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Who Knows about the Earned Income Tax Credit?

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Document date: January 01, 2001
Released online: January 01, 2001

Number B-27 in Series, "New Federalism: National Survey of America's Families"

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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.


The Earned Income Tax Credit (EITC) is the largest cash transfer program for low-income parents in the United States.1 The refundable tax credit supplements wages and offsets taxes paid by low-income workers. Research suggests that the EITC has not only been effective in moving families over the poverty line, but it has also encouraged work among single mothers (Eissa and Hoynes 1998; Meyer and Rosenbaum 1999; Porter et al. 1998). Recipients use the money they receive from the EITC for investments in education and savings as well as to help them pay bills and daily living expenses.2

The EITC is administered through the federal income tax system. To receive the credit, low-income workers must file a tax return, even if they are otherwise exempt from doing so. As a result, knowledge of the EITC is essential if all eligible, low-income parents are to receive the credit. Furthermore, the EITC can only influence the labor supply of low-income parents who know about the program.3 Although the federal government and many advocacy groups have designed outreach programs to increase program participation, relatively little is known about whether potentially eligible recipients are aware of the EITC.

Using data from the 1999 National Survey of America’s Families (NSAF), this brief examines demographic differences in knowledge about the EITC among parents across three divisions: (1) income and welfare participation; (2) marriage and education; and (3) race, ethnicity and citizenship.4 Nearly two-thirds of all parents have heard of the EITC and just under 30 percent of parents have received the credit at some time. Low-income Hispanic parents are much less likely to know about the program than low-income non-Hispanic parents of any race. Among low-income parents who know about the EITC, Hispanics are also less likely to have ever received the tax credit. Past welfare participants are more likely than current recipients or parents who never received welfare to know about the program.

The Earned Income Tax Credit

The EITC program was implemented in 1975 to help offset the Social Security payroll taxes paid by low-income working parents and to encourage parents to work. Over the past 25 years, the EITC has grown dramatically through a large increase in benefits and expanded eligibility. In 1998, non-administrative program costs for the EITC were $30.8 billion (IRS 2000a). During that year the EITC was responsible for lifting more children out of poverty than all other means-tested programs combined (Porter et al. 1998).

The EITC is available only to low-income tax filing units (individuals or families) with earnings. While the EITC is primarily for parents, there is a small credit for low-income workers who are not parents. For all EITC recipients, the size of the credit initially rises with earnings, reaches a plateau, and then diminishes with each additional dollar earned. The maximum credit for a working family with two children was $3,756 in tax year 1998. Families with two children and incomes between $9,390 and $12,260 could claim this maximum credit and families with two children and incomes up to $30,095 were eligible for some EITC benefit.5

Low-income workers have two options for receiving the EITC. They can file a tax return with a schedule EIC at the end of the tax year or they can apply to receive a portion of the credit in their paychecks throughout the year. Very few workers take advantage of the advance payment option.6 Low-income workers who do not file an income tax return will not receive any benefit from the program. Furthermore, low-income workers who do file a return, but do not claim the EITC on their return, might not receive the credit.7

Income and Welfare Participation

Nationally nearly two-thirds (65.9 percent) of parents know about the EITC (table 1). Given that the EITC is targeted to low-income adults, it is reasonable to assume that low-income parents are as knowledgeable about the program as higher-income parents. The first column in table 1 shows this is not always the case. The knowledge difference between parents with incomes above 200 percent of the federal poverty level (FPL) and parents whose incomes are near the FPL is not statistically significant.8 However, very poor parents, those with incomes below 50 percent of the FPL, are significantly less likely than higher-income parents to know about the EITC (54.6 percent compared with 66.9 percent). Very poor parents are less likely to have worked during the last year and, therefore, less likely to be eligible for the EITC.

TABLE 1. Parents at Various Income and Program Receipt Levels Who Heard of and Who Ever Received the EITC, 1999
  Heard of the EITC (%) Ever Received the EITC (of Parents Who Have Heard of the EITC) (%) Ever Received the EITC (All Parents) (%)
U.S. Average 65.9 45.1 29.5
Family Income as Percent of Federal Poverty Level
Less than 50% 54.6 ** 49.0 ** 26.6 *
50%–100% 65.7 68.6 ** 44.8 **
100%–150% 64.5 75.0 ** 48.0 **
150%–200% 68.3 69.6 ** 47.1 **
Greater than 200%a 66.9 32.7 21.7
TANF/AFDC Use
Current 61.6 54.2 ** 33.3 **
Past 82.9 ** 78.9 ** 65.3 **
Nevera 63.7 38.5 24.3
Food Stamp Use
Current 66.7 62.2 ** 41.3 **
Past 77.7 ** 75.1 ** 58.1 **
Nevera 62.3 31.6 19.4
Source: Urban Institute calculations of the 1999 National Survey of America’s Families.
** Significantly different from comparison group at 0.01 level.
* Significantly different from comparison group at 0.05 level.
a. Base category for statistical comparisons.

