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Welfare - EITC PHOTOCOPY PRESERVATION THE WHITE HOUSE WASHINGTON January 31, 2000 MEMORANDUM TO GENE SPERLING AND BRUCE REED CC: John Podesta Maria Echaveste Eric Liu FROM: Mickey Ibarra Wines In his remarks to the mayors at the White House event last Friday morning, the President called on them to help us expand participation of those eligible for both the EITC and CHIP. The President asked me to seek your assistance in working with the Conference of Mayors to build an outreach campaign to get results in both areas. Attached is a description of the Chicago EITC initiative that the President mentioned in his remarks. I suggest we convene a strategy meeting with the USCM and White House staff to discuss how best to procede together once we agree on our framework. Maria Soto of IGA will be assigned to coordinate this effort. Please ask the appropriate staff from your office to contact her at x6-5080. SERVI (5MC) DATE CHICAGO : 1-13- U S:SIFM 912024562215:# 2/3 TO INCURE STATE City of Chicago Richard M. Daley, Mayor January 13, 2000 VIA FAX Office of the Mayor Ms. Ann Lewis Counscior to the President Judith A. Gold Ground Floor West Wing Chief of Policy The White House Washington, D.C. 20502 City Hall, Room 509 121 North LaSalle Street Chicago, Illinois 60602 Dear Ann, (312) 744-4310 (312) 744-2324 (FAX) 11 was great to talk with you this afternoon. The following outlines Mayor Dalcy's outreach http://[email protected] initiative about the federal Earned Income Tax Credit (EITC). This may be relevant as you cran the State of the Union Address. Last year in Illinois, an estimated 250,000 families failed to claim some $300 million owed to them under the EITC. More than $100 million that could have been returned to Chicago residents and back into our cconomy was Ich on the table. (And that is just for one year the credit may bc claimed retroactively for three years.) Faced with these facts, Mayor Daley decided to launch :1 city-wide outreach campaign to educate working families about the credit and cncourage them to apply. As a result, the City of Chicago created a partnership that includes the business and foundation community ( the Chicagoland Chamber of Commerce, the Chicago Partnership for Economic Development, and The Civic Committee; the John D. and Catherine T. MacArthur Foundation, the Steans Family Foundation, the Woods Fund of Chicago) and not-for-profit tax preparers. This is the only city-driven c(fort in the country to get the word out about the EITC. We are drawing upon the resources and networks of the City's business leaders and grass-roots community organizations to ensure that as many cligible families as possible get the word - and gcl the credit. The outreach initiative will use television, radio, print media, direct mail - even grocery bags - to bring information about the EITC to the Chicago audience. In addition, we will be studying the barriers to filing, in an cffort 10 better understand the ways in which they can bc overcome. (A Fact Sheet about the program is attached.) Our message is simple: WC want to reward work, and make work pay. Our citizens earned this moncy, and they should keep it. The Mayor's effort could be mirrored across the country, and bring nuch-nceded, hard-carned dollars back to hardworking families nationwide. 1 hope this information about our EITC Outreach Initiative is useful. If you have any questions, or if 1 can be of help in any way, please lct mc know. All the best for a great year! Sincerely, Jrde Gald Judy Gold Chief of Policy NEIGHBORHOODS CHICAGO BUILDING CHICAGO TOGETHER SENT CHICAGO : 1-13- 0 : 5:51PM MAYORS EXECUTIVE OFCH 912024562215:# 37 3 Mayor Daley's Earned Income Tax Credit Outreach Initiative Fact Sheet The Federal Earned Income Tax Credit (EITC) provides moderate and lower-income working families and individuals with tax relief and an incentive to work. The EITC can provide a cash refund even to families whose incomes are low enough that they do not owe any Federal taxes. As of 1999, the EITC can provide as much as $3,816 per year to working families with incomes up to $30,580. The average refund in 1998 was about $1,500. In addition, if you were eligible for EITC but did not receive it in past years, you may claim up to three years retroactively. 