Earned Income Tax Credit Expansion
Peter Edelman, Mark Greenberg, Harry J. Holzer
Implementing these recommendations would increase EITC benefits by about $10.3 billion, with virtually all of the benefits concentrated in households with incomes below $30,000.
We propose an Earned Income Tax Credit (EITC) expansion for childless adults to coordinate with the Making Work Pay (MWP) credits proposed by the Obama Transition Team.
Our premises are that an EITC expansion for individuals without qualifying children is important and that it makes sense to structure it in a way that effectively coordinates with MWP. Accordingly, assuming MWP at 6.2 percent of first $8100 of earnings, we recommend:
- Set the EITC percentage for individuals without qualifying children at 13.8 percent. We, and others, have previously urged that the EITC percentage for individuals without qualifying children at 20 percent. So, if MWP is being implemented at 6.2 percent, the 20 percent rate could be achieved by setting the EITC percentage for individuals without qualifying children at 13.8.
- Set the phase-in amount for the EITC for individuals without qualifying children at $8100 — the same as the amount for MWP. One clear message from the EITC experience is the virtue of effective outreach and informing, and to accomplish that, it'd help enormously to foster simplicity. If the same phase-in amount is used for EITC and MWP, it'll be much more possible for local efforts to communicate a clear message to affected populations.
- Set the beginning of the phase-out range at minimum wage times 2000 hours (full-time work), using the idea that had originally been in the Bayh-Obama legislation (though with immediate implementation). In 2009, when the minimum wage increases from $6.55 to $7.25 during the year, this would translate to the phase-out beginning at $13,688.
- Extend the benefits of the EITC for individuals without qualifying children to young workers age 21-24 who are not full-time students.
Based on some simulations which the Tax Policy Center has done on our proposals, we find that:
- Implementing the above recommendations would increase EITC benefits (and costs) by about $10.3 billion, with virtually all of the benefits concentrated in households with incomes below $30,000, and much of the benefit (42 percent) concentrated in households with incomes below $15,000. Most of the benefits (56 percent) would be provided to households working full-time or part-time year-round.
- If the EITC percentage was not increased, but the rest of the above recommendations were implemented, the benefits (and costs) would be considerably less, but still quite significant — the estimated cost would be $4.3 billion, again with much of the benefit (44 percent concentrated in households with incomes below $15,000, and most of the benefits (provided to households working full or part-time year-round.
Boost Employment of Older Adults
Richard W. Johnson
The sound workforce-development idea needs to be backed up by more funds for training and employment services or few jobless seniors will find work.
The proposed American Recovery and Reinvestment Act includes $120 million to train low-income older Americans and help them find jobs. This is a laudable goal that could stimulate the economy and bolster retirement security, but the proposal is under funded so can't have much impact.
As the population ages, older workers are taking center stage and hold the key to our future prosperity. The pool of 25- to 54-year-olds—traditional mainstays of the workforce—will grow by only 2 percent through 2020. And workforce stagnation can choke off economic growth, reduce tax revenues, and strain the government's ability to finance essential services.
The good news is that older workers are beginning to step in and fill the gap. Over the past decade, the labor force participation rate at ages 55 to 69 jumped eight points to 56 percent. Workers ages 55 and older now account for one fifth of the labor force ages 25 and older, up from 14 percent 15 years ago. Only if these trends continue can the economy expand.
Even though they are no longer bit players, older workers are not used to their full potential. Back in 1950, when jobs were more physically demanding and health problems at older ages were more common, nearly 7 in 10 men ages 55 and older worked. Today, fewer than half do. Labor-force participation rates especially lag for older adults with little education and limited skills. Only one in six adults ages 55 and older who didn't finish high school have jobs. For college grads, it's more than two of every five.
The recession makes it even more difficult for older workers to find jobs. In December 2008, the unemployment rate for adults ages 65 and older reached 5.1 percent, the highest level for seniors since March 1977. In past recessions, many older workers retired when they lost their jobs. But few laid-off seniors can afford that route when stock market losses deplete retirement accounts. Helping older Americans find and keep jobs would bolster their current incomes and improve their future retirement security, increase consumer spending, and stimulate the economy.
