Obama and Ryan's EITC expansion proposals could penalize marriage for low-income workers

President Barack Obama and Speaker Paul Ryan have proposed similar expansions of the earned income tax credit (EITC) for low-income workers that don't have children. But as designed, their proposals could actually penalize many low-income workers who choose to marry or are married.

President Barack Obama and Speaker Paul Ryan have proposed similar expansions of the earned income tax credit (EITC) for low-income workers without children. Their goal is laudable: to provide some modest additional income support for low-income workers currently excluded from the EITC. But as designed, their proposals would penalize many low-income workers who choose to marry or are married. Taking that step would not only provide a disincentive to marriage, it would be unfair to many married couples and erode support for the credit itself and for wage subsidies more broadly.

Fortunately, they can fix this flawed design by splitting credits for low-wage workers and benefits for children. Before I explain how, here is a bit of background.

The EITC, enacted first in 1975 under President Gerald Ford, has been expanded under every succeeding president and has broad bipartisan support. As cash welfare programs like Aid to Families with Dependent Children (AFDC) and its replacement, Temporary Assistance to Needy Families (TANF), have shrunk as a share of both the economy and the budget, the EITC has become a bedrock of the nation’s social welfare structure and the largest government cash support for those neither retired nor disabled.

About 97 percent of EITC benefits, however, go to households with children, particularly single parent families. The very small sliver going to single individuals through the so-called “childless worker” credit is limited by a maximum of less than $600 and is completely phased out at less than $15,000 of income, or less than what would be earned at a full-time minimum wage job. By contrast, the EITC can provide close to $6,300 in 2016 for a single parent with three children and is available to families with up to $48,000 of income ($53,000 in the case of married couples).

Obama and Ryan would double the childless worker credit and increase the income levels at which it phases out. A similar though higher level of credit was provided by the Paycheck Plus Project in New York City, which offers some individuals up to $2,000 and even allows a modest credit for those making up to $30,000.

There’s a glitch in these proposals, however, and it’s a big one. For instance, one report suggests that Paycheck Plus provides “more generous support to all low-income workers.” But in reality it doesn’t. Many low-wage workers who marry into families not only lose their own childless worker credit, but also reduce the normal credit available to their partner with children.

Here’s one example of how they lose out. A childless male making $11,000 qualifies for a credit of $1,011 under the Obama-Ryan model in 2016. If he marries a spouse with two children making about $20,000 and getting a credit of $5,172, they would get only one credit of $4,018, a loss of $2,165 from the combined credits of $6,273 they had before marriage.

As a result, the credit Obama and Ryan both support would penalize many married couples, while encouraging low-income couples to delay marriage and household formation. Because these penalties would be quite transparent to millions of married couples filing their tax returns, they would likely erode support for the EITC in general.

There is an ongoing debate about how much a marriage penalty actually affects decisions to wed, but there is little doubt that avoiding marriage is THE tax shelter for low- and moderate-income individuals.

The problem can be fixed by separating credits for low-wage work and benefits for children. My Tax Policy Center colleague Elaine Maag and I have proposed this separation as a way to expand work supports for both groups largely left out now: the childless worker and low-wage workers who marry. As for the single head of household, her current credit would be replaced by two credits: one for households with children and an additional low wage worker credit based solely on earnings regardless of children. They’d phase in and out at roughly the same income levels and add up to roughly what she received under the old EITC.

Meanwhile, both the single person without children and the low-wage worker who marries into a family could get the new low-wage worker credit whether or not the family has children. Married couples with two low-wage workers would usually be better off, as now the addition of a worker to the household usually typically adds to rather than subtracts from total household credits received. Though we phase out the low-wage worker credit for those married to high wage workers, these are families for whom any EITC marriage penalty would be a smaller share of total income and who, at their income levels, largely benefit from marriage bonuses from other parts of the income tax rate structure.

The structure of any EITC is hard to summarize in a short column. The main takeaway is that the President and the Speaker could fix their proposals to do what they say they want—cover those low-wage workers now largely left out. And they could do it without penalizing those who vow commitment to their partners and their children. 

This article first appeared in TaxVox.