1999 qualifying income levels include: $30,580 with more than one qualifying child $26,928 with one qualifying child $10,200 with no qualifying children (A Qualifying Child includes a natural, adopted, grand-, step- or eligible foster child, children under age 19 or under age 24 if a full-time student, or children any age, if permanently/totally disabled.) Eligible workers often aren't getting the credit-either because they haven't heard about it, don't know they're eligible or don't know how to apply. EITC refunds are often used as asset building opportunities. Reported uses for EITC benefits range from payment of bills, especially rent and utility bills, to begin checking accounts, begin or supplement savings accounts, or use for specific social mobility purposes according to a survey by the Center for Law and Human Services. In Illinois, an estimated 250,000 families failed to claim some $300 million in tax credits. More than $100 million could potentially be returned to Chicago residents and back into our economy¹. The City of Chicago-in partnership with the Chicagoland Chamber of Commerce, the Chicago Partnership for Economic Development, and the Civic Committee, The John D. and Catherine T. MacArthur Foundation, The Steans Family Foundation, The Woods Fund of Chicago, the Tax Counseling Project and The Tax Assistance Program-It Adds Up launching a city-wide outreach campaign to educate workers about the Earned Income Tax Credit to help more people take advantage of this credit. By working with business leaders and community organizations as partners to help their employees obtain this money, the City's campaign will increase the region's economic development and to help make work pay. Join other Chicago area companies and organizations that are working to help lower-wage employees get this important federal tax benefit. 1 As estimated by the Tax Counseling Project, 1999 01/10/00 21:50 FAX 202 456 7431 DPC 001/009 CO:CR THE WHITE HOUSE WELFARE EITC Domestic Policy Council DATE: 1/10 FACSIMILE FOR: Bruce Rced/Eric 44/Jeff FAX: 6-2878 6-2870 6-5709 6-2223 PHONE: FACSIMILE FROM: Andrea Kane FAX: 202-456-7431 PHONE: 202-456-5573 9 NUMBER OF PAGES (INCLUDING COVER): Per Email, : COMMENTS: Seep.2 + Fig. 2 for almost nine-fold grawin in supports for law-income families not on wilfare from 84 to '99, 1 01/10/00 21:50 FAX 202 456 7431 DPC 002/009 no-2 November 1999 David T. Ellwood Children's Round n the decades right after World War II, the fortunes of American workers across the economic spectrum rose and fell more or less together. Since 1979, however, that pattern has changed for full-time male workers employed year-round-the segment traditionally considered the heart of the U.S. labor force. Figure 1 displays the changes in the inflation-adjusted earnings of workers at different points along the national income distribution scale since 1961. In earlier times, when the nation was prosperous, the rising tide lifted all boats; wages for workers at all levels grew at roughly the same rate, a trend that continued into the 1960s. But beginning in the 1970s and accelerating through the '80s and early '90s, the fortunes of working Americans at the opposite ends of the income ladder have panned out very differently. By 1994, full-time male workers in the bottom 10 percent of the national income scale were carning no more than their counterparts of nearly 35 years before. Workers with incomes in the top 10 percent, meanwhile, were doing far better than the same group did in decades past. The strong economy of the last few years has sparked some rebound in the wages of bottom-tier working men, but a substantial gap remains between their incomes and those of male workers whose earnings are closer to the national average. 1775 Massachusetts Avc. N.W. Washington, DC 20036-2188 Tel: 202-797-6105 www.brookings.edu 01/10/00 21:50 FAX 202 456 7431 DPC 003/009 David I. Ellwood The Quest for Policies TO Help These ongoing disparities in the fortunes of American workers have inspired considerable economic research, most of which suggests that today's technological David T. Ellwood is advances, declines in heavy industry, weakened unions, growing international trade, Lucius N. Littaner Professor of Political and demographic changes due to immigration all work to the disadvantage of less Economy at Harvard skilled jobholders. Nearly all the studies agree that more, better, and earlier education University's John F. Kennedy School of is critical to solving these inequities, but there is little consensus on how to make real Government. improvements. A successful program would take a generation even to begin to make an impact. Meanwhile, the more immediate concerns are what current policies have done to aid low-income working families, and what additional efforts ought to be considered. From Welfare to Work The much-heralded welfare reforms of the past five years signaled a sharp change in U.S. social policy. Time limits were