Turning the EITC into an emergency savings tool for low-wage workers

“Thank God for tax season!” says Debra McKinley, a restaurant worker in Boston who relies on her tax refund – particularly the Earned Income Tax Credit (EITC) – to catch up on bills, afford a special treat for her daughter’s birthday and put a little savings aside for emergencies. But it’s nearly August now, and tax season is a distant memory. For many of us that’s just fine, but for McKinley and millions of low-income workers like her, it means anxiously counting the days until next year’s tax return.

McKinley is one of more than a hundred low-wage workers interviewed for the book “It’s Not Like I’m Poor.” The EITC—often the most substantial part of their tax refund—is a financial lifeline for workers like her, but there’s one problem: it’s only available once a year.  

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As financial pressures mount throughout the year for families like McKinley’s, rainy day funds built up at tax time are often depleted.  That means unpredictable events such as a cut in work hours can quickly lead to ballooning credit card debt or a trip to the payday loan office. Something as simple as a “check engine” light signals a looming, unbearable financial burden. 

The EITC is the country’s largest anti-poverty program for workers, but it was not built to contend with the recurring financial shocks that define low-wage life in America. We have a plan that would give these workers the extra help they need when inevitable financial emergencies occur after tax season. We call it the Rainy Day EITC and it deserves attention on Capitol Hill.

Under the policy proposal, a worker who opts in to the Rainy Day EITC on her tax form receives most of the EITC (80 percent) during tax season and defers the remainder. Six months later, she gets a Rainy Day payment—the 20 percent she deferred and a 50 percent savings match.

For a typical low-wage family with an EITC of $2,500, this Rainy Day payment adds up to real savings. The family receives $2,000 at tax time, and six months later gets another $700. That $700 is larger than the typical pay day loan in America. It’s the difference between fixing the car when the check engine light goes on and just hoping for the best. It means a real financial cushion later in the year, after the boom times of tax season have receded into memory.

The Rainy Day EITC isn’t just the brainchild of ivory tower academics and policy wonks. It’s based on in-depth interviews  from “It’s Not Like I’m Poor”with low-wage workers who value the “forced savings” mechanism of the lump sum EITC, but find themselves without a rainy day fund months later. The proposal was honed with input from researchers and administrators of low-income tax preparation programs from across the country.

The Rainy Day EITC isn’t a silver bullet. Many low-wage workers will need their full tax refund at tax time. But for many low-wage workers, the reform would provide a new tool to help them achieve financial security year-round, rather than just during tax-season.

Congress can create that tool through a relatively modest expansion of the EITC. By our estimate, the initial cost would amount to a little over 1 percent of current spending on the EITC. That relatively small expansion would help millions of workers add some stability to their often unstable financial lives. We believe it is well worth the investment.

Edin is the Bloomberg Distinguished Professor in the Department of Sociology at Johns Hopkins University. Halpern-Meekin is an assistant professor of Human Development and Family Studies at the University of Wisconsin-Madison. Greene is an Associate professor of Law at the Duke University School of Law. Levin is the associate director of Government Affairs at the Corporation for Enterprise Development, a national nonprofit focused on helping low- and moderate-income Americans save, invest, and build wealth.

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