Another Pandemic Legacy: Removing the EITC’s Work and Earnings Requirement

Since its origin in the 1970s, the Earned Income Tax Credit (EITC) has been the premier federal program promoting and rewarding work by low-income adults. As displayed below, taxpayers have devoted rapidly growing resources to the EITC since the 1980s. Overall, between 1975 and 2022, the EITC cost taxpayers a total of $1.8 trillion, which includes both tax relief ($212 billion) as well as its far larger benefit payments ($1.6 trillion) that exceed recipients’ federal income taxes paid, confusingly dubbed “refundable tax credits.” But despite that history of generous and growing support for work, some liberal policymakers are now proposing to pay EITC checks even for years when adults don’t work, fundamentally altering the nature of this pro-work program.

Source: Author’s calculations, using Congressional Research Service
[i], Internal Revenue Service[ii], and Joint[iii] Committee[iv] on[v] Taxation[vi] data.

In their current form, EITC benefits, which are valued at up to $7,430 for a working parent with three qualifying children in 2023, directly reward and thus encourage work. [vii] Indeed, with only limited exceptions, the EITC has always required work during the tax year in question when an adult claims it during the following tax filing season. Thus, an adult had to work and have earnings in calendar year 2022 to be able to claim the EITC when she filed her 2022 federal income tax return earlier this year.

As noted last year by the IRS Taxpayer Advocate, limited exceptions to this “lookback rule” previously involved specific occasions when the President declared a disaster and Congress “passed legislation to give taxpayers who earn less income in the disaster year than the prior year the option of using their prior-year income to calculate their EITC benefits.” [viii] For example, when Hurricane Katrina struck in August 2005, Congress responded by legislating that adults directly affected by the hurricane could use their 2004 earnings, if higher than their earnings in the hurricane year, to claim the EITC. [ix] Absent such a change, as the Taxpayer Advocate noted, individuals who experienced a disruption in work and earnings due to the hurricane “may suffer a double financial hit” because “they may also lose their EITC benefits.” [x]

The federal government applied that same logic on a far broader scale during the coronavirus pandemic. In the December 2020 Consolidated Appropriations Act (CAA), Congress created a “temporary special rule” covering households nationwide, which provided that adults could use their 2019 earnings, if higher than their earnings during the first year of the pandemic in 2020, to claim the EITC for 2020. [xi] The March 2021 American Rescue Plan Act (ARPA) extended that treatment for the second year of the pandemic, so that a taxpayer could continue to use their pre-pandemic 2019 earnings, if higher than their earnings in 2021, to claim the EITC for 2021 as well. [xii] In effect, the ARPA policy meant that EITC claimants could have been out of work for two years (that is, throughout calendar years 2020 and 2021) while claiming that work-based benefit when they filed their tax returns for those years, using their 2019 income instead.

It’s worth recalling that Congress also covered households experiencing layoffs and income losses during the pandemic with unprecedented increases in unemployment benefits and a series of stimulus checks paid in 2020 and 2021. [xiii] Those payments meant a family with two unemployed adults and two children consistently collecting just the average weekly unemployment benefit nationwide could have collected up to $92,000 in combined state and federal unemployment checks in 2020 and 2021, along with over $11,000 in federal stimulus checks. [xiv]

Congress failed to coordinate those pandemic benefits with its expanded EITC lookback policies, which meant the same nonworking family with two qualifying children and significant unemployment benefit and stimulus check income also could have collected almost $6,000 per year in EITC checks for 2020 and 2021. Even if they didn’t work at all in those years, that large annual EITC payment would have been available to some 1 million adults who earned between about $15,000 and $20,000 before the pandemic, with significant but lower EITC checks payable to millions of others with pre-pandemic earnings above and below that range. [xv] All told, those government checks paid during the pandemic could have been more than twice some recipients’ prior annual earnings. And that’s without counting the temporarily expanded child tax credit (worth up to $7,200 for two children) that was paid to nonworking parents for the first time in 2021. Families with low or no earnings also accessed record-high food stamp benefits, free school meals, housing subsidies, and much more during the pandemic.  

