Chicago Earned Income Tax Credit (EITC) Periodic Payment Pilot

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1 Chicago Earned Income Tax Credit (EITC) Periodic Payment Pilot Interim Report Summary The Chicago Earned Income Tax Credit (EITC) Periodic Payment Pilot Project (EITC Pilot) is a collaborative project that brings together the Center for Economic Progress (CEP) which serves as the administrator of the program, the Chicago Department of Family and Support Services, the Office of Chicago Mayor Rahm Emanuel, the Chicago Housing Authority (CHA), and the University of Illinois at Urbana-Champaign (UIUC). This 18-month pilot seeks to demonstrate the effects having a portion of the federal EITC a refundable credit that can be worth up to $6,143 paid out in four installments in the year it is earned rather than as a lump sum claimed in the subsequent year when a tax return is filed. During 2014, a cohort of 343 households are receiving up to half of the next year s EITC credit through four periodic payments. Participants receive equal payments on a set schedule: May/June, August, October, and December. A control group of 164 participants, who are not receiving payments, serve as a comparison group for measuring the effects of the payments. The UIUC is the evaluator of the pilot, tasked with gathering longitudinal data through surveys administered to all participants, along with facilitating focus groups and interviews to collect qualitative data from participants. A full report of the findings from this pilot is expected to be available in June of This interim report will detail several preliminary findings. Background on the EITC The EITC is the largest federal anti-poverty program for families with children, annually providing earnings supplementation and family support to nearly 20 percent (about 30 million workers) of tax filers. Under current law, the EITC is available only as a lump-sum credit payable after a tax return is filed. The EITC can be as large as $6,143, and the average amount claimed by families with children is $2,905. In 2011, the IRS paid out $62 billion in EITC benefits. While the EITC has proven to be a powerful tool in assisting low and moderate income families, it is believed that providing an alternative disbursement mechanism may provide EITC beneficiaries with opportunities to make ends meet throughout the year. Similar programs have been established in many Western European countries and have proven effective.

2 Project Design Between the months of March and June 2014, CEP screened 343 participants for potential eligibility, which included: 1) receipt of the EITC for a qualifying child in 2013, 2) estimated EITC for 2014 of at least $600, 3) not subject to a future tax intercept through collection of back taxes or outstanding debt like student loans or child support, 4) and current recipient of CHA housing assistance. During the 2014 tax year, CEP is providing four periodic payments totaling up to half of participants next year s estimated EITC. Payment amounts range from $80 to $500, with a maximum of $2,000 paid to participants. Payments are paid directly to a bank account or prepaid debit card owned by the participant. Lastly, participants are required to have their 2014 tax return completed by CEP in 2015, at which time the total amount of the advance EITC that participants received will be paid back to CEP utilizing their tax refund. Sample Description Study Sample Group Variable Intervention Control Sample Size n=343 n=163 Gender Female 97.70% 85.40% Male 2.30% 14.60% Marital Status Single 96.20% 87.40% Married 3.80% 12.60% Race/Ethnicity African American 90.70% 84.50% Hispanic 6.60% 11.20% White 0.30% 2.50% Other 2.40% 1.80% Asian - - Education High School or Less 42.20% 36.20% Some College or Associate s 49.50% 48.50% Bachelor s or Higher 8.20% 15.30% Other Indicators Living with Significant Other 2.60% 13.20% Household receiving SNAP 78.70% 62.70% CHA Resident 100% 37.40% Comparisons Between Intervention and Control Group Variable (Means) Intervention Control Household Size # of Work Hours Weekly # of Missed Bills Last Month # of Months Unable to Pay Bills Monthly Income (All Sources) $1, $1, Monthly Salary $1, $ Debt $8, $9, Savings $67.30 $488.41

3 Areas of Inquiry and Preliminary Findings The pilot project design is informed by the work in recent years by Steve Holt and the Brookings Metropolitan Policy Program supported by the Annie E. Casey Foundation. The design focuses on two key areas of inquiry: 1) administrative feasibility; and 2) recipient utility. The following section looks at each of these areas and current preliminary findings. Issues related to administrative feasibility include the following: Future Eligibility. Any advance credit payment mechanism must successfully identify taxpayers who will in fact be eligible to claim the credit at year-end. Current finding: Through the eligibility screening process we found that an overwhelming majority of participants consistently received a comparable amount of EITC for the two prior years. The exception to this are individuals who lost a job during one of the past tax years, which substantially reduced their income, and changed the value of their EITC. Changes in Income. The EITC can vary significantly based on relatively small changes in income, meaning that overpayments could easily result from advances that are too large. Current finding: As noted above, pilot participants have fairly stable incomes. It is also worth noting that a majority of participants received the maximum or near maximum EITC for their household size in 2013, therefore a fairly large change in income would need to occur to result in overpayment. In addition, through the administering of surveys and a phone check-in after the second payment, CEP was able to reestimate participants income prior to the third payment. Only three (0.9 percent) participants had changes in their annual income that would result in an overpayment of the EITC if they received all periodic payments. Obtaining a new job was the primary driver behind changes in income. The three participants have discontinued their third and fourth payments in order to prevent over-payment. Disbursement of Advanced Credit. An effective periodic payment option must have low disbursement costs, so reliance on direct deposit via electronic funds transfer will be key. Current finding: All participants provided a bank account or pre-paid debt card for receiving periodic payments. Despite concerns about a high proportion of under-banked or unbanked individuals among project participants, we no longer believe this presents a barrier to program implementation. During the three rounds of payments, encompassing five months, 14 percent of participants have changed their direct deposit information. We will continue to track these changes, as IRS may have administrative concerns in regards to account information modifications.

