The Impact of Earned Income Tax Credit (EITC) On Income and Poverty Among Temporary Assistance for Needy Families (TANF) Recipients

Purpose: Since the 1996 welfare reform, the cumulative impact of policies designed to make work pay can play an important role in augmenting gains in working poor families' economic resources. One of the resources for working poor families is the Earned Income Tax Credit (EITC). The EITC supplements the earnings of working poor as it diminishes the burden of payroll and income taxes by providing cash refunds. Since 1991, the EITC is not counted as income for determining the eligibility or amount of benefits for TANF, which means that working poor families can be eligible for both TANF and EITC. As a result, TANF and EITC have become two main pillars of cash maintenance programs for working poor families in the U.S. However, there are no official statistics on income and poverty among TANF recipients who combine TANF benefits with refunds from EITC. In this regard, the present paper examined what would happen to income and poverty among TANF recipients in the presence or absence of EITC.

Methods: This study conducted secondary data analyses to examine the effect of EITC on income and poverty among TANF recipients. Data from CPS files of 1991 to 2005 are utilized in order to cover historical major expansions of EITC, especially including most recent one, the 2001 EGTRRA (Economic Growth and Tax Relief Reconciliation Act). We compared two scenarios: 1) income and poverty among TANF recipients when including refunds from EITC and 2) income and poverty among them when excluding refunds from EITC for every year. Additional analyses by race, education, region, age were also performed. Most of all, we examined changes in income and poverty across EITC's major expansions to figure out whether those expansions substantially affect financial status among TANF recipients.

Results: The research findings show that refunds from EITC increased income among TANF recipients to some extent and the extent of EITC's impact was enlarged whenever the EITC's benefit system was expanded. However, refunds from EITC did not help TANF recipients move out of poverty. Nevertheless, it seemed that the 2001 EGTRRA has been working better than previous expansions.

Implications: A major limitation of our study is that the EITC variable that we used was not collected based on answers from recipients but was simulated by the Census Bureau. This may mean that our results can be somewhat underestimated. The EITC has been known as a successful anti-poverty, non-welfare program that helps low-income families. Our results suggest, however, that the EITC alone cannot fulfill low-income families' needs. Other policies such as minimum wage to support or to supplement EITC are also needed. When all these are combined together, the effect of policies for low-income families would be greater and consequently make a long-term, positive influence on the wellbeing of families in poverty.