The stimulus proposal aims to help low-skilled older Americans find work by adding $120 million to the Senior Community Service Employment program (SCSEP), the nation's only workforce development initiative targeted to older adults. This program helps workers ages 55 and older with incomes below 125 percent of the federal poverty level acquire job skills, provides training and other supportive services, and places participants in subsidized, part-time community services assignments.
SCSEP helps only a small share of the older adults who could use it, and that number won't increase much under the stimulus proposal. The program now serves only about 80,000 adults, and the requested recovery funds would cover 24,000 more participants. For perspective, 1.4 million adults ages 55 and older were unemployed in December 2008 and more were underemployed. And that's excluding the untold numbers who have given up looking for work. In sum, the sound workforce-development idea embodied in the stimulus proposal needs to be backed up by more funds for job training and employment services for older workers or few jobless seniors will find work.
Supplemental Security Income Benefit Payments as Stimulus
Melissa M. Favreault
These modest one-time supplements would ease immediate pressures on these households. While the spotlight is on SSI, Congress should consider modernizing this neglected program.
Often called the forgotten safety net, the Supplemental Security Income (SSI) program provides cash payments to those ages 65 and older, the blind, and the disabled. Arguably, SSI has a much lower profile than Temporary Aid for Need Families (TANF), but reaches more people. In December 2007, 7.1 million Americans received federal SSI benefits, compared with 3.9 million for TANF.
The American Economic Recovery and Reinvestment Plan authorizes a one-time emergency payment to SSI beneficiaries (and to beneficiaries cut off in the prior two months because their incomes exceeded program limits). In the House version of the bill, the sum would average about $450 for individuals and $630 for couples. Payments, based on the average monthly SSI payment, would be made within 90 days of enactment and cost, the Congressional Budget Office estimates, about $4.1 billion in 2009. In the Senate bill, one-time payments to SSI beneficiaries are more modest, set at $300 and Social Security beneficiaries would also get one-time grants. Total program costs would increase to closer to $16.7 billion.
Boosting SSI payments would stimulate the economy. All SSI beneficiaries have low incomes and few assets. Close to half live in poverty and slightly more than half receive no other income so are likely to spend their payments quickly. These modest one-time supplements, amounting to about two-thirds of the base federal benefit (set at $674 per month for an individual and $1,011 for a couple in 2009), would ease immediate pressures on these households.
Payments to Social Security beneficiaries, in contrast, would be targeted less well. While many Social Security recipients are also economically vulnerable, many are not. Providing payments to higher-income beneficiaries is likely to be less effective than targeting families hurt more by the economic downturn.
While the spotlight is on SSI, Congress should consider modernizing this neglected program. The federal monthly benefit grows annually with inflation, but other features of SSI have not changed in decades. For example, the program's asset limits have remained at $2,000 for individuals and $3,000 for couples since 1989. (Eligibility criteria do permit a home, one car, personal effects, and modest burial funds/insurance.) Recipients would need almost twice that much today just to maintain the same purchasing power. Increasing these limits could efficiently reduce poverty among older women, an especially vulnerable group.
Likewise, SSI's income exclusions have not changed since 1981. Beneficiaries can receive full SSI benefits if they have earned or unearned income of up to $20 and (further) earnings of up to $65 per month. Earnings beyond those meager sums reduce benefits by fifty cents for every additional dollar earned, and other excess unearned income (for example, from Social Security, Veteran's benefits, Worker's Compensation, or an employer pension) reduces benefits on a dollar-for-dollar basis. These outdated asset and income limits deter SSI beneficiaries from working and saving.
