Brookings: Topics - Earned Income Tax Credit

A New Look at How the Tax Code Works for Working Families

Elizabeth Kneebone — Mon, 19 Nov 2012 16:00:00 -0500

As the clock ticks down to January 1, and lawmakers try to hash out a deal to avoid the fiscal cliff and address the expiration of the Bush tax cuts, new data on taxpayers in the United States--collected from federal tax returns and available down to the ZIP code level through Brookings’ EITC Interactive--provide an important perspective on the impact of the tax code on families and communities across the country.

For instance, the latest EITC Interactive data--which represent tax returns filed in January through June of 2011--show that key provisions in the tax code proved responsive to the Great Recession, helping working families to weather the downturn.

Roughly one in five tax filers claimed the Earned Income Tax Credit (EITC) in TY2010--a tax break for workers with low incomes--compared to 16 percent of filers in TY2007. In part the increase in EITC receipt reflects rising unemployment and falling incomes that may have led more workers to become eligible for the credit, but it also reflects targeted expansions to the credit made through the American Recovery and Reinvestment Act (ARRA) to help strengthen the safety net and stimulate local economies.

In TY2010, nine states saw anywhere from one quarter to one third of their taxpayers claim the EITC, led by Mississippi, Louisiana, Alabama, Georgia, and Arkansas. And 10 states experienced an uptick in the rate of EITC receipt of 5 percentage points or more over the course of the recession, led by Mississippi, Georgia, Arizona, Idaho, and Tennessee. No state experienced a decrease in EITC receipt during the downturn.
More than half (60 percent) of EITC filers also benefitted from the refundable portion of the Child Tax Credit (ACTC) in TY2010--a tax benefit for low- and moderate-income working families with children that was also expanded temporarily through ARRA—compared to 45 percent in TY2007.
All together, EITC filers claimed an average credit of $2,247 in TY2010, and for those EITC filers who who received it, the ACTC boosted the average refund by $1,234.

See the map: Share of Filers Claiming EITC by State, Tax Year 2010

The release of the Census Bureau’s Supplemental Poverty Measure (SPM) last week underscores the importance of these tax credits for low-income working families. If it weren’t for the EITC and ACTC, the Census Bureau estimates that the U.S. poverty rate in 2011 would have been 2.8 percentage points higher, at 18.9 percent. The impact on child poverty would have been even greater: without these credits the child poverty rate would have reached 24.4 percent rather than 18.1 percent under the SPM definition.

Though the SPM is not available for smaller, sub-state geographies, through Brookings’ EITC Interactive policymakers and other stakeholders can find estimates of the number of filers benefitting from these credits--and the dollar amounts claimed--for every congressional and state legislative district in the country, and for every ZIP code, municipality, county, metro area, and state.

Contrary to Mitt Romney’s narrative about the 47 percent “takers” and giveaways to the Democratic base, these data show that the impact of these credits is far-reaching and broadly shared (as the list of “red” states above suggests)--crossing party and geographic lines to reach struggling working families at tax time. And that phrase bears repeating: These are taxpayers who are working.

Part of welfare reform in the late 1990s was an explicit decision to do less via traditional cash assistance and do more through the tax code to encourage work. Years’ worth of research illustrates the success of the EITC as a policy to promote work and better economic outcomes for low-income families. Updated profiles of the EITC-eligible population in TY2010 give greater insight into who these taxpayers are. More than three-quarters of these taxpayers live in family units; more than 54 percent are white; and almost half (46 percent) have some higher education. The typical EITC-eligible taxpayer has an adjusted gross income of just $13,905, and is most likely to have earned that income working in the retail, health care, accommodation and food service, construction, and manufacturing industries. These are workers filling the increasing number of low-wage service sector jobs the economy has been churning out in recent years, and in industries that bore the brunt of the latest downturn.

Discussions over the fiscal cliff and longer-term tax reform will inevitably include calls for more taxpayers to have “skin in the game.” But that’s not only a distraction from the real issues, it’s a distortion of reality. We made a choice in the 1980s and the 1990s to support work and alleviate poverty through the federal income tax. And all the evidence--federal, state, and local--shows that it’s working, for a broad base of Americans. Taxing hard-working families deeper into poverty is no fix for our short- or long-run budget problems.

Authors

Elizabeth Kneebone

Publication: The Avenue, The New Republic

The Truth about Taxes: Just about Everyone Pays Them

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 06 Apr 2012 08:32:00 -0400

Today's employment report showed continued growth in the labor market, although at a slower pace than over the previous four months. Furthermore, the unemployment rate ticked down from 8.3 percent to 8.2 percent in March. The economy has now produced positive jobs growth for the last eighteen months. Employer payrolls increased by 120,000 jobs in March, with manufacturing and health care posting large gains.

In past months, The Hamilton Project has examined employment trends over the last several years, as the Great Recession has taken its toll on many Americans across various segments of the population. This month, in honor of tax day, we explore how the current labor market has impacted one area affecting all Americans: taxes and, more specifically, who pays them. We also continue to explore the nation’s “jobs gap.”

The positive signs of economic growth over the past several months are good news for policymakers and the American people. Inside the DC Beltway, however, there has been a renewed focus on the nation’s burgeoning deficit, and renewed calls to reform the tax system in ways that create more efficiency and, potentially, additional revenue. Congressional leaders are at a partisan standstill, with many misconceptions around the current tax system complicating the debate.

Who Pays Taxes?

A popular myth swirling around Washington, DC, and throughout the media these days is that many Americans do not pay taxes, and are therefore free-riding off of our society without contributing themselves. This has even been referred to by some as a “new orthodoxy.” The origin of this misconception is the observation that only about 54 percent of American households paid federal income taxes during recession-affected 2011. But that statistic is misleading because it provides an incomplete picture of the overall tax burden on American families, and because it incorporates individuals who naturally shouldn’t be paying taxes because of their age or economic circumstances due to the Recession. A closer look reveals that nearly all Americans do, in fact, pay taxes.

To help illustrate this point, let’s start with some basic fiscal background. Over the last two decades, tax credits for low-income working families with children, like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), have indeed decreased the number of American households paying federal income taxes. These credits reduce or eliminate income tax liabilities and sometimes result in a net income tax refund for low-income families.

But these credits are also an important component of the progressive tax system that help offset the burden of other taxes and raise poor working families out of poverty. Credits like the EITC and CTC have helped to reduce poverty, provide economic security, and offset declining labor-market opportunities for low-income workers. The EITC alone is responsible for raising 6.6 million children out of poverty. Perhaps most importantly, these credits expand the number of people contributing to the economy by causing many additional Americans to participate in the labor force and causing others to work more hours.

While this helps explain the declining number of low income families paying federal income tax, it does not address one key point: federal income taxes are only one component of the broader federal, state, and local tax system, and only one way in which Americans are able to contribute their fair share through taxes. Indeed, while some families do not pay federal income taxes, these households do pay other forms of taxes. Those who focus exclusively on the federal income tax ignore one of the most significant federal tax burdens on workers—the payroll tax. In fact, most Americans pay more in payroll taxes than in income taxes.

As shown in the figure below, after incorporating payroll taxes, the proportion of American households who paid federal taxes in 2007, a non-recession year, jumps to 78 percent.