imposed on benefits. The Aid to Families with Dependent Children (AFDC) program was transformed into Transitional Assistance for Needy Families (TANF). Considering the already weak financial condition of so many low-skilled workers, analysts feared that this new set of aid cutbacks would only The Brookings make the situation worse. Roundtable on Children, established However, at the same time that welfare reform was being implemented, various other in 1998 under the changes in policy were combining with the exceptional strength of the U.S. economy direction of Senior to improve the lot of low-wage workers. Within days of President Bill Clinton's signing Fellow Isabel V. the wide-ranging 1996 welfare reform bill providing for welfare through block grants Sawhill, focuses on to the states and ending guaranteed federal subsidies to poor people with children, a improving the higher minimum wage was enacted. More important, the federal government lifetime prospects dramatically increased non-welfare supports for low-income working families with of children. children. As Figure 2 shows, federal spending on low-income families not on welfare * We gratefully soared from less than $6 billion in 1984 to a projected $51.7 billion in 1999. acknowledge the generosity of the The biggest growth occurred in the federal Earned Income Tax Credit (EITC). The Alcoa Foundation EITC functions like a pay raise for the working poor. A family with two children and and the Foundation one adult working at a low-paying job gets as much as a 40 percent boost in income for Child from this refundable federal tax credit-up to a limit topping $3,800. A family earning Development for $9,500 qualifies for the full credit, which is gradually phased out as the family's their support of the annual income grows. Families with earnings up to around $30,000 still qualify for Roundtable on minimum assistance under the EITC. Children. The federal Medicaid program providing health care to the poor also has been 2 CHILDREN'S ROUNOTABLE REPORT ROVEMBER 1999 NO. - 2 01/10/00 21:51 FAX 202 456 7431 DPC 004/009 Low-Income Working Families dramatically expanded. Today, every state must cover at least children under 15 in families with incomes below the federal poverty levels of roughly $13,000 for three- member families and just under $17,000 for families of four. The recently enacted Children's Health Insurance Program (CHIP) gives still more money to states to cover children in families with incomes up to twice the poverty levels, through either Medicaid or a separate CHIP program. Figure 1 Taken together, these policy Distribution of Real Wape and Salary Earnings for Full-Year. changes have had a major Full-Time Male workers as Compared with 1961 (Constant Dollars) positive impact on the economic 60% prospects of many families at 90th percentile high risk of financial collapse. In 50% 1986, a two-parent family of 75th percentile four with a single minimum- 40% wage worker averaged an effec- Median tive after-tax income of less than 30% $13,000 (in inflation-adjusted 25th percentile 1997 dollars), including food 20% stamps, and their children rarely 10th percentile qualified for Medicaid. By 1997 10% such a family earned more than $16,000 on average-thanks in 0% large part to the expanded -10% EITC-and the children did 1960 1965 1970 1975 1980 1985 1990 1995 2000 qualify for Medicaid. Source: Author's tabulations of annual March Current Population Survey data As shown in Figure 3, the changes in Medicaid eligibility have been even more striking for single-parent families. In 1986, a non-working single mother with two children would have received roughly $8,500 in welfare and food stamps in an average state, and the whole family would have been covered by Medicaid. But if she took a full-time, minimum-wage job, after accounting for the loss of welfare, the cost of child care, and additional taxes, her family's income would have grown by only about $2,000, and she and her children would have lost their Medicaid coverage. Working or not, the family would be poor. In 1997, by contrast, the non-working mother would qualify for only $7,500 in benefits and for only a limited time. But if she got a full-time, minimum-wagc job, her net income would jump to $14,600 and her children would keep their Medicaid coverage. By working, such a mother can now pull her family above the poverty line, if not far above it. CHILDREN'S ROUNDTABLE REPORT NOVEMBER 1899 no. 2 3 01/10/00 21:51 FAX 202 456 7431 DPC 005/009 Single parents have responded to the opportunity by working more-much more. In the mid-1970s and for the 20 years thereafter, between 50 and 55 percent of single parents were working. Starting in the mid-1990s, however, their employment rates began to soar reaching 67 percent in 1998. The change was particularly dramatic among low-skilled single Figure 2 parents, whose employment Federal Outlays II Low-income Families not Receiving Cash Assistance rates rose from less than 35 (BIIIIODS of 1999 Dollars) percent throughout the 1980s 60 Children's Health and early '90s to more than 50 Insurance Program percent today. 