Parents who received Aid to Families with Dependent Children (AFDC)/Temporary Assistance for Needy Families (TANF) or food stamps in the past, but who are no longer participating in the programs, are very likely to know about the EITC program. Across all parents, past AFDC/TANF participants are significantly more likely to know about the program (82.9 percent) than either current participants (61.6 percent) or parents who never received AFDC/TANF benefits (63.7 percent). The same pattern holds for Food Stamp participation. Among those who have heard about the EITC program, 78.9 percent of past AFDC/TANF participants and 75.1 percent of past Food Stamp participants have received the EITC.

Not surprisingly, parents with incomes between 50 and 200 percent of the FPL are significantly more likely than higher-income parents to have ever received the EITC. The second column of table 1 shows that three-fourths of parents with incomes just over the FPL who have heard about the EITC have received program benefits. Although knowledge of the program spills over into the higher-income group of parents, receipt of the benefit is limited to low-income workers. Hence, the remainder of this brief focuses on parents with incomes below 200 percent of the FPL.9

Marriage and Education

Past research has found differential effects of the EITC on the labor supply of parents based on their marital status: the EITC is related to increases in work effort among single mothers and, to a lesser extent, decreases in work effort among married mothers (Eissa and Hoynes 1998; Meyer and Rosenbaum 1999). Interestingly, knowledge about the EITC also differs by marital status. Married low-income parents are less likely than nonmarried low-income parents to know about or receive the EITC (table 2). Among low-income parents who have heard of the program, divorced/separated parents are the most likely to have received the tax credit.

TABLE 2. Low-Income Parents (Income below 200 Percent of FPL) with Various Characteristics Who Heard of and Who Ever Received the EITC, 1999
  Heard of the EITC (%) Ever Received the EITC (of Parents Who Have Heard of the EITC) (%) Ever Received the EITC (All Parents) (%)
U.S. Average 64.2 67.8 43.2
Marital Status
Marrieda 59.3 65.9 38.5
Widowed 63.3 71.3 45.1
Divorced/separated 73.3 ** 73.0 * 53.4 **
Never married 67.7 ** 68.7 46.3 **
Cohabitors 63.3 63.6 40.1
Education
Less than high school 44.4 ** 60.1 ** 26.5 **
High school graduatea 69.3 71.8 49.5
Some college 79.9 ** 69.1 55.0 *
College + 68.5 60.1 ** 40.7
Source: Urban Institute calculations of the 1999 National Survey of America’s Families.
** Significantly different from comparison group at 0.01 level.
* Significantly different from comparison group at 0.05 level.
a. Base category for statistical comparisons.

Low-income parents with some college education are the most likely to know about the EITC and to ever have received the credit (79.9 percent). In contrast, less than half of low-income parents who did not finish high school know about the program (44.4 percent), and less than a third have ever received benefits from the program (26.5 percent). When we look only at low-income parents who know about the program, those who did not graduate from high school are no less likely to have received the credit than low-income parents who graduated from college. However, both of these groups of low-income parents are significantly less likely to have received the credit than high school graduates (table 2, column 2).

Race, Ethnicity, and Citizenship

Low-income Hispanic parents are much less likely to know about or receive the EITC than low-income non-Hispanic parents of any race (figure 1). Most low-income parents know about the EITC program (64.2 percent) and a large portion have received the credit at some time (43.2 percent). In contrast, fewer than one in three Hispanic low-income parents know about the program (32.0 percent) and fewer than one in five have ever received the credit (18.4 percent). Among low-income parents who know about the program, the ethnic difference in EITC receipt is somewhat smaller, but still statistically significant.

To better illustrate the ethnic difference, table 3 shows the percent of low-income parents who know about and who have ever received the EITC by citizenship status, ethnicity, and language of the NSAF interview. Among low-income immigrants, naturalized citizens are significantly more likely to know about the EITC than noncitizens (37.9 percent compared with 21.6 percent). Both groups are much less likely to know about the tax credit than low-income parents who were born in the United States (73.2 percent). These knowledge differences translate into differences in receipt rates. More than half of native low-income parents have received the EITC compared with 22.9 percent of naturalized citizens and 9.1 percent of non-citizens. Among low-income parents who know about the EITC program, receipt rates of U.S.-born and naturalized citizens are not statistically different.