Like most pandemic expansions, the temporary exceptions to the EITC’s work requirement have expired. But even though proponents suggested[xvi] “tweaking the EITC’s design on a temporary basis” this way during the pandemic, some in Congress continue trying to revive the expanded lookback policy. In November 2021, the House passed its version of the President’s trillion-dollar Build Back Better proposal, which included a one-year extension of the expanded lookback policy.[xvii] That temporary legislation was designed to mask the enormous cost[xviii] of making such benefit increases permanent. More recently, under the ironically titled Working Families Tax Relief Act[xix], introduced in June by Sen. [xx] Sherrod Brown (D-OH) and other senior Democratic senators, the mask was removed and the lookback policy would be made permanent. That is, if an individual’s current year earnings are below their earnings in the prior year, they could use the prior year’s earnings when applying for the EITC—permanently.

Significantly, this proposed change does not require an intervening pandemic or other disaster, as in the past, or even a recession. Instead, it would permanently allow EITC claimants nationwide to collect two years of payments from the IRS based on only one year of work, paying the EITC even for years when adults don’t work at all. If this “two for one” change is enacted, policymakers should expect claims for unemployment benefits, food stamps, and even disability and other benefits paid in lieu of working to rise as families seek to maximize their benefit income when they lack earnings—but are nonetheless eligible for earned income tax credit checks.

As they always do, supporters of this change will argue that paying more government benefit checks is all upside and no downside. Yet, as a 2020 Brookings Institution report noted, low-wage workers already “are most likely to become unemployed” and also “tend to work intermittently.” [xxi] For them, this proposal sharply increases benefits for leaving or not quickly returning to work, potentially doubling the EITC paid to those who engage in intermittent work, including year-long spells of non-work. Subsidizing the absence of earned income is the opposite of the EITC’s goals. For an economy that continues to experience labor shortages, that’s not a help, either. [xxii]      

In 2021, liberals succeeded in temporarily repealing the longstanding work requirement for claiming the child tax credit (CTC), as ARPA provided full payments for the first time to parents who didn’t work at all. [xxiii] The authors of the Working Families Tax Relief Act spotlight their intent to permanently revive that massive and costly expansion of the CTC.[xxiv] But they make no mention of the fact that their proposal would also permanently undermine the work requirement for the EITC, making that previously pro-work benefit payable for entire years when adults don’t work at all—without the “disaster” logic that previously applied to such exceptions. Naturally, some on Twitter have proposed[xxv] going even further, and eliminating the EITC’s work and earnings requirements altogether. [xxvi]

The left-leaning Economic Policy Institute noted a decade ago that the EITC is “by far, the most progressive tax expenditure in the income tax code.” [xxvii]  For today’s liberals, however, that’s no longer good enough. They propose transforming the EITC specifically because it requires work and earnings to receive its progressive benefits. That expectation conflicts with their radical vision of universal government benefits[xxviii] which, as Rep. Alexandria Ocasio-Cortez (D-NY) famously said, should provide economic security even to those who are “unwilling to work.[xxix]” If enacted, this proposal would bring them halfway to realizing that radical vision that pro-work benefits like the EITC must be paid to non-workers, too.

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[i] Congressional Research Service, The Earned Income tax Credit (EITC): How It Works and Who Receives It, Updated January 12, 2021. https://crsreports.congress.gov/product/pdf/R/R43805

[ii] Internal Revenue Service, SOI Tax Stats – Individual Statistical Tables by Size of Adjusted Gross Income, https://www.irs.gov/statistics/soi-tax-stats-individual-statistical-tables-by-size-of-adjusted-gross-income

[iii] The Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2020-2024, https://www.jct.gov/publications/2020/jcx-23-20/

[iv] The Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2022-2026, https://www.jct.gov/publications/2022/jcx-22-22/