50 Medicaid The Fragility 01 40 Child Care Low-Income Working Families and Their 30 Child Tax Credit Chlidren Earned Income The news is not all good. One 20 Tax Credit August 1999 study from the Center on Budget and Policy 10 Priorities suggests that people whose family situations make 0 working outside the home 1984 1999 difficult have been left behind Note: Figure 2 is modeled on B greph created with Jata from the August 1998 Congressional Budget Office report "Policy Changes Affecting Mandatory Spending for Low-Income Workers Not Receiving Cash Welfare," by by the recent welfare reforms, Ran Haskins for "Welfare in a Society of Permanent Work," Committee on Ways and Means, U.S. 1 louse of and the plights of many are Representatives. August 1999. growing increasingly bleak. Yet even for the group that is the focus of this brief-those able to work and find jobs- the financial outlook may be less rosy than it first appears. It is true that low-income working families now qualify for the Earned Income Tax Credit, food stamps, Medicaid, and sometimes subsidized child care. To get the EITC, working parents need only file a tax return with the appropriate form. Information about the credit, which once seemed hard to come by, is now readily available in low- income communities, and participation rates are very high-in sharp contrast to those for Medicaid and food stamps. In the past, Medicaid was linked to welfare; eligibility was generally automatic for welfare recipients. Recent policy changes have sought to "de-link" the two programs, so that the working poor can get Medicaid as well. Yet this is where the problem comes in: as welfare caseloads have dwindled, so too has participation in Medicaid, even though eligibility theoretically has been greatly expanded. In most states, Medicaid and CHIP remain a hodgepodge of interlocking programs reflecting incremental expansions. Over time people in need find themselves shunted from program to program, sometimes 4 CHILDREN'S ROUNDTABLE REPORT NOVEMBER 1999 no. 2 01/10/00 21:51 FAX 202 456 7431 DPC 006/009 facing very different rules and administrative requirements, sometimes losing aid alto- gether, and often failing to realize that they might qualify for support under yet another program. Low-income working families applying for Medicaid usually still must provide considerable docu- Figure 3 mentation of their Earologs, Taxes, and Benellts under Different Scenarios income, assets, living for work and marriage In 1986 and 1997 arrangements, and (1997 Dollars) family relationships. 1986 1997 The process is frus- Single Parent Single Parent Single Parent Works Full- Single Parent Works Full- trating, time-consum- Marriage and Work Scenario Does Not Time at Difference Docs Not Time at Difference ing, and all too often Work Minimum Work Minimum Wagc Wage humiliating. Tocal Earnings 0 9,820 9,820 0 10,300 10,300 Similarly, Federal Taxes: Social Security, 0 -861 -861 0 -788 -788 even Medicare, and Income Taxes though virtually every Other than EITC poor and near-poor Means-Tested Benefits: 8,459 2,578 -5,881 7,501 2,462 -5,039 American qualifies TANF(AFDC) and Food Stamps for food stamps, participation in the Child Care Expense 0 -2,000 -2,000 0 -2,000 -2,000 program has dropped Earned Income Tax Credit 0 768 768 0 3,656 3,656 much faster than the Child Care Support 0 159 159 0 1,000 1,000 poverty rate. As welfare offices have Total "Disposable" Income $8,459 $10,464 $2,005 $7,501 $14,630 $7,129 pushed to get people Government-Paid Health Adult Loses All Children Yes No Insurance (Medicaid) Yes off government- Coverage Under 15 Only Lases Coverage funded assistance, Source: David Ellwood, "Antipoverty Policy in the Next Century: From Welfare ID Work and Worries," Journal of Economic Perspectives, forthcoming. many families appar- ently have dropped off food stamps as well, even though they remain eligible for the program. In addition, some low-income workers who know they are eligible may avoid applying because of the continuing stigma attached to food stamps as well as the hassles of procuring them. In the case of Medicaid in particular, there is a lesson to be learned