Other needed SSI reforms to consider in the longer term include further reducing the program's work disincentives, simplifying rules covering living arrangements, and addressing the difficulties child beneficiaries--now numbering over a million--face transitioning to adulthood when benefits may stop abruptly. Also in dire need of fixing is a tortuous benefit-application process, which is especially long and complicated for those with disabilities. Additional recovery funds are targeted toward modernizing Social Security Administration computers and helping to eliminate Social Security and SSI processing backlogs. Along with modernization of asset limits and income disregards (the amounts of income permitted without jeopardizing program eligibility), this funding could help increase the program's low participation rate.
Stimulus Proposals and State Budgets
How effectively this money will stimulate the economy depends on which formulas are used to allocate revenue and how quickly the money can be sent to states and ultimately spent.
The House and Senate recovery plans aim to boost the economy and foster employment. States and local governments will get a hefty share of the funds to maintain programs and foster new investment. Roughly $100-150 billion will be available to help fund current state services and potentially offset state budget shortfalls, largely through increases in Medicaid funding and a new “Fiscal Stabilization Fund” that increases payments for education programs by $79 billion in the House bill and a much-reduced $39 billion in the Senate version. Other funding measures cover pay for more police and boost local revenue coffers.
Channeling stimulus funds to states can help them avoid either raising taxes or cutting spending to comply with balanced budget rules. These funds seem the most timely type of stimulus, especially compared to other proposed relief to states—including tax credits for municipal bonds or infrastructure spending, which would take longer to spend. Clearly, having states layoff workers or increase taxes will have an anti-stimulative effect, often on the regional economies that are hardest hit.
Currently, states face budget shortfalls estimated at $300 billion or more over the next three years, so while the current stimulus bill will help stave off further budget cuts it can’t wipe out all shortfalls. Instead, new funds will help states reverse recent program cuts and some resultant layoffs or service denials. How effectively this money will stimulate the economy depends on which formulas are used to allocate revenue and how quickly the money can be sent to states and ultimately spent. Funds will have the most impact if directed to the most economically distressed areas. If, instead, money is distributed equally across all states, the best off may face windfalls while the worst off continue to wrestle with deficits and the attendant spending cuts or tax increases.
Under the current stimulus bill, most stimulus funds will be distributed to states using funding formulas already in use, making pay-outs faster and easier but less targeted and strategic. Medicaid funds do increase for states with higher unemployment rates. In contrast, stimulus funding for education is largely distributed based on population, though some programs consider the characteristics of students.
Because this recession is nationwide and most states are facing shortfalls, getting money out quickly probably trumps more fine-tuned targeting of relief. Even relying on current formulas takes months before states will have additional funds in hand—no matter that many state budgets have been short of funds for much of the last two years. The federal government could, alternatively, have allocated new discretionary funds to states, ideally based on current or changing economic circumstances. In the last recession, funds were distributed based on population. Funds were less well targeted but allocations were more straightforward and states had more spending responsibility and discretion.
Automating this process may be a better way to provide a stimulus or state fiscal relief—one that doesn’t require such a painful trade-off between speed and efficiency. For example, information about economic factors could be built into current funding formulas, or, better, government could establish a program that automates federal payments to states, based on changes in economic circumstances. Recognizing that state balanced budget rules often force states to cut spending or raise taxes during economic downturns, Congress might enact automatic stabilizers. Options could include automatic increases in Medicaid match rates, or we could adopt more explicit payments to states that would kick in when unemployment increases or other economic conditions deteriorate. This approach would give Congress less control on how states could spend the money but if transparency and accountability were built into such a system we could hold states accountable. Building in such automatic changes could mean that the next stabilization will occur automatically, faster, and with a tad less pain.
Increasing Nutrition Assistance
Sheila R. Zedlewski
SNAP benefit increases will provide an effective stimulus and help America's neediest. To make long-term dependence less likely, the package might also fund more workforce-development services.
The Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp Program), provides the only near-universal assistance to low-income households. Most benefits go to America’s neediest. About nine in ten SNAP recipients live in poverty; more than one in ten has no other source of income. Over eight in ten such households contain a child or an elderly or disabled person.