[v] The Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in Rules Committee Print116-68, The “Consolidated Appropriations Act,” https://www.jct.gov/getattachment/c0ae3ddb-47e8-471a-8db5-e29f5551061a/x-24-20.pdf

[vi] The Joint Committee on Taxation, Estimated Revenue Effects of H.R. 1319, The “American Rescue Plan Act of 2021,” https://www.jct.gov/getattachment/52961732-5521-49ea-8443-59a539b71b62/x-14-21.pdf

[vii] Internal Revenue Service, Earned Income and Earned Income Tax Credit (EITC) Tables, https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income-and-earned-income-tax-credit-eitc-tables

[viii] Internal Revenue Service TaxPayer Advocate, Allow Taxpayers the Option of Using Prior Year Income to Claim the Earned Income Tax Credit (EITC) During Federally Declared Disasters, https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2022/01/ARC21_PurpleBook_08_MiscRecs_57.pdf

[ix] Katrina Emergency Tax Relief Act of 2005, Public law 109-73—September 23, 2005. https://www.govinfo.gov/content/pkg/PLAW-109publ73/pdf/PLAW-109publ73.pdf

[x] Internal Revenue Service TaxPayer Advocate, Allow Taxpayers the Option of Using Prior Year Income to Claim the Earned Income Tax Credit (EITC) During Federally Declared Disasters, https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2022/01/ARC21_PurpleBook_08_MiscRecs_57.pdf

[xi] Consolidated Appropriations Act, 2021, Public Law 116-260—December 27, 2020, https://www.congress.gov/116/plaws/publ260/PLAW-116publ260.pdf

[xii] American Rescue Plan Act of 2021, Public law 117-2—March 11, 2021, https://www.congress.gov/117/plaws/publ2/PLAW-117publ2.pdf

[xiii] Matt Weidinger, Unprecedented: A Brief Review of the Extraordinary Unemployment Benefit Response to the Coronavirus Crisis, American Enterprise Institute, April 9, 2020. https://www.aei.org/research-products/report/unprecedented-a-brief-review-of-the-extraordinary-unemployment-benefit-response-to-the-coronavirus-crisis/

[xiv] Matt Weidinger, As Democrats Offer Massive New Benefits, a Refresher on Pandemic Check Writing, AEIdeas, August 30, 2022, https://www.aei.org/opportunity-social-mobility/as-democrats-offer-massive-new-benefits-a-refresher-on-pandemic-check-writing/; House Committee on Ways and Means, Analysis: Family of 4 Getting $109,048 in COVID Government Checks Already Approved by Congress, June 3, 2021. https://waysandmeans.house.gov/analysis-family-of-4-getting-109048-in-covid-government-checks-already-approved-by-congress/

[xv] Tax Policy Center, EITC Parameters, https://www.taxpolicycenter.org/statistics/eitc-parameters; Congressional Research Service, The Earned Income tax Credit (EITC): How It Works and Who Receives It, Updated January 12, 2021. https://crsreports.congress.gov/product/pdf/R/R43805

[xvi] Chuck Marr et al, Center on Budget and Policy Priorities, Temporarily Expanding Child Tax Credit and Earned Income Tax Credit Would Deliver Effective Stimulus, Help Avert Poverty Spike, July 21, 2020. https://www.cbpp.org/research/federal-tax/temporarily-expanding-child-tax-credit-and-earned-income-tax-credit-would

[xvii] Matt Weidinger, WH to Dems: Pass the Plan, but Zip It on the Cost, RealClearPolitics, October 20, 2021. https://www.aei.org/articles/wh-to-dems-pass-the-plan-but-zip-it-on-the-cost/; Matt Weidinger, CBO Score Highlights the Massive Budget Gimmicks Behind Build Back Better, AEIdeas, November 19, 2021. https://www.aei.org/opportunity-social-mobility/cbo-score-highlights-the-massive-budget-gimmicks-behind-build-back-better/; Congressional Research Service, The Earned Income Tax Credit (EITC) in the House-Passed Build Back Better Act: Summary Table, Updated December 13, 2021. https://crsreports.congress.gov/product/pdf/IN/IN11823#:~:text=On%20November%2019%2C%202021%2C%20the,not%20be%20modified%20by%20BBBA