But, when we take the data a step further, even this statistic is misleading because it counts older households, who are often retirees, and young individuals, even if they are still in school. In fact, many households with no tax liability are young or old, meaning that they are likely to be led by students who subsequently will pay taxes or retirees who paid taxes over their lifetimes. The figure below illustrates the relationship between age and the odds of paying payroll and income taxes. The graph makes clear that younger individuals—those in their late teens and early 20s—pay taxes at relatively low rates, but that is largely because they are in school and not working. But as they get older and find jobs, the evidence suggests that they will pay taxes. Similarly, after age 60, when more and more Americans are retiring and leaving the labor force, the fraction paying taxes falls rapidly. These retirees have certainly contributed to America’s revenue stream over their lifetimes. To this point, as the U.S. population ages into the future and a greater proportion of Americans reach the retirement age, it is inevitable that a growing percentage of the overall population will pay no income or payroll taxes.

But during middle age, almost all workers face a tax burden. When looking at those in middle-age, 84 percent faced a net payroll and income tax bill in 2007. This general theme also holds true for low-income households: even households that receive the child-related EITC generally only receive it temporarily, usually when their children are young. On net, even these families face a positive tax bill over time (Dowd and Horowitz 2008).

Furthermore, rising unemployment during the Great Recession has meant that the proportion of American families paying no federal taxes is unusually large today. Unemployed workers without incomes naturally don’t face tax liabilities. But as they find jobs and rejoin the labor force, they will once again contribute to the federal system. Indeed, some of the trends we see today are less illustrative of an unfair tax advantage for the poor; rather, the trends indicate the existence of a group of unfortunate families who have found themselves affected by hard times. And young people today have been particularly hard hit: many are unemployed or weathering the storm in graduate schools, meaning that they are, thus, not paying taxes. When looking more specifically at middle-aged workers with jobs, 96 percent paid federal income or payroll taxes.

Other Forms of Taxes Also Count

Finally, incorporating the additional—and significant—other forms of taxation into our calculation leads to the conclusion that nearly 100 percent of Americans pay taxes in some way, shape or form. All consumers bear the burden of state and local property, sales, and income taxes, as well as excise taxes on items like gasoline, alcohol, or cigarettes. These other taxes tend to be regressive, imposing more of a burden on low-income families than on high-income families—the state and local tax burden is over twice as large as the federal tax burden for the bottom fifth of households (Citizens for Tax Justice 2011). When you fill up your car with gasoline, you can’t avoid paying the tax. The pump does not differentiate between the richest Americans and the poorest families.

The March Jobs Gap

As of March, our nation faces a “jobs gap” of 11.3 million jobs. The chart below, which reflects our updated assumptions about labor force growth, shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions for job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until March 2020—or eight years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by May 2016—not for another four years.

Conclusion

Virtually all Americans will pay taxes during their lifetime. The uncertainty that came packaged with the Great Recession has allowed for the proliferation of many other economic misconceptions, especially in regard to taxes. Today’s economic context for tax reform is very complex. Most immediately, the economy is still in the midst of a slow recovery with an unemployment rate that remains too high. Even with robust rates of job growth, it will take years to close the jobs gap. An important role of fiscal policy in the near term is to support recovery in the labor market.

And in the longer-run, the United States is contending with three economic problems: a daunting outlook for budget deficit that imperils our well-being, an increasingly competitive global economy for many American workers and industries, and rising income inequality. The tax code affects each of these problems, and a successful tax reform effort will need to address each of them—or, at a minimum, avoid making any of them worse.

As policymakers return their attention to the nation’s fiscal crisis, reforming the tax system has become a focus of debate. To help inform discussions, The Hamilton Project will release a set of economic facts about taxes that provides an economic context for tax reform, and basic economic criteria that should be used when evaluating tax reform options. These facts will be released during a public forum on May 3 in Washington, DC. As part of the policy forum, former Council of Economic Advisers Chair Martin Feldstein and Lawrence H. Summers, former Assistant to the President for Economic Policy and former U.S. Treasury Secretary, will discuss the broad economic case for tax reform. They will be followed by a panel of distinguished experts who will focus on principles for a successful tax reform effort. More information about the event can be found by clicking here.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Publication: The Hamilton Project

Image Source: Gary Arbach

Ten Years of the EITC Movement: Making Work Pay Then and Now

Steve Holt — Mon, 18 Apr 2011 16:48:00 -0400

The Earned Income Tax Credit (EITC) is an earnings supplement available through the income tax system that offsets payroll taxes and supports low- and moderate-income workers raising children. It has grown to be called the nation’s largest federal anti-poverty program. The EITC has had significantly beneficial effects for its recipients and their communities. These include encouragement of work, reduction of poverty, and boosting of local economic activity.

The EITC has always had features that distinguish it from traditional family support and tax policies. It is predicated on work. It is claimed not through caseworkers and onerous application processes but by filing a tax return. And it is refundable, meaning that the amount of the credit is not tied to one’s federal income tax liability. Pioneered by the EITC, these are now features of several programs.

The new approach of the EITC created a new environment. The credit has spawned a remarkable array of social, business, and political activity. There is a national network devoted to promoting the existence of the credit, a large business sector (commercial tax preparers) and a burgeoning non-profit industry (community tax programs) each closely tied to it, financial services and products reliant on it, and significant political activity related to it.

This brief describes this activity, labeling it the "EITC Movement". This is not a traditional social movement. In fact, it is the work of dispersed actors pursuing sometimes disparate goals. It has been about a decade since this EITC Movement began to emerge in earnest, and it has now reached a maturity characterized by greater stability and institutionalization.

This brief reflects on what the EITC Movement has achieved. Making this assessment is a challenge. As a collection of distinct (however interrelated) efforts, there is not a clear set of goals to use as the standard for measuring accomplishments. An added complication is the limited data available for empirical observations.

This brief also looks ahead at the future for the EITC Movement. Challenges to the relatively stable environment of the past decade are likely. All levels of government are experiencing budgetary pressure that could affect both policy and program, and the typical cycle of philanthropy points to a period of re-evaluation and change. It is time to examine fresh approaches.

After setting the historical context for the past decade, the paper describes how the EITC Movement coalesced and grew. It then evaluates the impact of these efforts from various perspectives before concluding with a look forward to potential developments.

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Authors

Steve Holt

Image Source: Andrew Qualls

Responding to the New Geography of Poverty: Metropolitan Trends in the Earned Income Tax Credit

Emily Garr and Elizabeth Kneebone — Thu, 17 Feb 2011 03:13:00 -0500

This report assesses the changing geographic distribution of the low-income population compared to recipients of the federal Earned Income Tax Credit (EITC) between 1999 and 2007, focusing on trends in the nation’s 100 largest metro areas. The analysis finds that:

Changes in EITC receipt have tracked closely with the growing and shifting geography of working poverty. From 1999 to 2007, major metropolitan suburbs accounted for roughly half of the nation’s net growth in low-income residents (4.8 million) and EITC recipients (2.5 million), outpacing other types of communities. By 2007, these suburbs were home to more than one-third of all low-income Americans and EITC recipients.
Between 1999 and 2007, all 69 large metro areas that experienced significant growth rates in their low-income populations saw EITC receipt increase in response. Southern metro areas like Raleigh, Charlotte, and Atlanta that had the greatest increases in low-income population also saw the greatest upticks in EITC receipt as a result.
Low-income workers claimed $47.5 billion through the EITC in 2007—a real increase of 25 percent over 1999—with 60 percent of EITC dollars going to residents of the 100 largest metro areas. Suburban filers claimed one-third of all EITC funds and accounted for half the net increase in EITC dollars claimed. In the 10 metro areas experiencing the greatest increases in low-income population, EITC claims increased by almost $1 billion.

