Issues, Challenges and Opportunities: LowIncome Taxpayers and the Tax Code Presentation to the Presi

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Issues, Challenges and OpportunitiesLow-Income
Taxpayers and the Tax CodePresentation to the
Presidents Advisory Panel on Federal Tax Reform

• David Marzahl, Executive Director
• Center for Economic Progress

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Center for Economic Progress

• Provides tax and financial services to the
  working poor
• VITA (Volunteer Income Tax Assistance) Tax
  Counseling Project
• Volunteers have prepared more than 100,000
  federal income tax returns since 1994
• VITA programs assist almost 2 million taxpayers
  each year in U.S.2
• LITC (Low-Income Taxpayer Clinic) program
  volunteers assist more than 500 taxpayers
  annually mainly immigrants and many first-time
  filers
• Financial education programs opened more than
  2,400 bank accounts since 2001, primarily using
  direct deposit of tax refund
• Programs serve households with annual incomes lt
  35,000
• National Community Tax Coalition brings
  together 500 organizations around tax practice,
  tax policy and financial services issues

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Equity in the Tax Code

• A progressive tax code, desirable for equity, may
  beget complexity not necessarily a bad thing
• Widening inequality in income and wealth and
  reduced social mobility tax code has unique role
  in facilitating families access to American
  Dream e.g. homeownership education
• Horizontal equity challenged by disparate tax
  treatment of wage vs. investment income
• Wage earners assume higher tax burden other
  sources of income are taxed at lower rates,
  undermining principles of fairness

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Tax Credits Tools of Social Policy?

• Refundable Tax Credits Earned Income Tax Credit
  (EITC) and Child Tax Credit (CTC)
• For example, EITC has been demonstrated to
  increase participation and retention in the
  workforce
• Non-Refundable Credits Child Dependent Care
  Credit, Education Credits and Savers Credit
• All credits have phase-in and phase-out and are
  targeted all require additional forms and
  paperwork
• Non-refundable credits of limited utility to
  low-income earners, lt25,000
• Non-refundable credits of increasing relevance
  for earners gt25,000

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Tax Counseling Project 2004 Tax Filing Season
Statistics

• Tax Counseling Project 2004 Tax Filing Season
  Statistics
• 21,300 tax year 2003 returns completed 2,700
  prior year returns
• 90 obtained a refund 10 owed tax
• Average refund 1,500 median refund 791
• Average refund for families - 2,508 median
  refund 2,489
• 60 claimed EITC (refundable)
• 23 claimed Child Tax Credit (refundable)
• 5 claimed the Savers Credit
• 4 claimed one of the Education Tax Credits
• 3 claimed Dependent and Child Care Tax Credit
• Refundable tax credits have a substantial impact
  on low-income taxpayers non-refundable tax
  credits much less so
• Taxpayers with dependents receive large tax
  benefits from child-related tax credits

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Tax Counseling Project Tax Credits Claimed by
Taxpayers with Refunds
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Low-Income Taxpayer Return Preparation

• Fact 72 of EITC filers use a paid preparer,
  60 of all taxpayers do
• Ritual of filing a tax return is a function of
  democracy
• High degree of civic pride associated with filing
  tax return
• Immigrants particularly so
• Filers with multi-year returns eager to get
  squared away with IRS even with penalties
• Use of intermediaries to access tax
  benefits/credits is increasing
• Paid preparers on-line filing Free File and
  for-profit and VITA

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Taxpayer Awareness and Understanding of Tax Code

• Eligibility for particular tax credits will vary
  from year-to-year
• EITC recipient population varies by more than 30
  annually
• Limited understanding of how withholding impacts
  tax refunds
• Tax Counseling Project Case study
• Taxpayers lack understanding of the connection
  between size of refund, annual income and
  household composition
• Taxpayers have limited grasp of the different tax
  credits with exception of EITC, which they all
  want
• Taxpayers have no understanding of interplay of
  different credits
• Disparate treatment of children within tax code
  creates unnecessary confusion and errors new
  rules for uniform definition of qualifying child
  may help

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Leveraging the Tax Code for Asset-Building

• Vast majority of tax benefits for savings and
  asset-building flow to moderate and upper income
  households
• Lump-sum nature of tax refund (and EITC) promotes
  savings and asset-building
• Syracuse University Center for Economic
  Progress study found that 49 of EITC recipients
  wanted to use some/all of EITC refund for social
  mobility purpose (Smeeding, 1999)
• Many low-income taxpayers unbanked solution
  open bank accounts at tax sites
• Direct deposit of refunds at tax sites up from
  30 to lt50 since 2002 2,400 new bank accounts
• A refundable Savers Credit would incent savings

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Profile of a Low-income Taxpayer

• Renita Jackson Keys, single mother of 4 children
• Lives in Lawndale, an economically disadvantaged
  neighborhood in Chicago
• Has been Center for Economic Progress tax client
  since 2001
• Used 1,200 of her refund in 2001 to match 2,400
  from matched savings (IDA) program to purchase
  her first home
• In 2002, used her refund to purchase a car
•   - reduced commuting time from 60 to 25 minutes
• In 2003, she received a tax refund of 4,688 from
  her 14,144 income as a lunch room assistant in a
  Chicago Public School

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Conclusions

• Streamlining and simplifying tax code is
  desirable ditto for tax credits such as EITC
• Some complexity of the tax code is not inherently
  bad if principles of equity are maintained
• Taxpayers generally desire to comply with tax
  laws and meet their tax obligations, despite the
  fact that they often dont understand the tax
  code and how it applies to them
• The tax code can facilitate savings and
  asset-building objectives across all cohorts of
  taxpayers and is uniquely positioned to link
  unbanked consumers to mainstream financial
  services