4 Issues related to recipient utility include the following: Attractiveness to Recipients. Prior studies of EITC recipients found a clear preference for maximizing year-end lump-sum payments as well as significant fear of incurring repayment obligations to the IRS. Current finding: All participants received a clear explanation of how the program worked. Most importantly, participants understood the responsibility to repay the funds paid to them utilizing their 2014 tax refund. Of those that attended information sessions about the EITC pilot, only six individuals who appeared to be eligible decided not to participate. The first survey revealed that the vast majority, (86 percent), would participate in the pilot again if the opportunity was offered. Lastly, interested individuals continue to call CEP inquiring about the opportunity to participate. Continued demand highlights that the general concept is attractive to EITC recipients. We note, however, that attractiveness of the model will be best measured once participants file their 2014 tax returns and experience smaller tax refunds than they have been accustomed to in previous years. Earnings Supplementation. There is an assumption that accelerating receipt of at least some of the EITC would improve the credit s functioning as an earnings supplement and financial support mechanism. Current finding: Reported stress levels between those receiving periodic payments and those not receiving the payment are worth noting. About a month after periodic payment disbursement, 69 percent of participants receiving periodic payments reported feeling Less stress in making ends meet versus only 30 percent of those not receiving the payment. Furthermore, within the same time period, 72 percent of participants receiving periodic payments reported feeling Less stress in their ability to feed their family versus only 33 percent of those not receiving payments. Lastly, there are preliminary findings that receiving periodic payments had at least a small influence over an individual s ability to save. Between June and August, 39 percent of participants receiving the periodic payment reported increasing their savings versus 22 percent of those not receiving payments. All of the differences were statistically significant. Reduction in Liquidity Constraints. Introducing a periodic payment as a disbursement method to the EITC has the potential to meaningfully ease liquidity constraints for low-income households and their negative consequences. Current finding: Within the month of the periodic payments being disbursed, 32 percent of participants receiving periodic payments reported paying off a payday or car title loan versus only 17 percent of those not receiving a payment. By paying off high interest debt, those who receive the periodic payments may be able to free up their income for other spending and savings. Participants receiving periodic payments overwhelmingly reported using their payment for basic needs. When asked how they were spending their payments, 52 percent reported using it towards utilities, 27 percent towards groceries, 20 percent towards rent, and 14 percent towards savings. In addition, 26 percent of participants receiving the periodic payments reported having more disposable income versus only 7.6 percent of those not receiving payments. In the words of one participant, It [the periodic EITC payment] puts balance in my life. I can pay my bills and have money left.

5 Other findings: As with any pilot there are unexpected findings along the way that may be important for informing policy. The following are some additional discoveries that we will continue to follow: Self-Employment Income and Self-Employment Tax. Program participants that receive a majority of their income from self-employment do not pay quarterly self-employment taxes, and therefore pay their annual tax obligation when they file a tax return. Due to receiving a fairly large EITC along with a Child Tax Credit, participants meet their tax obligations utilizing these credits through their tax refund. This can result in a tax refund smaller than the received EITC. For participants in this situation, CEP staff adjusted the periodic EITC payments to half of the participants 2013 tax refund as opposed to their EITC. Further efforts will be undertaken to determine whether taxpayers who receive the majority of their income from self-employment would be good candidates for periodic EITC payments. Incorporation in Household Budgeting. Participants receive their periodic payments on a set schedule June 15th (May 2nd or 15th for payment test group), August 15th, October 15th, and December 15th. Participants are aware of this schedule, and CEP staff also sends out an electronic reminder 5 days before the periodic payment alerting participants to the forthcoming payment. Before the October 15th periodic payment, participants received their notification of the forthcoming payment. However, the payment was not made on that day. CEP staff was not aware of this until mid-morning of the 15th, and therefore was unable to alert participants to the delay. The response was astounding. CEP received over 150 phone calls during a seven hour window from participants reporting they had not received their payment. This illustrates that the participants quickly integrated the periodic advance EITC payments into their financial planning. In fact, a number of participants reported that they had planned on using the payment that day. Conclusion These preliminary findings provide important insight about the administrative feasibility and recipient utility of periodic advance EITC payments. CEP s experience indicates that a carefully administered planning and training process for enrolling participants can result in accurately assessing participants EITC payment potential and correctly transferring payments to participants bank accounts. In addition, the preliminary data indicates positive material and psychological impacts for participants receiving the EITC payments. Additional findings will be shared in 2015, including a final report in June. David Marzahl President & CEO Tel: (312) dmarzahl@economicprogress.org