In the wake of the first recession of the 2000s and the slow recovery that followed, the number of low-income Americans increased significantly, especially in suburban communities. As that population grew and suburbanized over the decade, the EITC responded effectively both to economic trends—offering critical support to help working families weather downturns in the economic cycle—and to the changing geography of the working poor.

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Tinkering with the EITC

Alan Berube — Tue, 10 Aug 2010 14:34:00 -0400

Last week was an active one for America’s stealth anti-poverty policy—the Earned Income Tax Credit (EITC)—though you’d be forgiven for not noticing. A couple of decisions, made with little fanfare, should have big implications for how low-income taxpayers receive the credit in the future.

The first development was a little disappointing. After a more than 30-year run, Congress seems poised to do away with the Advance EITC, to help offset a new round of federal aid to states. The Advance EITC is a little-used mechanism by which workers can get a portion of their expected EITC through their paycheck throughout the year. Under the program, employers can advance their workers up to $35 a week in credits, and then offset those payments against their payroll tax. But for a host of reasons, the Advance EITC never caught on with more than 1 percent of eligible filers, and the GAO found that the program suffered from a high degree of error. Our own research on the subject concludes that the design is so flawed, it’s probably best to scrap it and start over.

Emphasis on “start over.” With the expansion of the EITC and other refundable tax credits for families with children, more and more low-income filers are getting a significant amount of their annual earnings via a tax refund. It’s time to ask whether we’re really alleviating poverty, and “making work pay,” to use President Clinton’s phrase, when a low-earning mother with three children can receive upwards of half her annual income in a lump sum at tax time. These working families have pressing ongoing needs for food, shelter, and clothing, the bills for which don’t come due just once a year. The fact that so many of these taxpayers use expensive “rapid refund” loans to access these dollars just a few days before the IRS would deliver them testifies to the severe liquidity problems they face (more on that below).

The demise of the Advance EITC should obligate us to find a new and better way to pay the EITC periodically, throughout the year. Other industrialized countries with “in-work” tax credits—the U.K., Ireland, Australia, New Zealand—pay them directly to eligible families (not through employers) on at least a monthly basis. We’ve figured out how to do periodic tax payments, or may soon have to, to provide subsidies for health insurance, and for offsetting the impacts of climate change legislation on lower-income households. There are some tricky questions to contend with, including how to protect taxpayers whose circumstances change unexpectedly during the year from having to repay significant amounts. But we can strategically minimize the cost of those allowances, and the benefits of offering families real financial help throughout the year would far outweigh those costs.

Last week’s other notable, more positive EITC development was IRS’ decision to suspend availability of the “debt indicator” next tax filing season. This indicator, provided to tax professionals, enables preparers to identify whether or not the taxpayer’s refund will be reduced via an offset for federal debts, such as prior-year taxes owed or student loan arrears. Sounds innocent enough, but the debt indicator essentially enables preparers to make those high-priced, essentially risk-free refund loans, most of them to low-income taxpayers who receive the EITC. Without it, the rapid-refund business will probably (hopefully) die a quick death.

That’s a good thing for low-income taxpayers, though it won’t necessarily do much to improve the dire financial conditions that drive some of these families to refund loans in the first place. With deficits as far as the eye can see, it’s not clear that we’ll be able to increase the EITC or other low-income credits significantly in the near future. In the meantime, getting more of the money to families throughout the year is a meaningful step we can take toward improving their financial security.

Authors

Alan Berube

Publication: The Avenue, The New Republic

Image Source: © Mike Segar / Reuters

Economic Recovery and the Earned Income Tax Credit

Elizabeth Kneebone — Wed, 21 Oct 2009 00:00:00 -0400

The American Recovery and Reinvestment Act of 2009 increased support for low-income working families by making important expansions to both the Earned Income Tax Credit (EITC) and the Child Tax Credit. At the National Community Tax Coalition’s inaugural Day of Action on Capitol Hill, Elizabeth Kneebone discussed the impact of these expansions on families and communities across the country. She also explored the effects of recent legislative proposals to strengthen the EITC for workers without qualifying children.

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Authors

Elizabeth Kneebone

Publication: National Community Tax Coalition

Smarter Dumb Tax Policy

Alan Berube — Fri, 09 Oct 2009 10:48:00 -0400

All right, let’s acknowledge up front that the $8,000 first-time home buyer’s tax credit, enacted as part of the federal stimulus package, is poor tax policy. It’s untargeted--one estimate suggests that as many as four out of five buyers would have purchased homes without the credit, but got handed the $8,000 anyway. It’s expensive--it will probably cost on the order of $15 billion this year. And U.S. homebuyers get all manner of tax breaks anyway--deductions for mortgage interest and state and local taxes, an exclusion for capital gains--not to mention tax subsidies for Fannie Mae and Freddie Mac, now effectively owned by the government.

But now it seems like extension of the stimulus credit is on the fast track. Proponents argue that it’s needed to prop up a still-weak housing market. Some argue that the credit should be increased to as much as $15,000, or extended to all homebuyers rather than just first-time buyers. Perhaps the Democrats will support the credit’s extension in part to gain Republican support for extensions of other, more targeted stimulus policies--unemployment compensation and health insurance for the long-term unemployed.

The discussion, however, overlooks the fact that house price trends across the country are highly uneven. Some metro areas like Las Vegas (coincidentally, in Senate Majority Leader Harry Reid’s home state) have been absolutely battered, suffering a 25 percent decline in prices over the past year. Many others like Houston have actually seen prices rise, by as much as 5 percent over the same period. In Las Vegas, an $8,000 credit might not be quite enough subsidy to right the ship. But all $8,000 does in Houston is inflate prices in an already healthy market.

If politics require that the credit be extended, then why not do it in a less dumb way? The federal government collects quarterly data on metropolitan home price trends. Why not use those data to modify the generosity of the credit based on where the purchase occurs? If prices are down more than 15 percent in the local market, perhaps the credit should be worth $12,000 or $14,000. You probably have to provide something to the healthy markets to make the politics work, but perhaps the credit in those places should be worth only $2,000 or $3,000. The law would establish a formula for calculating the appropriate subsidy level based on these federal housing data, and the IRS would publish tables on its website detailing the credit available for each metropolitan (or non-metropolitan) housing market.

To be clear, this geographic targeting wouldn’t address many of the problems inherent in a homebuyer tax credit. It would, however, recognize the fact that in housing, like a lot of other things, we’re a big and diverse country. If the purpose of this credit is to stabilize the housing market, let’s stabilize the metropolitan markets that really need it, and avoid overheating the ones that don’t.

Authors

Alan Berube

Image Source: © Brian Snyder / Reuters

Delivering Metropolitan Stimulus

Alan Berube, Mark Muro and Robert Puentes — Fri, 13 Feb 2009 00:00:00 -0500

A historic fiscal experiment in this country will evolve in the weeks, months and years ahead as a $790 billion stimulus package is spent to revive America’s economy. Metropolitan Policy Program experts suggest how this money might be strategically deployed to invigorate our nation’s metropolitan areas, the sources of national prosperity.

Mark Muro , Fellow and Director of Policy

My hope is that the stimulus funding flows will occasion the emergence of stronger regional organization in metropolitan areas.

The conventional wisdom is that the package--with its haphazard collection of separate funding items, many to be allocated by states--will be frittered away in a random spending spree governed by business as usual. The fear is this will undercut rather than strengthen the emergence of cohesive metro regions.

However, few things would yield greater long-term benefit than if, in at least some areas, the administration of stimulus flows at the local and state level was pursued in ways that fostered metropolitan decision making—the key to national prosperity. Ultimately, this should be one of the signal goals of all federal policy as argued in the report "MetroPolicy."

