positive press and boost political support as they visibly help local residents put more money in their pockets.
The remaining sections of Part I of this toolkit lay out the common elements of an EITC campaign, provide city examples, and outline NLC support for municipal EITC activities. Part II covers key steps to preparing for an EITC initiative. Part III offers ideas about conducting an outreach and public awareness campaign. Part IV provides specific considerations for providing free tax preparation services and highlights some suggesting post-campaign activities. Part V looks at how communities can move beyond the EITC by conducting complementary outreach for additional public benefits, and Part VI review asset building opportunities. Appendix A includes a list of additional resources for each of the key topics covered in the toolkit. Appendix B includes contact information for IRS regional offices.
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