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This paper examines the noncustodial parent earned income tax credit (NCP EITC), a new type of credit recently enacted in New York and Washington, D.C. and proposed by Senator Bayh and then-Senator Obama in 2007. The NCP EITC offers an earned income tax credit to low-income noncustodial parents who work and pay their full child support. This paper describes the rationale for this policy and provides national estimates of the benefits and costs of an NCP EITC under three alternative policy scenarios. It also discusses several key design and implementation issues.
In 2006, the state of New York and the District of Columbia became the first jurisdictions to implement an earned income tax credit (EITC) for low-income noncustodial parents who work and pay their child support in full. The Responsible Fatherhood and Healthy Families Act of 2007 (S. 1626), introduced by Senator Bayh and then-Senator Obama, would create a similar tax credit at the federal level. Under current federal income tax rules, low-income noncustodial parents are ineligible for the EITC benefits available to low-income families with children, even when they support their children through full payment of child support. While the EITC and child support have successfully removed many low-income working families from poverty, the combined effect of taxes and child support payments can impoverish noncustodial parents working at or near the minimum wage. Noncustodial parent (NCP) EITC policies work to reduce this disparity.
Like the EITC, an NCP EITC also increases work incentives by supplementing the incomes of low-wage workers. Because noncustodial parents must pay child support to be eligible, incentives to pay child support are increased, which can in turn produce more child support payments to custodial families. If an NCP EITC extends eligibility to noncustodial parents with child support arrears, then custodial families will also benefit when the noncustodial parent’s tax refund is intercepted to repay arrears owed to the family.
We examine three policy scenarios for a national NCP EITC, which are based on the NCP credits adopted by New York and Washington, D.C. and proposed in S. 1626. Based on the NCP EITC policies examined here, we estimate that as many as 645,000 noncustodial parents would be eligible for an NCP EITC, depending on the age and income criteria for the credit. On average, an NCP EITC would increase the annual incomes of eligible noncustodial parents by between $500 and $1,900. Estimated costs for an NCP EITC range from under $100 million to $1.1 billion (in 2004 dollars) depending on the policy option chosen.
There are several key design and implementation issues that need to be considered when enacting an NCP EITC. One of these issues is whether the credit should be limited to those in the child support enforcement program or open to all with a child support order. Also, the definition of “full payment” has important implications for the administration of the credit and how many noncustodial parents would benefit. Another key issue is how dual-eligibility should be treated, as many noncustodial parents live with some of their children while living apart from others and thus could be eligible for both the child-based EITC and the NCP EITC. Also of interest is how the NCP EITC would interact with the tax offset program. Lastly, different strategies to encourage participation should be considered.
Below, we provide background and rationale for an NCP EITC, present alternative designs for an NCP EITC, and estimate their costs and effects. We then discuss key issues to consider when designing and implementing an NCP EITC.
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