Along these lines, it would be optimal if a surprise outcome of the package is that it evokes new efforts by state and local leaders to aggregate and align the package’s myriad separate funding flows--for roads and transit projects, water infrastructure, weatherization, or various block grants—in support of metropolitan growth.

Signs point to that already happening in some places. The Chicago Metropolitan Agency for Planning is thinking hard about how to marshal the stimulus in ways that support metropolitan prosperity, and has posted draft criteria for project selection. In the Kansas City region, the Mid-America Regional Council is assembling a regional public works list so the region can advocate as a unified entity for its needs and make the most of the moment. And for that matter, Vermont, Ohio, New York, and Massachusetts have all appointed infrastructure or stimulus “czars” to oversee and organize stimulus spend-down, although not necessarily with metropolitan coordination in mind.

In short, let’s hope every state strives to insure that the stimulus package’s implementation is coordinated, integrated, and metro-focused. Ultimately the point here is economic growth, and growth emerges from cohesive, dynamic metros.

Robert Puentes, Senior Fellow

The recovery plan will direct nearly $50 billion toward infrastructure projects designed to help put Americans back to work and boost the economy by rebuilding roads, bridges, mass transit systems, and investing in rail and ports. Given our nation's outstanding investment needs, it is up to the states to ensure that projects focus on metropolitan areas which, as the nation's economic engines, drive American productivity and prosperity and so are fundamental to national economic recovery.

Stimulus funds for the highway and road network should prioritize rehabilitation and maintenance projects especially in underserved areas. States should also consider the option of flexibly transferring funds to ready-to-go transit initiatives, non-motorized initiatives, and projects that decrease driving. Reducing vehicle miles travelled will help the nation achieve its energy independence goals, as transportation contributes one-third of the nation’s greenhouse gas emissions and is the fastest growing contributor to our carbon footprint.

To ensure we have the human capital to rebuild our nation's infrastructure, states should set-aside a portion of funds for each project for job training programs, particularly those in partnership with community colleges or trade unions. Such programs can help stabilize low income communities and provide a pathway to good jobs.

The recovery package should send a strong signal and set the course for a new economy and a rethinking of transportation policy in this country.

Alan Berube, Senior Fellow and Research Director

The economic stimulus/recovery package rightly directs much of its assistance toward where the dollars will be spent immediately on goods and services. In doing so, the package also aims to invest in several longer-term priorities that can lay the groundwork for higher future economic growth.

The package’s expanded tax credits for low- and moderate-income working families provide significant stimulus. In particular, increases to the Earned Income Tax Credit, or EITC, have been shown to help these families pay for necessities like housing, food, clothing, and school supplies, and durable goods like furniture and appliances. The expansions made to the refundable Child Tax Credit, and the creation of a new Making Work Pay credit, can further the same goal. Moreover, these expansions can help to fill some of the long-term wage/price gap that many of the nation’s lower-paid workers face.

The package also includes important assistance for lower-income communities where foreclosures threaten housing market viability and local fiscal capacity. A new, competitive round of HUD’s Neighborhood Stabilization Program will help mitigate the secondary impacts of foreclosures, employ local workers in occupations such as property maintenance and construction, and ultimately preserve asset values to facilitate market recovery and sustain quality places.

Finally, the package provides nearly $9 billion to states through a Fiscal Stabilization Fund, which they can use to modernize institutions of higher education. As states prepare to deploy these funds, they should keep in mind the value of investments in community colleges. These institutions face rising enrollments, sure to accelerate in an economic downturn, yet lack the capacity to serve students consistently well. Over the longer run, a larger, sustained federal financial commitment to two-year colleges, with dollars targeted to high performing institutions, would promote better outcomes for students, meet emerging skills needs, and enhance earnings for the American workforce.

Authors

Poverty and Economic Stimulus

Rebecca M. Blank and Mark H. Greenberg — Tue, 10 Feb 2009 12:00:00 -0500

The bad news on the economy continued last week, when we learned that the unemployment rate has now reached 7.6 percent, with more than 11 million unemployed people. It's worth focusing on the people behind these statistics. The pain of unemployment is not spread equally among the population. When unemployment rises, less skilled workers are laid off at a much higher rate than more skilled workers. In the most recent unemployment statistics, almost 11 percent of high school dropouts are unemployed, while the unemployment rate is less than 4 percent among college graduates.

Some demographic groups experience much greater unemployment in recessions. Black and Hispanic unemployment rates have increased faster than white unemployment rates; unemployment among young minority workers has increased particularly rapidly and is now more than 30 percent. Perhaps surprisingly, women's unemployment rates have remained below men's, but that reflects the fact that the downturn started earlier in construction and manufacturing industries, which are heavily male-dominated. As the consumer spending sector sheds workers, women's unemployment rates are catching up with men's.

Unemployment means steep reductions in family income. It isn't surprising that rapid increases in unemployment lead to substantial increases in poverty. A rough rule of thumb is that for every percentage point increase in unemployment, the poverty rate increases by almost half a percentage point. If unemployment reaches 10 percent, as some analysts now project, the nation's poverty rate could grow from 12.5 percent in 2007 to 14.8 percent _ meaning that more than one out of every seven Americans will be living in poverty.

Such a large increase in poverty and economic need is not inevitable, however. Government policy in the coming months matters a great deal. If the recovery package generates millions of jobs, we may avoid 10 percent unemployment. Furthermore, provisions in the recovery package and state decisions about how to spend recovery funds can contribute to raising family incomes during the recession.

Specifically, the stimulus package includes provisions such as the Making Work Pay tax credit worth $500 for most workers, expansion of the federal Earned Income Tax Credit and Child Tax Credit, temporary increases in food stamp benefits and child care subsidies, enhanced unemployment insurance benefits, and expanded health care coverage for unemployed workers. These all will help unemployed and lower-income families weather the recession.

This stimulus package can jump-start economic growth two ways. It can fund programs that result in direct hiring (such as infrastructure programs) and it can provide funds to individuals or organizations that will be spent throughout the economy, hence generating more economic activity and more employment. The support for low-income families in this legislation fits into the second category.

Dollars aimed at lower-income families in the recovery package provide a double benefit. First, they target resources to the groups who are hardest hit by the recession and most likely to experience extended unemployment. As we have targeted billions of dollars to troubled banks, we should surely also target dollars to the families who are most hurt by rising unemployment.

Second, the stimulus effect of these dollars on the whole economy is high. Because these groups are struggling to meet their basic needs, they are likely to spend every dollar they receive. Hence, the multiplier effects of dollars spent on the poor are higher than dollars spent on the rich.

During the campaign, the president put forward an ambitious agenda for poverty reduction, including some features of the recovery bill such as tax credits and expansion of early and higher education. He also advocated targeted initiatives in high-poverty communities, an improved official poverty measure, and a national goal of cutting poverty in half in ten years. Long-run success depends on reviving and renewing the economy, but significant parts of this strategy can move ahead even during the downturn. For example, improving the official poverty measure this year would cost little, would provide a far more accurate picture of poverty, and will help us measure how effectively the recovery bill addresses it.

President Obama recently announced that Vice President Biden will lead a Middle Class Working Families Task Force. That task force should focus not just on conditions of the middle class, but the policies needed to help millions of additional Americans who are struggling, but falling short, to join the middle class.

In the short run, economic need is rising rapidly and we need to address the short-run problems as well as think about the long-term reforms. The parts of the recovery plan that are directed to low-income and unemployed families are good economics and good social policy. But they are only the beginning of any serious effort to deal with poverty in America.