Regardless of their citizenship status, Hispanic low-income parents are less likely to know about or to have ever received the EITC. However, when we take knowledge of the program among U.S. citizens into account, the receipt rates of Hispanic low-income parents do not differ statistically from the receipt rates of non-Hispanic low-income parents (column 2 of table 3).

TABLE 3. Low-Income Parents (Income below 200 Percent of FPL) Who Heard of and Who Ever Received theEITC, by Ethnicity, Citizenship, and Interview Language, 1999
  Heard of the EITC (%) Ever Received the EITC (of Parents Who Have Heard of the EITC) (%) Ever Received the EITC (All Parents) (%)
Native-Born U.S. Citizen 73.2 69.4 50.5
Non-Hispanic 75.7 69.3 52.2
Hispanic 53.2 ** 69.4 36.5 **
Naturalized U.S. Citizen 37.9 61.3 22.9
Non-Hispanic 48.5 63.1 30.1
Hispanic 29.6 ** 59.1 17.3 *
Not a U.S. Citizen 21.6 42.8 9.1
Non-Hispanic 47.2 63.3 29.7
Hispanic 16.5 ** 31.3 * 5.1 **
English Interview 71.7 69.2 49.3
Non-Hispanic 74.2 69.1 51.0
Hispanic 53.6 ** 70.3 37.2 **
Spanish Interview 15.4 26.1 3.9
Non-Hispanic na na na
Hispanic 15.4 27.0 4.1
Source: Urban Institute calculations of the 1999 National Survey of America’s Families.
Note: na = not applicable.
** Significantly different from non-Hispanics at 0.01 level.
* Significantly different from non-Hispanics at 0.05 level.

The ethnic difference in knowledge about the program might arise from a language barrier. Although the Internal Revenue Service (IRS) publication about the EITC is available in Spanish, the notice that the IRS sends out to potentially eligible tax filers who did not claim the credit is available only in English. The bottom half of table 3 shows that low-income parents who had the NSAF administered in Spanish are significantly less likely to know about the EITC program than low-income parents who took the survey in English (15.4 percent compared with 71.7 percent). Even among low-income parents who had the survey administered in English, Hispanic parents are still much less likely to know about the EITC or to have ever received the credit than non-Hispanic parents (53.6 percent compared with 74.2 percent for knowledge, and 37.2 percent compared with 51.0 percent for receipt).10

Conclusion

For the EITC to meet its goals of encouraging and rewarding work among low-income adults, it is very important that those eligible know about the tax credit and its benefits. Almost two out of three parents have heard about the EITC, and parents with incomes near the poverty line and past welfare participants are among the most likely to know about the program. These results suggest that knowledge about the EITC is fairly well-targeted toward currently eligible parents.

Specific subgroups of the population, however, are less likely to know about the EITC program. Low-income Hispanic parents are less than half as likely as low-income non-Hispanic parents to have heard of the tax credit. In addition, very poor parents, those who are the least likely to have worked recently, are less likely than higher-income parents to know about the program. Furthermore, although the EITC can help provide an effective bridge from welfare and Food Stamp participation toward economic self-sufficiency, current welfare and Food Stamp participants are less likely to know about the program than are former recipients.

Demographic differences in knowledge about the EITC program can translate into differential receipt patterns among eligible low-income workers. The receipt rates presented in the above tables demonstrate this outcome for parents and suggest populations that policymakers, government officials, and advocates should target in their EITC outreach programs.


Endnotes
  1. Nonadministrative program costs for the EITC were $30.8 billion for tax year 1998. Of that amount, $26.3 billion was refunded to recipients; the remainder went to offset taxes owed (IRS 2000a). The combined expenditure of state and the federal government on cash assistance under TANF was $14.6 billion in fiscal year 1998 (U.S. DHHS 2000).
  2. Smeeding et al. (2000) and unpublished data from the NSAF.
  3. Some tax filers who rely on paid preparers may actually receive the credit without "knowing" about the program. For the 1998 tax year, significantly more EITC returns were filed with the assistance of a paid preparer (61.7 percent) than returns not claiming the EITC (53.3 percent) (IRS 2000b).
  4. The NSAF is nationally representative of the civilian, noninstitutionalized population under age 65 and their families. (For more information about the survey, see Dean Brick et al. (1999).) In house-holds with children, the survey interviews the person who is "most knowledgeable" about each randomly selected child in the household. Throughout this brief the term "parent" refers to the subset of most knowledgeable adults of the sampled children who are also parents. If the parent who knows the most about a child is not familiar with the family’s finances, using this sample may understate knowledge about the EITC.

    The 1999 NSAF included survey questions designed to measure knowledge about and receipt of the tax credit. Specifically the NSAF asks:

      1) Workers with low incomes can sometimes get benefits from the government in a tax refund or added to their paycheck. The program is called the Earned Income Tax Credit. Have you heard about the program?

