Posted by Kerry Spitzer and Michael Jacobs, April 14, 2010
At a time when some programs benefitting lower-income working New Yorkers are on the wane, there’s one program that continues to grow: the earned income tax credit, also known as the EITC. As April 15 approaches these credits are on the minds of many because the EITC is a significant boon to the hundreds of thousands of city tax filers who benefit from the tax credit. In 2006 (the most recent year for which comprehensive data is available), low-income New Yorkers received well over $2 billion in earned income tax credits through the city, state, and federal governments, with refund checks for some or all of the credit sent to over 80 percent of recipients.
The EITC is also a boon to the city because New Yorkers who receive the credits tend to spend nearly all of their income, and they spend it locally. This provides a boost to neighborhood economies.
Given the benefits, the city’s Department of Consumer Affairs has run promotions encouraging New Yorkers to apply for the credits and the Department of Finance has mailed amended returns to filers who might qualify. The cost to the city of these efforts is relatively modest, since the credit largely comes at the expense of the federal and state governments, and administrative costs are low with much of the assistance to filers applying for the credit provided by volunteers.
The earned income tax credit, which has become the nation’s largest antipoverty program, is a form of tax relief for low-income, working Americans. For filers with very low incomes, the amount of the credit increases as income from work increases and is adjusted each year for inflation. For example, a single mother with two children can receive an EITC against her 2009 federal income tax liability of 40 cents for every dollar earned up to $12,570, at which point her maximum credit of $5,036 is reached. The EITC for such filers remains at the maximum for income levels up to $16,420 and then declines gradually for higher incomes and is phased out entirely for incomes above $40,295. Filers with one or no children receive smaller credits, and the federal stimulus package enacted last year temporarily provides larger credits for households with more than two children and for many married couples filing joint returns for 2009 and 2010.
New York State also offers an EITC against state income tax liability, equal to 30 percent of the federal credit and residents of New York City—one of only three localities in the country to offer an EITC—can get a local credit against city personal income tax liability, equal to 5 percent of the federal credit. Thus, if the New York mother cited above is eligible for the maximum federal EITC, she would also receive credits of $1,511 from the state and $252 from the city, an additional $1,763. All three EITCs are fully refundable, meaning that filers receive the full benefit of the credit even if they owe little or no tax prior to taking the credit, with the unused portion paid out like a tax refund.
While it is difficult to quantify how many eligible families and individuals fail to claim the EITC, evidence suggests that many are unaware of the credits. Others miss out because their earnings are so low that they are not legally required to file tax returns.
The city has taken a number of steps to encourage all eligible New Yorkers to claim the credits. Starting in 2002, the Department of Consumer Affairs organized efforts to publicize and increase the number of volunteer income tax assistance sites, commonly known as VITA centers, where people can get help preparing tax returns and file for the EITC. The volunteer centers also serve as an alternative to some private preparers who attract cash-needy clients by loaning them the amount of their refund upfront. These loans also enable customers to pay for the tax preparation services, but often come at the cost of substantial interest payments. Although the percentage of EITC filers using tax preparers who provide loans in anticipation of customers’ refund checks is down and the number of returns prepared by volunteers has increased, in 2006, five times as many city filers used preparers who offered refund anticipation loans to obtain their federal EITC than used volunteer sites.
In addition to encouraging New Yorkers to claim the credit for the current tax year, in 2007 the Department of Finance started mailing amended prior-year federal and New York tax returns to tens of thousands of low-income filers who had not claimed the credit. In order to claim the federal, state, and or city credit retroactively, filers needed only to review the forms, enter social security numbers and dependents’ information, and sign and mail in the forms. The department estimates its mailing of tax year 2005 amended returns led to city filers receiving 3,600 federal, 3,300 state, and 3,200 city credits totaling nearly $3.6 million. Similarly, amended returns for 2003 and 2004 resulted in EITC refunds totaling $10 million for the two years combined.
The extent to which the city’s campaign for earned income tax credit participation is responsible for recent increases in EITC claims is hard to measure, but it is clear there has been an increase in the number of returns claiming the city and state EITC. For 2007, 857,000 city tax filers claimed the city EITC, up from 731,000 for 2004, the first year for which the city credit was available. Similarly, claims of the state credit by city residents grew from 741,000 for 2004 to 846,000 for 2007. For 2007, about 24 percent of all city filers claimed the city and state EITCs, with considerable variation among the boroughs—from a low of 12 percent in Staten Island to a high of 35 percent in the Bronx.
The EITCs increase the disposable (after-tax) income of many working New Yorkers who are most likely to spend their income locally and generate economic activity and tax revenue in the city. In 2006 city tax filers claimed $1.7 billion in federal, $435 million in state, and $76 million in city EITCs, making the combined average value of the credits worth roughly $2,600 per recipient. For families struggling to make ends meet, the EITC is a significant and dependable source of tax relief.