Authors

Rebecca M. Blank
Mark H. Greenberg

Publication: Real Clear Politics

Expanding the Earned Income Tax Credit to Benefit Families and Places

Elizabeth Kneebone — Mon, 26 Jan 2009 11:06:00 -0500

Introduction

The economic recovery package currently under consideration by the U.S. House of Representatives, as well as corresponding legislation before the Senate Finance committee, includes a number of tax relief provisions that would benefit lower-income workers and their families. One such provision would temporarily expand the federal Earned Income Tax Credit (EITC). The EITC—a refundable tax credit for people who work but earn low incomes—is the country’s largest and most successful anti-poverty program. The EITC delivers over $40 billion dollars a year in wage supplements to lower-income workers and their families and lifts more than 4 million people out of poverty each year.

As effective as the EITC has been at encouraging work and alleviating poverty, the credit could do more for certain groups of taxpayers to help make work pay, especially given the nation’s current economic challenges. In particular, larger families—those with three or more children—receive no additional support under current EITC eligibility rules, though these families are more likely to be low-income even when they are working. In addition, married couples face a “penalty” when they claim the EITC in that they must report their joint income, resulting in a smaller credit (or no credit) compared to what they might claim if they were not married.

These two groups—larger families and married couples—are the focus of the EITC expansion included in House and Senate versions of the economic recovery package.

Read the full paper »

Table one »
Table two »
Table three »

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Elizabeth Kneebone

How to Reverse the Trend of Concentrated Poverty

Alan Berube — Sun, 28 Dec 2008 00:00:00 -0500

One of Cleveland's neighborhoods made the Washington scene earlier this month.

Alas, it wasn't up for a multibillion-dollar bailout.

Instead, the Central neighborhood and 15 other communities across the United States were the centerpiece of a new report published by the Federal Reserve System and the Brookings Institution.

These communities share a simple, disappointing characteristic. In 2000 - the peak of the last economic boom - at least 40 percent of their residents lived below the federal poverty line. That was about three times the national average.

No American needs to look very far to find places like these. Concentrated poverty affects manufacturing cities like Cleveland, and Albany, Ga.; immigrant gateways like Miami, Fla., and Fresno, Calif.; and rural areas like eastern Kentucky and northern Montana. About 4 million poor Americans live in these areas of extremely high poverty.

How did this happen? Policy decisions made decades ago - like clustering thousands of the Cleveland region's public housing units in the Central neighborhood - helped shape their trajectory. So too did economic changes, like the long-run loss of decent-paying manufacturing jobs, or - in rural areas - mining and agricultural jobs.

By allowing poverty to concentrate in these places, we've magnified the problems their poor residents face. For instance, many low-income children in these communities start school not yet "ready to learn." On top of that, though, they attend schools burdened with lots of other poor kids who face similar challenges, and deal with higher levels of neighborhood crime that affect their mental health and educational performance.

The challenges of concentrated poverty extend to many other areas: low adult work-force skills and employment, poor-quality housing and a lack of investment by mainstream businesses.

And that's in a good economy. Today, Central - and thousands of other high-poverty communities like it across the nation - faces even more significant challenges as the United States enters what may be its worst recession in decades.

So what should Washington do for these places and their residents in the face of such difficult circumstances?

First, we must not lose sight of them in the economic turmoil. That's especially true because the roots of this crisis, in the subprime mortgage market, grew in many very poor neighborhoods like Central. As a result, home foreclosure rates in high-poverty communities are more than double the national average.

To stabilize these hard-hit communities, Washington must adopt new measures to prevent foreclosure and provide additional resources and guidance for state and local governments to help them cope with the rising numbers of vacant properties.

Second, a forthcoming economic stimulus package from Washington that could amount to half a trillion dollars or more should not bypass these neighborhoods and their residents.

That implies the need for immediate federal aid to sustain basic public services in states like Ohio, where the deficit for this year already tops $1 billion. It also suggests providing direct assistance to struggling workers and their families, through enhanced unemployment benefits and tax credits.

At the same time, the infrastructure dollars in the package - which could amount to more than $100 billion - must be spent strategically. States should not be permitted to go on expanding highway capacity at the metropolitan fringe, to the detriment of poor communities near the urban core. Cities like Cleveland, and metropolitan organizations like the Northeast Ohio Areawide Coordinating Agency, should get their fair share of new transportation funds. And funds should be set aside for training programs that provide low-income residents with a pathway to decent jobs.

Third, we have to rethink neighborhood policy over the longer term.

For too long, government has funded housing, schools and economic development in these communities as though they were islands unto themselves.

That's not how the real economy works. These neighborhoods are part of larger regional labor and housing markets. Decisions made across the Cleveland region, such as where firms locate new jobs, or where families buy homes and send their kids to school, ultimately dictate whether neighborhoods like Central can become real neighborhoods of choice and better connected to economic opportunity.

Public policy must leverage that real economy for the benefit of lower-income residents, by building on smart regional strategies like the Fund for Our Economic Future and WIRE-Net in Northeast Ohio. It should diversify housing in poor communities, but also encourage affordable housing development in wealthier parts of metropolitan areas.

Cleveland's Central neighborhood, like other high-poverty communities across the United States, faces a tough road ahead. Short-term opportunities, and long-term strategies, are needed to help its next generation of residents overcome the challenges of concentrated poverty.

Authors

Alan Berube

Publication: Cleveland Plain Dealer

Fighting Poverty in the Land of Opportunity

Rebecca M. Blank — Wed, 17 Dec 2008 12:00:00 -0500

Holidays should be a time of blessing. But this year, with unemployment rising, more families are feeling squeezed rather than blessed. A sound plan from the new White House to support low-wage workers, ensure an effective safety net and create opportunities in high-poverty neighborhoods might guarantee American families more on their tables in the seasons ahead.

One in eight Americans lived in families with income below the official U.S. poverty level in 2007. As 2008 wraps up in a deepening economic recession, many more families are finding it difficult to pay the bills that cover the costs of food, clothing and shelter. The ability to cope with medical bills, transportation and child care costs must also be part of the modern-day basic survival package.

To understand the problems of poverty, it is important to identify accurately who is poor. Unfortunately, our current poverty measure is seriously outdated. The current thresholds for measuring whether a family is in poverty are based on 50-year-old data about food consumption, updated only for inflation since the Johnson administration established the poverty measure.

If Barack Obama is serious about waging a new war on poverty, a good start would be to consider a more effective way to measure poverty that better indicates how many families have sufficient economic resources to pay for their basic necessities. In a developed country like the United States, this means more than merely avoiding starvation or homelessness; it means having the resources needed to seek and hold employment.

In a new Hamilton Project discussion paper, Mark Greenberg and I recommend the adoption of an improved measure, drawing from the recommendations of the National Academy of Sciences, which would better define a poverty line and better measure the actual amount households have to spend on the necessities of food, clothing and shelter.

The new measure would provide a more accurate picture of poverty in America and a better understanding of the effectiveness of antipoverty programs. Combating contemporary poverty, however, also requires a rapid-action plan.

For a major political win early in the Obama administration, his policy advisers should propose expanding the Earned Income Tax Credit for low-wage workers without children. Currently, only working parents who live with their children can receive an EITC that is large enough to matter. We need to "make work pay" for all low-wage workers, including less-skilled men who do not live with their children but still have child-support obligations.