      2) Have you ever received the Earned Income Tax Credit? (asked only of respondents who heard of the program).
  5. For comparison, the federal poverty level (FPL) in 1998 for a family of three with two children was $13,133. A single mother of two children who worked full-time at a minimum wage job would have earned $10,712 in 1998. With no additional earnings, this family would have been poor. If they received EITC, the credit would increase their income by more than 35 percent, to $14,468, and move the family out of poverty.
  6. Less than 1 percent of all EITC participants use the advanced payment option (Sholz 1994).
  7. The IRS used to compute the EITC for low-income earners who appeared eligible for the credit but did not claim it. As of 1992, however, low-income tax filers must complete at least a portion of the schedule EIC in order to receive the EITC. Tax filers who appear to be eligible for the credit, but do not claim it, will receive a notice from the IRS. To receive the credit, nonclaimants must file an amended return with the schedule EIC (Sholz 1994).
  8. The income thresholds used in this analyses are based on the FPL and the monetary value of the EITC, if received, is not included in the income status calcuation.
  9. The sample is not restricted to workers. The EITC was designed to encourage new entrants into the workforce, but the program can only influence the labor supply decisions of low-income adults who know about the credit. Additional analyses, with the sample restricted to low-income workers, yielded the same pattern of results.
  10. The results of multivariate analyses that are not shown here confirm that Hispanic parents, regardless of their citizenship status, language, education, and other characteristics are much less likely than non-Hispanic, white low-income parents to either know about or to ever have received the EITC.


References

Dean Brick, Pat, Genevieve Kenney, Robin McCullough-Harlin, Shruti Rajan, Fritz Scheuren, and Kevin Wang. 1999. Survey Methods and Data Reliability. Washington, D.C.: The Urban Institute. Assessing the New Federalism Methodology Report No. 1.

Eissa, Nada and Hilary Williamson Hoynes. 1998. "The Earned Income Tax Credit and the Labor Supply of Married Couples." National Bureau of Economic Research Working Paper 6856. Cambridge, MA: NBER.

Internal Revenue Service. 2000a. Statistics of Income Bulletin, Spring 2000, Table 2.

Internal Revenue Service. 2000b. Unpublished Analytical Table B for the 1998 tax year.

Meyer, Bruce D. and Dan T. Rosenbaum. 1999. "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers." National Bureau of Economic Research Working Paper 7363. Cambridge, MA: NBER.

Porter, Kathryn, Wendell Primus, Lynette Rawlings, and Esther Rosenbaum. 1998. Strengths of the Safety Net: How the EITC, Social Security and other Government Programs Affect Poverty. Washington D.C.: Center on Budget and Policy Priorities.

Sholz, John Karl. 1994. "The Earned Income Tax Credit: Participation, Compliance, and Antipoverty Effectiveness." National Tax Journal 47(1): 63–87.

Smeeding, Timothy, Katherin Ross Phillips, and Michael O’Connor. 2000. "The EITC: Expectation, Knowledge, Use, and Economic and Social Mobility," National Tax Journal 53(4): 1187–1209.

U.S. Department of Health and Human Resources, Administration for Children and Families. 2000. "Expenditures in the TANF Program in Fiscal Year 1999." http://www.acf.dhhs.gov/programs/ofs/data/q499/hilites.htm. (Accessed October 5, 2000.)


About the Author

Katherin Ross Phillips is a research associate in the Urban Institute’s Income and Benefits Policy Center. Her research focuses on low-income workers with children. She is currently studying the relationships between parental work and child well-being and the effects of family policy on parental work effort.

About the Series

This series is a product of Assessing the New Federalism, a multiyear project to monitor and assess the devolution of social programs from the federal to the state and local levels. Alan Weil is the project director. The project analyzes changes in income support, social services, and health programs. In collaboration with Child Trends, the project studies child and family well-being.

The project has received funding from The Annie E. Casey Foundation, the W.K. Kellogg Foundation, The Robert Wood Johnson Foundation, The Henry J. Kaiser Family Foundation, The Ford Foundation, The David and Lucile Packard Foundation, The John D. and Catherine T. MacArthur Foundation, the Charles Stewart Mott Foundation, The McKnight Foundation, The Commonwealth Fund, the Stuart Foundation, the Weingart Foundation, The Fund for New Jersey, The Lynde and Harry Bradley Foundation, the Joyce Foundation, and The Rockefeller Foundation.

This series is dedicated to the memory of Steven D. Gold, who was codirector of Assessing the New Federalism until his death in August 1996.



Topics/Tags: | Economy/Taxes | Poverty, Assets and Safety Net


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