The recovery proposal would spend $20 billion on temporarily increasing SNAP benefits and drop the benefit time limit for able-bodied adults without dependents. The proposed SNAP benefit increase of 13.6 percent will provide an effective stimulus. By U.S. Department of Agriculture estimates, each additional food stamp dollar should generate $1.84 dollars in total economic activity. The increased benefits will also help low-income families pay for groceries. The average benefit today provides only $7 a day to feed an entire household. SNAP benefits are adjusted annually as the cost of the items in the Thrifty Food Plan change. Still, many recipients report running out of grocery money every month.
The benefit increase, along with recent state efforts to simplify the application process, could encourage more eligible families to apply for benefits. In 2006, only 67 percent of people eligible for SNAP received benefits. Thus, an extra $300 million in the proposal would help states administer increased caseloads.
Dropping the time limit on SNAP benefits for able-bodied workers, itself a stimulus, will help unemployed adults without children get by in this job-jettisoning recession. The current time limit aims to encourage work among this group by requiring at least 20 hours of work a week to stay eligible after the first three months.1
But expect trouble when the provisions expire at the end of fiscal year 2010. Since households still on the food stamp rolls will feel what amounts to a benefit cut then, lawmakers instead should consider a one-time permanent benefit increase. This move would recognize the near impossibility of feeding a household on $7 per day. As the economy recovers and fewer need this help, the impact on the federal budget will diminish.
To make long-term dependence on SNAP less likely, the recovery package might also include money for states to offer more adult beneficiaries workforce- development services. Today, SNAP’s small employment and training service component covers relatively few recipients. As more low-wage adults turn to SNAP for help, adding employment services to the benefit package makes good economic sense for them and policy-makers concerned about the program’s size over time.
 States with unemployment rates in excess of 10 percent already can apply for waivers from the time limit.
Maximizing the Stimulus Effect of Prevention Activities
Barbara Ormond, Brenda Spillman, and Timothy Waidmann
How big these effects are, who is affected, and the economy-wide impact depend greatly on the allocation of resources between population-based primary disease prevention and more clinically oriented secondary prevention.
The House version of the stimulus package includes substantial funding for public health and prevention activities, as did the Senate bill until the final round of cuts prior to passage. Should the funding be included in the conference report, the magnitude of the long- and short-term effects on health, who is affected, and the impact on jobs and the economy depend greatly on the allocation of resources between population-based primary disease prevention and more clinically oriented secondary prevention.
Much of the ongoing debate about the cost-effectiveness of prevention stems from the failure to clearly distinguish among different types of prevention or adequately address the range of prevention benefits. Primary prevention is aimed at preventing illness, secondary prevention at early detection and treatment of disease to slow or prevent its progression. Most secondary prevention focuses on clinical interventions, while primary prevention may be either clinical or nonclinical. All clinical prevention activities raise health care costs in the short run, though not necessarily in the long run.
The cost-effectiveness debate often focuses on secondary prevention, such as screening and treatment. These interventions unquestionably increase short-run medical care costs, although there may be positive societal value created through improvements in productivity among workers and school attendance and achievement among children. In contrast, nonclinical primary prevention, which includes community-based programs to promote healthier behaviors, improve the local environment, and add or improve such infrastructure as sidewalks, parks, and recreational facilities to encourage healthier lifestyles, by definition, doesn’t increase medical costs. Such measures have been shown to reduce health spending fairly quickly and, in addition, may have spillover effects on local quality of life and economic vitality.
The farther upstream in the disease process that prevention occurs, the larger the pay-off. As Figure 1 illustrates, the medical cost savings from secondary prevention that keeps individuals with early diabetes and hypertension from developing complications (heart disease, stroke, kidney disease) accrue entirely from reducing the number of very high-cost cases. The savings from primary prevention that reduces the number of people who ever develop diabetes or hypertension accrue from both reduction in high-cost cases with complications and reduction in the treatment costs associated with uncomplicated disease. In our calculations, the health care cost savings from early prevention are more than twice the savings of efforts focused farther along the typical disease pathway.
