Pilot Suggests Periodic EITC Payments Could Reduce Income Volatility, Create Financial Stability
October 20, 2015Print
By Kate Skochdopole
Some working families say getting their Earned Income Tax Credit (EITC) at tax time is “better than Christmas.” But recipients who plan their financial year around their refund check could be in danger of falling into a boom-and-bust financial cycle, which can damage a family’s financial future. Using the refund on large purchases early in the year can create financial stress at the end of the year when families are farthest away from receiving the EITC. As a result, many turn to predatory financial services, including payday loans and high-interest credit cards.
The Chicago-based Center for Economic Progress (CEP) set out to test a payment structure for the EITC that would reduce income volatility and increase overall financial stability. CEP sponsored an 18-month pilot program that administered quarterly EITC payments to 343 families and compared their experience to those of 164 families receiving a standard EITC payment at tax time.
Back in February, we wrote about the project’s interim report, which suggested that restructuring the EITC payment model could improve the lives of recipients. In the final report, CEP concluded that administering the EITC in periodic payments was administratively feasible and that this new model improved overall financial stability among low-income families, significantly reducing financial stress. Researchers also report that 83 percent of families who received a quarterly payment preferred this structure to the current lump-sum method.
CEP is not alone in calling for a restructuring of the EITC payment schedule. In January, Sen. Sherrod Brown (D-Ohio) introduced an “Early Refund EITC,” which would provide workers with short-term cash advances from a worker’s EITC. The Corporation for Enterprise Development (CFED) also created a plan called “Rainy Day EITC,” which allows EITC recipients to opt to receive 80 percent of their credit at tax time and the remainder, plus a 50 percent savings match, six months later.
For the latest on plans to improve the structure of the EITC and updates on federal and state tax reform, visit our website.