logo for print

 

Using the Earned Income Tax Credit to Stimulate Local Economies

by Alan Berube,
The Brookings Institution

In 2006, the federal Earned Income Tax Credit (EITC) will provide more than $40 billion to low-income working families.  It lifts nearly 5 million Americans above the poverty line each year.  The average claimant in 2004 received a credit of roughly $1,800, amounting to more than 10 percent of his or her annual income. 

Many cities recognize that indirectly, they receive more funds annually through EITC than they do through traditional “urban” federal programs.  The large sums of EITC dollars claimed in urban areas provide a concentrated cash infusion to local economies—in some cities, more than $1 million per square mile.  Because most EITC recipients spend their tax refunds on short- to medium-term needs, the credit creates important ripple effects as its proceeds move among local consumers, firms, and their employees.

Yet the EITC’s economic impact could be even larger.  Nationwide, between 15 and 25 percent of eligible taxpayers fail to claim the credit, missing out on an estimated $5 billion.  Of those that do claim it, the vast majority—over 70 percent—file their tax returns through a paid tax preparer, incurring high fees that add up to more than $2 billion annually.

In recent years, a growing number of leaders at the local level have discovered these missed opportunities for families and communities.  Many cities have mounted multi-pronged efforts to raise the number of eligible taxpayers who claim the EITC, and to provide these families with access to free and low-cost assistance to complete and file their tax returns, a crucial alternative to high-priced commercial tax services.

Congressional leaders can provide a real boost to local EITC campaigns by getting involved in efforts in their states and districts to promote the credit and related tax benefits, and by helping to provide low-wage workers with access to free tax assistance.  Federal lawmakers can:

  • Publicize the EITC (and other tax benefits) and sources of free tax assistance using their websites, constituent newsletters, and op-eds in local newspapers.
  • Participate in campaigns by visiting free tax assistance sites in their states and districts.
  • Protect the EITC as a support for low-income working families and their communities.

Full Article (pdf format)