Chicago’s Promising Experiment with a Year-Round EITC

A Chicago pilot program is improving financial stability for low-income families by converting the Earned Income Tax Credit into installments.

Since its expansion in 1993, the federal earned income tax credit (EITC) has helped millions of low-income working Americans. In 2013, the credit helped lift more than six million Americans (the majority of them children) out of poverty, according to the Center on Budget and Policy Priorities.

But one drawback of the EITC, as successful as it is, is that families receive it in one lump sum at tax time. This means that families don’t have support throughout the year and often rack up debts in anticipation of receiving the EITC refund. According to the Brookings Institution, as many as 95 percent of households receiving the EITC have some form of debt. The Center for Economic Progress (CEP), a Chicago-based non-profit, says that more than 80 percent of families use a portion of their EITC refund to pay down bills and debt accumulated over the past year.

To improve the financial stability of families receiving the EITC, the CEP launched an EITC Pilot project in 2014 – with support from the University of Illinois at Urbana-Champaign, Advent Financial, and the Office of Chicago Mayor Rahm Emanuel – that allowed 343 workers to get half their anticipated credit in four payments, spread out from May to December. To compare the impacts of this experiment, the CEP also created a “control group” of 164 other workers who got their EITC under the current system as a single lump-sum.

In its final report on the project, Restructuring the EITC: A Credit for the Modern Worker, the CEP found that workers who received their EITC in installments throughout the year were better off on a number of measures in comparison to the control group. For example, control group participants were twice as likely to borrow from friends and family and twice as likely to report “higher levels of stress regarding their ability to make ends meet compared to the prior year.” Workers who received a periodic EITC payment were also almost half as likely to rely on payday loans and less likely to accumulate new debt.

The CEP experiment builds on earlier efforts to offer an “Advance EITC,” which was available to taxpayers until 2010. Under this program, workers could receive a portion of their anticipated EITC along with the paychecks, provided their employers were informed and were able to administer it. But take-up rates were very low – only one percent of eligible workers chose the advance credit, according to the Brookings Institution.

Source: Center for Economic Progress

CEP study authors Dylan Bellisle and David Marzahl said their findings show that periodic payments should be available nationwide and can be administered accurately. They argue that qualifying households with children who meet certain criteria, such as a history of meeting past tax obligations and a willingness to report income changes, should be eligible for this form of payment.

Both President Obama and Rep. Paul Ryan (R-WI) have called for expanding the EITC, which is testament to its enduring effectiveness and bipartisan appeal. Improving the credit by offering periodic payments could allow the program to help even more families in the future.

Michael Purzycki

Michael Purzycki is a public policy researcher and writer based in Somerset, New Jersey.