Evidence suggests that community-based interventions to promote and facilitate healthy lifestyles offer an effective means for the primary prevention of many chronic conditions. A Massachusetts pilot program showed sufficient effect on child health outcomes that it is being replicated in additional communities across the country. Research in Scandinavia and in France has shown the effectiveness of community programs in reducing the incidence of adult diabetes and overweight. These studies demonstrate the beneficial health effects of well-targeted investments in community infrastructure even in the short run. In the longer run, reductions in expensive complications of diabetes and obesity can be expected.
Stimulus spending priorities should take into account the economic sectors each wellness-related provision affects. Investment in community infrastructure can create construction jobs. The new spending on pharmaceuticals or physician services implied by secondary prevention would create fewer new jobs overall and many fewer jobs among low-income workers. In addition, infrastructure development and improvement can be targeted easily to communities most in need of investment where, not coincidentally, health problems are greatest.
For the greatest effect on population health and the economy:
- Prevention funding should focus on primary prevention and be targeted to communities with high disease prevalence.
- Evaluation should be built into all programs so policy-makers can learn which interventions or combinations of interventions work best in what situations and so merit replication.
- Assessments of primary prevention programs should consider avoided medical costs in both the short and long runs as well as the increased productivity at school and work resulting from reduced disease.
Figure 1. Medical Care Expenditure Savings from Primary and Secondary Prevention
(per capita, 2004 dollars)
New Markets Tax Credits: Focus on Job Creation
Martin Abravanel, Nancy Pindus, and Brett Theodos
Since challenges to low-income communities are especially acute in the current environment, NMTC can be an important economic driver. Policymakers should consider focusing on projects that can quickly add to or retain jobs, de-emphasizing other important aims.
The New Markets Tax Credit (NMTC) program was created in December 2000 to improve the economic viability and development of low-income urban and rural communities. A recent addition to an over half-century-long succession of such Federal government efforts, NMTC aims to redress the lack of access to "patient", reasonably priced capital. Because this lack impedes community and economic development even where viable opportunities exist, the program has directed $9 billion of investment to capital-short communities since it began.
NMTC works by competitively allocating scarce federal tax credits to special purpose entities associated with either for-profit or mission-driven organizations. Examples of those organizations include community development corporations and other types of non-profits as well as investment banks and real estate development and venture capital companies.
Decisions about which projects to fund originate with the special purpose entities themselves. The program’s broad mandate allows them considerable latitude with respect to investments because no one type or size project fits all communities. Tax credits have been used for projects ranging from modest expansions of small businesses to large mixed-use real estate developments, including industrial, retail or manufacturing. They have also been used to rehabilitate for-sale housing units or construct such community facilities as charter schools, health centers, or museums. Some require more time to implement than others, and some are more likely than others to create jobs or prevent job losses—objectives that are central to the current stimulus package but by no means the only or best measures of economic or community development outcomes.
Since community and economic development challenges to low-income communities are especially acute in the current environment, NMTC can be an important economic driver. And the demand for tax credits is high—just 24 percent of applicants receive credits and only 13 percent of the amount they request is awarded. This means that the provision in the Senate's American Recovery and Reinvestment Act of 2009 authorizing a supplemental $1.5 billion for the program in both 2008 and 2009 will not languish. But, with rapid economic recovery in mind, policymakers should consider reorienting the supplemental credits to focus on projects that can quickly add to or retain jobs, de-emphasizing other important aims.
For maximum impact, supplemental tax credits in the Recovery Act should be allocated to special purpose entities on evidence-based answers to the following questions:
- Are qualifying projects ready-to-go and investors already lined up?
- Will projects create jobs (and how many) or prevent job losses (and how many)?
- Will the credits free up money for other needed projects or services in low-income communities?
Precedent exists for temporarily modifying the NMTC program for special interventions and otherwise leaving the larger program in tact. After Hurricane Katrina struck, Congress allocated an additional $1 billion of tax credits for use exclusively in the Gulf Opportunity (GO) Zone. Today’s national emergency also deserves a focused response.