For the unemployed, temporary extensions of Unemployment Insurance – as was folded into recent stimulus proposals – offer some relief but do not fix the long-term problems with this program. Rising unemployment rates should spur political impetus for broader reforms that Obama proposed on the campaign trail. Since states are partners in the design and funding of the Unemployment Insurance system, accomplishing this will take close collaboration with governors and some financial sweeteners to get states, as well as the private sector, to transform the new president's ideas into meaningful benefits.

Candidate Obama also pledged to create 20 Promise Neighborhoods, each providing a full network of services to children in poor neighborhoods, such as early childhood education, violence prevention and after-school programs. President Obama should move quickly to implement and evaluate this experiment with urban reform.

Expanding Internet connectivity in low-income neighborhoods, both rural and urban, could help alleviate the isolation that breeds poverty. The private sector should make sure that all families have low-cost laptops to access this resource. Reminiscent of the rural electrification projects of the last century, the ability to join the World Wide Web can recharge entire communities.

What Obama has not yet put on the table, but should, is ways to strengthen the safety net. An increasing number of single mothers, particularly those who face barriers to work, are not receiving badly needed cash public assistance. With a decimated economy, it also time to rethink how the welfare block grants are distributed to the states.

The landmark 1996 welfare reform law dramatically changed the nation's safety net. We should applaud the success of that legislation in putting mothers into the workforce, but recognize that this legislation makes life harder in a time of rising unemployment for single mothers who can't find jobs.

In this land of opportunity, Barack Obama should renew a focus on the problems of poverty and the policies that can provide new opportunities for struggling families and their children. Holidays should be bountiful across more of America.

Authors

Rebecca M. Blank

Publication: The Charlotte Observer

The Enduring Challenge of Concentrated Poverty in America

Alan Berube and Elizabeth Kneebone — Fri, 24 Oct 2008 12:00:00 -0400

The Federal Reserve System and its 12 member banks partnered with the Brookings Metropolitan Policy Program to produce a new, in-depth look at concentrated poverty in America. The two-year study, The Enduring Challenge of Concentrated Poverty in America, profiles 16 high-poverty communities across the United States, investigating the historical and contemporary factors associated with their high levels of economic distress.

The report is the first to analyze concentrated poverty and its impacts across the wide range of community types in which it occurs--urban, small city, and rural; white, black, Latino, and Native American; growing and declining; and every region of the United States. It finds that all of these communities face obstacles related to under-performing local schools and low adult labor market skills; insufficient quality and diversity of housing; lack of mainstream commercial investment; and the limited capacity of local public, private, and non-profit organizations to navigate this suite of challenges. Strategies to help both poor places and the people who live within them are needed to tackle the double burden of concentrated poverty in America today.

Federal Reserve Resources »

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Alan Berube
Elizabeth Kneebone

How Can We Reduce the Rising Number of American Families Living in Poverty?

Rebecca M. Blank — Thu, 25 Sep 2008 12:00:00 -0400

INTRODUCTION

A Quick Review of the Recently-Released Data on Poverty for 2007

The Census Bureau recently released the official numbers on income and poverty last year (2007) in the United States. Let me underscore a few of the key facts that these data illustrate.

First, poverty did not fall to any appreciable extent during the economic expansion of the 2000s. This is quite unusual. Figure 1 shows the poverty rate and the unemployment rate. In past decades, these two indicators have moved together. When unemployment fell in the 1980s expansion, so did poverty. Unemployment and poverty both fell rapidly in the strong expansion of the 1990s. But when unemployment fell after 2003, poverty remained essentially flat.

The increase in poverty in 2007 is surprising. This was a year when GDP growth averaged 2%, with two quarters of GDP growth in excess of 4.5%. Average unemployment was largely the same as in the previous year. This does not bode well for 2008 when all economic indicators look far worse.

Second, the rise in poverty reflects the generally sluggish growth in income by all families in the bottom half of the income distribution. Figure 2 shows an index of household income growth at the 20^th, 50^th, 80^th and 95^th percentiles of the income distribution over the last 30 years. Income among the bottom 20 percent grew as fast (or as slowly) as among those at the median (the 50^th percentile) throughout this period. While these lower-income families achieved significant income gains over the last 30 years, particularly over the 1990s, both families in the middle of the income distribution and those at the bottom have lower household incomes in 2007 than they had in 2000. While incomes at the top of the distribution incomes have not risen rapidly in the 2000s, they have risen over the past 10 years.

If 2007 data didn’t look as good as we might have hoped, we should expect 2008 data to be far worse. Given rapidly rising unemployment since the first of the year -- a problem that could accelerate with the economic news of recent weeks – poverty is going to be a major issue in the policy discussion for any new administration in 2009.

What Does This Poverty Measure Indicate?

I have been asked to spend most of this testimony focused not on the numbers, but on the poverty measure itself. There is widespread agreement that our poverty measure is badly flawed and needs to be updated. A bill to produce a modern poverty measure was just introduced in the House (HR 6941) and will soon be introduced in the Senate. As a scholar, I have been involved in the discussion of poverty measurement for many years. I served on the National Academy of Science’s panel in the mid-1990s that recommended a methodology for improving poverty measure, and have written about this topic (Blank 2008).

The current poverty measure was defined in 1963 by a Mollie Orshansky, a staffer in the Social Security Administration. She proposed both a way to measure an official poverty line, and a way to count family resources, comparing them to the poverty line to see if a family was poor or not. Let me talk about each in turn.

The current poverty line: Orshansky created a poverty line using the calculation

Poverty line = 3 x Subsistence food budget

The subsistence food budget was the Economy Food Plan developed by the USDA in 1961, using data from the 1955 Household Consumption Survey. The multiplier of 3 was used because the average family of three or more spent one-third of their after-tax income on food in the 1955 data. If the average family spent one-third of its income on food, then three times a minimal food budget provided an estimated poverty threshold. This number was adjusted for families of different sizes.

With only minor changes, the current poverty line is this number, calculated in 1963, based on 1955 data, and updated by the Consumer Price index in the following years. There is no other economic statistic in use today that relies on 1955 data and methods developed in the early 1960s. In the years since, food prices have fallen, housing prices have risen, and medical expenses have grown enormously. In short, consumption patterns have changed dramatically but our poverty line does not reflect these changes.

Defining family resources: The resource measure in Orshansky’s calculation was simply a family’s cash income. Forty-five years later, this definition is also seriously flawed, as cash income alone is no longer an adequate description of the economic resources available to low-income families. There is broad agreement that the resource measure should reflect a family’s disposable income, that is, the income that a family has available for buying necessities, minus taxes and other mandatory expenditures. However, the gap between cash income (the current resource measure) and disposable income is large for low-income families.

In the years since the current definition was developed, the biggest expansions in anti-poverty assistance have come through the tax system, such as the expansion in the Earned Income Tax Credit (EITC), or through in-kind benefits, such as growth in the Food Stamp Program or in Section 8 housing vouchers. Because the historical poverty measure is based only on family cash income, it is unaffected by many of these changes:

If a disabled individual starts to receive Medicaid assistance and has lower out-of-pocket medical expenses, this does not affect his poverty status;
If a family receives food stamps and has more income left over for other purchases, this does not affect their poverty status;
If a worker receives an EITC refund check, this does not affect her poverty status.

Why does this matter? Our measured poverty rate is insensitive to many of the most significant policy changes designed to help low-income families that we’ve made in this country. This made it easy to claim that public spending on the poor had little effect. But the problem was not the policies, but the statistic we used to measure the problem. In a fundamental way, our poverty measure has under-counted policy gains, and made it easy to claim that public spending on the poor had little effect.

