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The EITC and Immigration

By Matt Graham

Wednesday, February 18, 2015

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The Earned Income Tax Credit (EITC), which supplements the wages of low-income workers, is receiving a lot of attention in policy circles these days. In President Obama’s budget submission to Congress, he again proposed to dramatically expand the EITC for childless workers and non-custodial parents. The president isn’t alone – members of Congress on both sides of the aisle have also released plans to reform the EITC.

The EITC supports eligible low-income workers by decreasing their tax liability. The value of the credit is a percentage of earned income up to a level that depends on whether the worker is married and, if they are a parent, how many children they have. The value of the credit phases out at higher income levels. Importantly, the credit is refundable, so workers whose credit exceeds their income tax liability get the difference back in their tax refunds.

Here’s an example of how it works in practice: A single mom with one kid who earns $15,000 would be eligible for a credit of just over $3,000; if she has three or more kids, she would be eligible for just over $6,000. These amounts would offset any income tax liability and be refundable beyond that. If the mother earns more, the credit would begin to phase out.

Under current law, childless workers and noncustodial parents are eligible for only very modest benefits – a maximum of $503 for the year. President Obama’s proposal to expand the value of the credit for these workers was estimated to cost the federal government $60 billion between Fiscal Years (FYs) 2016 and 2025. In addition to that issue, many policymakers are concerned about the complicated structure of the credit and its susceptibility to error and fraud.

The EITC and Immigration Executive Action

Unauthorized immigrants who do not have Social Security numbers are not eligible to collect the EITC. Unlike the Child Tax Credit (CTC), which tax-compliant unauthorized immigrants with eligible children can claim using Individual Taxpayer Identification Numbers, only Social Security Numbers can be used to claim the EITC.

President Obama’s recent executive action on immigration, which expanded the classes of immigrants eligible for Deferred Action programs that grant work authorization and protection from deportation, could allow up to 4.2 million currently ineligible immigrants to receive a Social Security Number and therefore become eligible for the EITC. However, not all newly eligible immigrants are expected to apply for deferred action—for example, while estimates vary, they find that only between 40 to 70 percent of eligible immigrants have applied for President Obama’s original deferred action program. Yesterday, a federal judge issued a temporary injunction that will halt implementation of these deferred action programs while legal questions are resolved.

The House recently passed an appropriations bill for the Department of Homeland Security that would repeal the president’s executive actions. The Congressional Budget Office estimated that this legislation would prevent approximately $10.2 billion in refundable EITC and CTC payments to currently undocumented immigrants between FYs 2015 and 2025, the bulk of which would be attributable to the EITC. In total, CBO found that repealing the new deferred action programs would reduce both revenues and outlays for direct spending programs, decreasing spending by about $15 billion and revenues by about $22 billion.

Alex Gold contributed to this post.