Children and the Economic Recovery Package
Without an aggressive recovery package, children will likely suffer greatly from today’s deep recession. The multi-faceted approach passed by the House and proposed by the Senate is the right one.
The economic recovery packages passed by the House and proposed by Senate Democrats include provisions specifically targeted to children – for example, increases in education, Head Start, child care subsidies, the Earned Income Tax Credit, and the Children’s Tax Credit. These are buttressed by provisions to support their families’ income, work opportunities, and health care and to bail out state budgets to avoid program cuts. Given the large risks that the recession poses for children, this multi-faceted approach is the right one. That said, the federal, state, and local officials who will be implementing the programs need to start preparing now to coordinate them effectively.
Without an aggressive recovery package, children will likely suffer greatly from today’s deep recession. Many-- some 40 percent -- lived in low-income families even before the recession struck, and, Urban Institute research suggests, their families will lose proportionately more income than better off families and will take far longer -- perhaps five years—to return to pre-recession levels.*
Children also face the loss of health insurance coverage and the risk of instability in home, school, and child care. Even those who don’t become uninsured as parents lose work-based health insurance become dependent on state decisions to maintain public coverage through Medicaid or SCHIP – at just the point when state budgets are most strained. In today’s recession, children also may face the loss of their home to foreclosure – either a home their family owns or one they rent from a foreclosed owner. The risk to children’s stability is multiplied when changing neighborhoods means changing schools or early childhood programs. At the same time, parents may be forced to take children out of child care if one or both earners loses work hours and earnings or as states cut child care subsidies.
Research shows that even one major change in a child’s life – a move, a change in schools, a change in child care – raises risks of academic problems or other bad outcomes. Several such changes added to loss of income, unstable health insurance, and parental stress pose serious risks to children’s long-term well-being and prospects.
Fortunately, the recovery proposals strike directly at many of these risks simultaneously. They address the immediate consequences for children and their families, reducing the risk of long-term damage for children, while also fulfilling the stimulus’ overall goal of creating jobs. Children’s most immediate needs are for high-quality early childhood programs that help keep the most vulnerable children on track, child care subsidies so parents don’t have to pull children out of care, unemployment insurance, food stamps, and refundable tax credits so families don’t go without food and basic necessities while parents are unemployed, health insurance, and extra funding for state health care budgets so that coverage isn’t cut when families need it most. At the same time, many of these strategies wisely target resources to lower-income families who will quickly spend the money and to low-wage workers (for example, child-care paraprofessionals) who need paychecks.
Yet sensible as the strategy is, it will take hard work at all levels of government to carry off this ambitious multi-pronged proposal. Federal officials in dozens of agencies need to develop guidance for the states so they know what expenditures are allowed. State legislators need to turn on a dime amid budget-cutting sessions, analyze the newly offered federal dollars – for Medicaid match rates, for new unemployment insurance benefits, for education assistance, for child care subsidies, for job creation and workforce training -- and both erase planned cuts and expand programs expeditiously.
Once these basics are in place, state agency commissioners must make further choices and act accordingly. For example, how should child care dollars be allocated to families? Are more state agency workers needed to reach eligible families quickly? Should special up-front help be offered so nonprofit child care programs don’t close down (laying off more workers) before the dollars arrive? How can training child care workers be stepped up so programs can expand fast enough to meet need? And how can state agencies coordinate with local officials if new infrastructure work projects and child- care resources aren’t located in the same places?
The more this planning happens now, even while the shape of the federal legislation remains uncertain, the more effective the economic recovery plan will be in taming the recession’s damage to children and families. While policy experts debate the shape of the legislation in Washington, it’s critically important for those who will be responsible for delivering on the promise -- career public servants in federal agencies and state and local officials -- to prepare for this highly complex job now They can do it, but only if politicians and policy advocates who care about children understand and support their central role.
*This is based on the experience of households at the higher and lower ends of the income scale during the 1980-82 recession (Acs 2009).