from the success of the Earned Income Tax Credit. If the process is simple, people will enroll. At a minimum, the program should be straightforward and seamless within every state. Making this so may well mean starting from scratch on the procedures for determining Medicaid eligibility for working families. Perhaps the same tax form now used to assess EITC eligibility could be put to use for a national Medicaid program as well. In any case, without major changes Medicaid may never escape its welfare roots, and thus will continue to fail at providing health care to poor working families. CHILDRER'S ROUNDTABLE REPORT NOVEMBER 1999 NO. 2 5 01/10/00 21:51 FAX 202 456 7431 DPC 007/009 As more and more households send all their adults out to work, the question of child care becomes paramount. At present, the arrangements low-income working parents make for their children's day care are often informal, unreliable, and even unsafe. Meanwhile, the evidence mounts that high-quality, developmentally oriented child care can go far to enhance the prospects of the children lucky enough to get it. Nevertheless, an odd schism exists among policymakers that is reflected in the programs they craft for children: those who promote work for poor parents often regard child care primarily as a means to that end; the implicit goal is to remove an excuse for not working by providing adequate care, but at the lowest possible cost. Policymakers concerned with child development, on the other hand, look first to the best ways to meet the needs of the child, often with little regard for the work situation of the parent. These contrasting concepts collide not only on the question of cost, but also on that of coverage. The generally successful federal Head Start program, for example, was built on a part-day child care model requiring heavy parental involvement, which may not be practical for many working parents. At the very least, today's growing emphasis on supporting working parents will require increased spending on child care. Both the federal and many state governments are starting to boost their funding for such initiatives. Programs like Head Start are beginning to create all-day "wrap-around" services to better accommodate the needs of working parents. Ultimately, however, Americans will have to answer a critical question: Do we simply want to ensure the minimum custodial care for children in low-income working families, or are we willing to pay for the kind of day care that opens brighter futures to these children? The Perils of Economic Downturns and Unemployment When the economy stumbles, the working poor fall. Among the greatest dangers in the recent strategy of doing more to support low-income working families and less for those without workers is that the employed but poor will become the unemployed and destitute in bad times for the overall economy. The United States' primary means of supporting its out-of-work citizens is unemployment insurance (UI). Unfortunately, this system has not proven very effective at helping low-wage workers. To qualify for UI, formerly employed workers must meet minimum income levels over several quarters and satisfy a number of other requirements, including an appropriate reason for separation from their last job. A 1998 study by Cynthia Gustafson and Philip Levinc estimated that only about a third of low-skilled men over 21 who had recently separated from a job met all the conditions for receiving unemployment benefits. An even smaller percentage of low-skilled female workers passed the tests. 6 CHILDREN'S ROUNDTABLE REPORT NOVEMBER 1999 NO. 2 01/10/00 21:51 FAX 202 456 7431 DPC 008/009 One possible alternative to UI would be the provision of some form of community or public service jobs, at least to welfare recipients whose benefits are running out during an economic downturn. A number of states already have modest programs in place to support welfare recipients who can't find private sector work in hard times. Unfortunately, the fiscal demands on state welfare systems are apt to skyrocket in the event of a falloff in the nation's economy. Most observers think that in such circumstances the federal government's modest Transitional Assistance for Needy Families reserve fund would quickly prove inadequate, just as the states would be facing dwindling resources for all programs. It is disturbing how little evidence there is that either the states or the federal government are doing any serious planning for a future recession and its likely impact on poor working families. Accumulating Adverse Incentives The new emphasis on supporting low-income workers has created another