The only group who has experienced a major decline in the official poverty data over the past 30 years is the elderly. It is not a coincidence that the elderly are the one group for whom we have provided greatly expanded assistance in the form of cash income, through expansions in Social Security and in Supplemental Security income. Hence, our assistance to this group was reflected in our official statistics.

None of this says that the historical poverty measure is entirely meaningless. It does capture cash income movements, which largely reflect changes in employment and in wages. In a year – like 2007 – in which there were no major tax or policy changes, the movement in the historical poverty measure shows how economic changes are affecting low-income families. But we can and should do better, with a poverty measure that reflects policy changes as well as economic changes.

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Rebecca M. Blank

Publication: Joint Economic Committee

Making Work Pay – Again

Ron Haskins — Mon, 15 Sep 2008 12:00:00 -0400

INTRODUCTION

One of the rallying cries of the welfare reform movement of the 1990s, coined by President Bill Clinton, but soon suffusing the entire movement, was “Make Work Pay.” So few words have rarely captured such a fundamental goal of social policy. Government could help millions of families working for low wages by supplementing their incomes with benefits, especially benefits designed to encourage work. Doing so would both improve the economic well-being of children and families, and increase the incentive to escape poverty and welfare dependency through work. Clinton’s primary idea for making work pay was to increase the Earned Income Tax Credit (EITC), which uses the tax code to make cash payments to low-income workers, primarily those with children. Clinton accomplished this goal in 1993 with legislation that substantially increased the EITC. Today the maximum EITC benefit is $4,500 for workers with two children – a level of benefit by which the federal government, in effect, converts an $8-anhour job to a $10-an-hour job.

But the EITC is only the most conspicuous of the programs that provide additional benefits to low-income workers. Taken together, these programs are often called the “work support system.” The primary programs in the work support system, in addition to the EITC, are child care, food stamps, and the combination of Medicaid and the State Child Health Insurance Program. Less often mentioned are the refundable portion of the child tax credit, child support enforcement, and employment and training programs. A family with two children with a parent earning $8 an hour and working full time can enjoy a package of earnings and work supports worth more than $37,000.

The wholesale abandonment of welfare during the 1990s for low-wage work augmented by benefits from the work support system has directly contributed to a substantial increase in earnings and income and to an impressive reduction in poverty among children in female-headed families. Indeed, a recent report from the Congressional Budget Office showed that between 1991 and 2005, families with children in the bottom fifth of the family income distribution enjoyed a greater percentage boost in income than families with children in all but the top quintile. Even after the recession of 2001 reduced the percentage of single mothers with jobs by around 2 percentage points, child poverty was still more than 20 percent lower than it had been before the explosion in employment by single mothers during the mid-1990s.

So the federal government and, to a somewhat lesser degree, the states have done a lot to advance the agenda of making work pay. The best way to achieve further reductions in poverty and to promote economic opportunity is to conduct a two-front war: one focusing on increasing the human capital of low-income workers, and the second on improving the work support system. As it happens, Congress now has an opportunity to adopt a major reform that would greatly strengthen the work support system, increase work incentive, promote economic opportunity, and dramatically improve the economic well-being of around 3 million households. A little less than half of these households have children, mostly living with their single mother. And Congress could achieve these outcomes without spending an additional dime of taxpayer money and without increasing the federal deficit. This reform offers the best opportunity for advancing the make-work-pay agenda over the next several years.

View the entire volume: “Big Ideas for Children: Investing in Our Nation’s Future” »

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Ron Haskins

Publication: First Focus

Low-Income Families and Communities

Alan Berube — Tue, 12 Aug 2008 12:17:35 -0400

In a new report, Reversal of Fortune: A New Look at Concentrated Poverty in the 2000’s, Alan Berube and Elizabeth Kneebone detail significant trends in concentrated poverty rates over the course of this decade. The authors explain that following a dramatic decline in concentrated poverty in the 1990s, the number of low-income workers and families living in high-working-poverty neighborhoods rose by a striking 41% in the first half of this decade. They argue that policies that foster stronger national and regional economic growth—together with targeted efforts to create and protect neighborhoods of choice and connection—may offer the best route to longer-term progress against concentrated poverty.

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Stronger National Growth will Help High Working-Poverty Places

Reversal of Fortune: A New Look at Concentrated Poverty in the 2000s

Alan Berube and Elizabeth Kneebone — Fri, 08 Aug 2008 12:00:00 -0400

An analysis of the changing geographic distribution of low-income workers and their families, measured by receipt of the federal Earned Income Tax Credit (EITC) in tax years 1999 and 2005, nationwide and in 58 major metropolitan areas across the country reveals that:

The number of tax filers nationwide living in areas with high rates of working poverty increased by 40 percent, or 1.6 million filers, between tax years 1999 and 2005. By 2005, 12.3 percent of low-income working families lived in high-working-poverty communities—ZIP codes where more than 40 percent of taxpayers claimed the EITC—up from 10.4 percent in 1999.
Of 58 large metropolitan areas studied, 34 experienced increased rates of concentrated working poverty (the share of EITC filers living in high-working-poverty communities) over the first half of the decade, while 24 showed declines. Older industrial metro areas including Detroit and Rochester exhibited the greatest increases in concentrated working poverty, while the Los Angeles and Phoenix metro areas experienced the largest declines.
Major metropolitan areas in the Midwest and Northeast experienced substantial increases in concentrated working poverty over the first half of the decade, but Western metro areas saw steep declines. Metro areas in the Northeast and West had similar rates of concentrated working poverty in 1999 (13 percent), but by mid-decade, the rate had risen to 18 percent in the Northeast while it dropped to 7 percent in the West.
Both central cities and suburbs saw an increase in high-working-poverty communities between tax years 1999 and 2005. The number of tax filers living in high-working-poverty areas in the central cities of major metropolitan areas across the country grew by 40 percent, while the surrounding suburbs experienced an increase of 36 percent. Still, central-city EITC recipients were five times as likely (25 percent) as suburban EITC recipients (5 percent) to live in high-working-poverty communities in 2005.

These trends suggest that the decline in concentrated poverty that occurred during the 1990s may be reversing over the course of this decade, particularly in regions hardest hit by the economic challenges of the early 2000s. Policies that foster stronger national and regional economic growth—together with targeted efforts to create and protect neighborhoods of choice and connection—may offer the best route to longer-term progress against concentrated poverty.

Read the Press Release »

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Alan Berube
Elizabeth Kneebone

Economic Stimulus Act: Hard to Kill Two Birds with One Stone

Ron Haskins — Fri, 08 Aug 2008 11:05:37 -0400

Introduction

The bipartisan stimulus package enacted in February 2008 was, like most stimulus packages, a straightforward application of Keynesian fiscal policy: Spend your way out of recession. To the extent that recessions involve declines in consumption, convincing people to spend more money might prevent a recession or make a recession shorter and shallower than it might otherwise have been. Given that consumer spending comprises 70 percent of the nation’s GDP, stimulating consumer spending as an antidote to recession has face validity.

Thus, policymakers have long responded to evidence of an approaching recession by increasing government spending in ways designed to increase consumer spending. In fact, programs like unemployment insurance, food stamps, cash welfare, and a number of others are said to be automatically countercyclical because as a recession sets in people lose jobs and qualify for unemployment insurance and welfare. As a result, they have more money than they would have had without the government benefits and they are—given their financial condition—likely to spend it, thereby achieving the desired end of increasing economic activity.

