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The District of Columbia is considering a creative new plan to transform the city’s earned income tax credit (EITC) from a one-time payment received at tax time into an incentivized savings program. If participants save part of their EITC refund and stick with the plan for six months, the city would considerably increase their EITC refunds. This proposal has the potential to further enhance the EITC as a tool for improving the economic stability of low- and middle-income families.
Last week, Councilmember Brianne Nadeau introduced the Rainy Day Refund Act, which would allow recipients to save up to 30 percent of their District EITC in a bank account, prepaid card, or other eligible savings method. If the participant does not withdraw that money for six months, they’d get the portion of their EITC that had been saved plus the city would provide a 50 percent match of that savings.
In 2018, the maximum federal EITC for a family with two children is $5,716. The DC EITC is calculated as 40 percent of the federal EITC, making the maximum DC EITC for this family $2,286. If a family qualifies for the maximum amount and opts to save the full 30 percent allowed, DC would add just over $340 to their EITC refund at the end of the six-month savings period.
The plan builds on an idea floated by Prosperity Now, an organization that develops and analyzes policies designed to encourage low- and moderate-income families to save. The group sought to use the federal EITC as a tool to help working families build wealth at tax time. But the DC legislation goes beyond this by creating a financial incentive for families to delay receiving a portion of their EITC refunds.
Designers hope that incentive will encourage workers to save some of their tax refunds, which could in turn help offset the downward dips in income low-income families frequently face. Prior research by my colleagues at the Urban Institute show that even such a relatively modest amount of money set aside in an account could provide families with enough savings to weather a crisis.
Researchers have documented the financially stabilizing effect of taxpayers receiving the EITC at tax time. And a recent experiment in Chicago that delivered the EITC throughout the year found that periodic payments can lower borrowing, stabilize finances, and reduce financial stress for low- and moderate-income families. Whether families are able to delay receipt of some of the EITC in order to receive an extra payment in six months is unclear, but DC is looking for opportunities to further improve financial stability for its low- and moderate-income workers – and this idea might be one vehicle to do that.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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Rainy Day Refund Act/AP Photo