set of potential problems: work and marriage penalties. The push to accord more benefits to poor but working families is without doubt a strong incentive for households to send at least one adult into the workforce. But these benefits are designed to phase out as income rises, which sometimes creates a powerful disincentive to work extra hours or send another family member into the job market. In fact, some evidence suggests that this disincentive for second workers may be encouraging some mothers in two-parent families not to work. Some policymakers may actually welcome this development if the EITC allows some married mothers to stay home with their children. Still, the accumulating incentives are a legitimate source of concern. Another consequence of targeted benefits is marriage penalties and rewards. Programs The views expressed in this like the EITC support low-earning families with children. Thus they offer a reward for Children's Roundtable Report are those of the author and are marriages between non-working mothers and working men-her children and his not necessarily those of the trustees, officers, OT other staff earnings allow the couple to qualify for the EITC-and among childless couples members of the Brookings contemplating getting married and raising a family for the first time. But for low- Institution. income adults who are already working parents, these supports can actually serve as Copyright © 1999 the Brookings Institution a deterrent to marriage: a working single parent who marries another worker usually will suffer a substantial reduction in benefits, because the couple's combined income reduces what they can receive. The loss can range as high as 15 percent or more of their combined income. Although there is little evidence that the EITC and other Brookings gratefully worker supports have had much if any impact on marriage rates, Congress was acknowledges the sufficiently concerned about marriage penalties in the tax system that it recently generosity of the sought to eliminate them-for everyone but low-income working taxpayers. The idea Cabot Family that the nation should use its budget surplus to remove marriage penalties for all but Charitable Trust the most vulnerable workers seems both morally questionable and foolish. and B. Francis Saul Il for their Supports for the Future support of the Increased government support for low-income workers has been critical in shoring up Policy Brief series. CHILDREN'S ROUNDTABLE REPORT NOVEMBER 1999 NO. 2 7 01/10/00 21:52 FAX 202 456 7431 DPC 009/009 NONPROFIT ORG. U.S. POSTAGE PAID BOWIE, MD PERMIT NO. 4434 Upcoming Policy Briefs economically marginal families in the face of growing income The Use and Abuse of Military Force Richard N. Haass, November 1999 inequities and welfare reforms aimed at getting recipients off public Elections in India and assistance and into the workforce. Despite these programs, however, Uphereval in Pakistan many working families remain poor or close to it. To help them out of Stephen P. Cohen, November 1999 poverty, a number of states have begun to adopt EITCs of their own Recent Policy Briefs and to expand other supports. At the federal level, another push is on The Plans Truth Michael E. O'Hanlon, September 1999 to raise the minimum wage, which could help at least some working Greenhouse Cas Emissions families. Jeffrey A Frankel, June 1999 The International Financial Architecture Jeffrey A Frankcl, June 1999 Now it is time to look for ways to make existing support programs such as Medicaid and food stamps work better for employed recipients. We Related Books ought to seek to reduce marriage penalties. The next recession will Savings for the Poor: The Hidden Benefits of Electronic Banking force Americans to confront the unpleasant features of a social policy Michael Stegman (1999) focused primarily on assisting those with jobs. More to the point, if Bootstrup Capital: Microenterprises and the American Poor the income disparities of the 1980s and '90s continue to widen into Lisa J. Servon (1999) the next century, the financial stability of the nation's low-wage New Markets, New Opportunities? working families will become ever more tenuous. Economic and Social Mobility in a Changing World Nancy Birdsall and Carol Graham, editors (1999) Tourrd an End to Hunger in America Peter Eisinger (1998) This and all previous Policy Briefs are also posted on the World Wide Web and linked to the Brookings home page at www.brookings.edu If you have questions or comments about this Policy Brief, please send an email message to [email protected] Authors' responses will be posted on the Brookings website.