On those unfortunate occasions when Congress is looking for ways to spend additional money to stimulate the economy and avoid recession, advocates concerned with the rise of inequality in America over the past two or three decades might wonder whether it would be possible to design a stimulus package that would also have the long-term effect of reducing inequality or— the other side of the same coin—increasing economic mobility. Personally, I’m skeptical about whether a stimulus package, even the stimulus package passed on a bipartisan basis in February, will achieve its major goal of getting the economy back on track, let alone killing two birds with one stone by simultaneously having an impact on inequality. Sending a $150 billion stimulus package out to boost a $14 trillion economy strikes me as tantamount to sending a tugboat into a hurricane to rescue an ocean liner. Even so, let’s ignore whether a stimulus package might actually stimulate something other than the federal deficit, and reflect on how stimulus packages differ from reforms designed to reduce inequality and promote mobility.

According to Doug Elmendorf and Jason Furman of the Brookings Institution, there is substantial agreement among economists that a good stimulus plan must be timely, targeted, and temporary. Timeliness is difficult to gauge. Policymakers want to boost the economy just as it is about to nosedive by boosting spending and consumption. But if we think we’re entering a recession and we’re not, stimulating the economy is inflationary. So the emergency spending both adds to the deficit and boosts inflation. But if policymakers wait too long, the spending package could come after the recession is already well under way or nearing its end. In either case, policymakers’ attempt to help the economy could increase both inflation and the deficit without producing much good.

Even if the timing is right, and Congress acts in timely fashion as it did earlier this year, the money must arrive quickly in the hands of people who will spend it. As Elmendorf and Furman put it, the targeting must be right. If the money—$1,200 for couples and $600 for individuals in the current case—is sent to middle class households, as more than half of it was under the current plan, the households may save a substantial fraction of the money or use it to pay off debt, thereby defeating the purpose of the stimulus. Similarly, the provision in the package allowing rapid expensing of equipment and thereby increasing the cash available to businesses does not come with a guarantee that businesses will spend the funds on new equipment or new hires. In large part, the economy is in the doldrums because of excessive borrowing for lousy investments, so there may be reason to question whether individuals or businesses will suddenly make sound investments—especially given that good investments are relatively difficult to find during a recession. Still, it must be granted, if many of the credit-constrained businesses use their savings to hire or make productive investments in equipment, there will be some economic boost.

Finally, a good stimulus package must be temporary. Historically, the American economy has been the most innovative and productive in the world, characteristics that most economists believe result in part from low taxes and decisions by risk-taking individuals and corporations who operate without major government interference. If a stimulus package gets the economy back on track, it is important to quickly restore the level of government spending and government interference in the economy to the status quo ante. In fact, under Keynesian theory, after the economy recovers the government should tax more than it spends to maintain fiscal balance. In any case, by sending out one-time checks, making income from the stimulus checks that is spent within two months tax free, and allowing one-time expensing of equipment, most of the spending in the stimulus package meets the criterion of being temporary.

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Ron Haskins

Publication: Pathways Magazine

Periodic Payment of the Earned Income Tax Credit

Stephen D. Holt — Thu, 05 Jun 2008 12:00:00 -0400

A Background Paper prepared for the Brookings Institution Metropolitan Policy Program in support of Metro Raise: Boosting the Earned Income Tax Credit to Help Metropolitan Workers and Families.

Introduction

There has been a shift over the last two decades in public policies designed to provide income support to impoverished households. A focus on encouraging and supporting work has guided this shift, and the tax system has become as important as the welfare office. Emblematic is the nation’s largest anti-poverty program: the Earned Income Tax Credit (EITC).

The EITC supplements earnings and is targeted at households with children. In 2008, a person with two or more children at home who works full-time for $6.00 to $7.50 an hour qualifies for the maximum benefit of $4,824 from the federal government. If she resides in one of the several states or localities with its own version of the EITC, she might qualify for even more. Many workers able to claim a large EITC can also receive additional support through other tax code features such as the federal Child Tax Credit (CTC).

Although the EITC is an income tax credit, it functions for many of its recipients as a transfer payment to offset payroll taxes and provide additional cash. The EITC is fully refundable, meaning that its size is not determined by a person’s income tax liability. The worker with two children eligible for the largest EITC has no federal income tax liability and but can nonetheless receive the full credit. At higher earnings, the EITC can offset both income and payroll taxes and provide an additional benefit.

A key difference between the EITC and other forms of income support is timing. The norm for programs such as cash assistance, Food Stamps, and Social Security is monthly payment. There is a reasonably close association in time between financial need and receipt of funds to meet that need. In contrast, almost all EITC households receive no benefit until a few months after the end of the year for which they qualify. Very few utilize the advance payment option to receive a portion of the credit with each paycheck.

This research paper considers the problems with almost exclusive reliance on year-end (“lump sum”) payment, and the value of providing a viable periodic payment method. After reviewing the currently available advance payment option, its low utilization, and evidence of its limited potential, the paper suggests a design framework for an alternative system that would provide eligible workers and families with a portion of their EITC throughout the year.

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Stephen D. Holt

Metro Raise: Boosting the Earned Income Tax Credit to Help Metropolitan Workers and Families

Alan Berube, Elizabeth Kneebone and David Park — Thu, 05 Jun 2008 12:00:00 -0400

View the policy brief »

To alleviate poverty, make work pay, and help low-wage workers and lower-income families meet rising costs of living, the federal government should expand the Earned Income Tax Credit (EITC).

Targeted expansions to the credit, and new options for workers to receive the EITC’s proceeds throughout the year (rather than in a lump sum), would ensure more economically inclusive growth, especially in the major metropolitan areas where the bulk of America’s working poor resides.

America’s Challenge
Even as the U.S. economy was growing strongly in recent years, median household incomes and average hourly wages stagnated. Today, about onequarter of the nation’s workforce is employed in low-wage jobs, and low-wage occupations are projected to account for 30 percent of U.S. job growth in the coming years. Meanwhile, prices for necessities such as housing, transportation, and child care have continued to rise for lower-income workers and families. Slowing economic growth, and a potential recession, place additional, immediate pressures on the nation’s less-skilled, lower-wage workforce.

Limitations of Existing Federal Policy
Because it reduces poverty and inequality while promoting work, the EITC is widely acknowledged as one of the singular successes of American social policy in recent decades. Yet the EITC could do more for certain workers and families to help make work pay and to close the growing gap between stagnant wages and rising prices. Moreover the annual lump sum in which nearly all EITC is delivered is not well-timed to help low-income families meet their year-round needs.

A New Federal Approach
The federal government should expand and modernize the EITC, and in doing so help an estimated 8.4 million tax filers in the nation’s 100 largest metropolitan areas, and 14.5 million nationwide, by:

Tripling the maximum EITC for low-income, childless workers to about $1,300 in tax year 2008, boosting the financial return to work and ensuring that the federal government does not tax these workers into deeper poverty
Allowing married couples to exclude one-half of a second earner’s income when calculating the EITC, thus reducing economic disincentives for low-income couples to marry and for spouses to join the labor force
Expanding the EITC for working families with three or more children; these families are twice as likely as smaller families to have low incomes, but they receive no incremental assistance under the current EITC
Creating a new, streamlined periodic payment option that would provide eligible tax filers with a portion of the credit’s proceeds directly from the IRS throughout the year, as other countries with similar tax credits do

Metro Raise supporting material (appendix tables) »
Metro Raise One-Page Profiles for 100 Largest Metro Areas »
Steve Holt: Periodic Payment of the EITC »
Technical Appendix: Building The Metrotax Model »

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Authors

Alan Berube
Elizabeth Kneebone
David Park