[xviii] Matt Weidinger, The Bill Is Fake, Not the Latest CBO Score, AEIdeas, December 15, 2021. https://www.aei.org/opportunity-social-mobility/the-bill-is-fake-not-the-latest-cbo-score/

[xix] Brown, Bennet, Booker, Warnock, Wyden, Durbin Introduce Legislation to Cut Taxes for Ohio Workers and Families, June 14, 2023. https://www.brown.senate.gov/newsroom/press/release/sherrod-brown-bennet-booker-warnock-wyden-durbin-introduce-legislation-cut-taxes-ohio-workers-families

[xx] Congressional Research Service, The Earned Income Tax Credit (EITC) in the House-Passed Build Back Better Act: Summary Table, Updated December 13, 2021. https://crsreports.congress.gov/product/pdf/IN/IN11823#:~:text=On%20November%2019%2C%202021%2C%20the,not%20be%20modified%20by%20BBBA

[xxi] Manuel Alcala Kovalski and Louise Sheiner, How Dose Unemployment Insurance Work? And How Is it Changing During the Coronavirus Pandemic?, Brookings, July 20, 2020. https://www.brookings.edu/articles/how-does-unemployment-insurance-work-and-how-is-it-changing-during-the-coronavirus-pandemic/

[xxii] Stephanie Ferguson, Understanding America’s Labor Shortage, U.S. Chamber of Commerce, July 12, 2023. https://www.uschamber.com/workforce/understanding-americas-labor-shortage

[xxiii] Matt Weidinger, ‘Child Allowances’ Revive Welfare as We Knew It, AEIdeas, February 5, 2021. https://www.aei.org/opportunity-social-mobility/child-allowances-revive-welfare-as-we-knew-it/

[xxiv] Brown, Bennet, Booker, Warnock, Wyden, Durbin Introduce Legislation to Cut Taxes for Ohio Workers and Families, June 14, 2023. https://www.brown.senate.gov/newsroom/press/release/sherrod-brown-bennet-booker-warnock-wyden-durbin-introduce-legislation-cut-taxes-ohio-workers-families; Matt Weidinger, Will Tens of Millions of New Monthly Benefit Checks Be Joe Biden’s Legacy, National Review, September 22, 2021. https://www.aei.org/op-eds/will-tens-of-millions-of-new-monthly-benefit-checks-be-joe-bidens-legacy/; Erica York and Huaqun Li, Making the Expanded Child Tax Credit Permanent Would Cost Nearly $1.6 Trillion, Tax Foundation, March 19, 2021. https://taxfoundation.org/expanded-child-tax-credit-permanent/

[xxv] Max Ghenis, Twitter, February 27, 2023. https://twitter.com/MaxGhenis/status/1630260405837746176

[xxvi] Matt Weidinger, Child Allowances Make the IRS America’s Number One Welfare Agency, RealClearPolicy, June 9, 2021. https://www.aei.org/op-eds/child-allowances-make-the-irs-americas-number-one-welfare-agency/

[xxvii] Thomas L. Hungerford and Rebecca Thiess, The Earned Income Tax Credit and the Child Tax Credit, Economic Policy Institute, September 25, 2013. https://www.epi.org/publication/ib370-earned-income-tax-credit-and-the-child-tax-credit-history-purpose-goals-and-effectiveness/

[xxviii] Robert Doar and Matt Weidinger, Democrats’ Stealth Plan to Enact Universal Basic Income, The Wall Street Journal, March 2, 2021. https://www.aei.org/op-eds/democrats-stealth-plan-to-enact-universal-basic-income/

[xxix] Matt Weidinger, Green New Deal ‘Guarantees Economic Security to All Who Are Unwilling to Work,’ AEIdeas, February 7, 2019. https://www.aei.org/economics/green-new-deal-guarantees-economic-security-to-all-who-are-unwilling-to-work/