An increasing amount of the money the nation spends in efforts to raise the income of poor Americans comes in the form of tax credits.
Editor’s Note: Tax credits given to poorer Americans have grown over the last 30 years. Ron Durst and Tracey Farrigan of the Economic Research Service (USDA) have just published a report on how those changes in tax policy have affected rural America.
Below are excerpts from their study. A complete copy can be found here.
Since 1980, the total cost of tax expenditures has increased by over 250 percent and currently exceeds $1.1 trillion.
A primary reason for this growth is that there is greater bipartisan support to enact tax expenditures than to fund or increase direct spending programs, especially since tax expenditures are often viewed as tax cuts. These expenditures have significantly reduced the share of taxpayers who owe federal income tax.
As a result, in 2009, only about half of rural taxpayers owed any federal income tax. This is slightly below the overall rate of 53 percent of all taxpayers and reflects the lower income levels of rural taxpayers.
In 2008, 22 percent of rural taxpayers received a cash payment from one or more of the refundable tax credits. The average amount was $2,428. Thus, an effect of the increased use of the tax code for social policy goals has been an increase in the number of rural taxpayers who owe no federal income tax and who receive a cash payment as a result of the refundable tax credits.
Rural America Receives a Relatively Larger Share of Benefits
Rural households have historically had lower incomes and a higher poverty rate than urban households.
In 2008, rural taxpayers reported an average adjusted gross income (AGI) of $43,616, compared with $60,841 for urban taxpayers. A larger share of rural taxpayers had an AGI below $50,000.
While there is little difference between the share of urban and rural taxpayers with incomes between $50,000 and $100,000, the share of urban taxpayers with incomes in excess of $100,000 is more than double that for rural taxpayers. This distribution of income is a primary reason that a larger share of rural taxpayers benefit from the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).
The poverty rate has also been significantly higher in rural areas. In 2008, 15.1 percent of the rural population lived in poverty compared with 12.9 percent of the urban population.
One reason for the higher rural poverty rate is the preponderance of low-wage jobs in rural areas. Given the income differential and the prevalence of low-wage jobs, it is not surprising that rural taxpayers receive relatively greater benefits from programs targeted at low-income workers, especially from the EITC.
In 2008, 21.6 percent of rural taxpayers received EITC benefits compared with 16.9 percent of urban taxpayers. However, urban taxpayers receive slightly higher benefits—$2,065 on average compared with $2,061 for rural taxpayers.
This reflects the fact that the EITC payment increases as the amount of earned income increases before being phased out at higher income levels. Thus, a married couple with two or more children and $25,000 in income would receive a larger benefit than a similar couple with an income of $10,000.
With lower average incomes, rural taxpayers receive slightly lower average EITC payments than urban taxpayers. The share of rural taxpayers who receive the refundable portion of the CTC is also slightly higher, at 13.9 percent compared with 12.6 percent for urban taxpayers.
The earned income and child tax credits provided a total benefit of $20.6 billion to rural taxpayers in 2008. Overall, one of every three rural taxpayers received benefits from either the EITC or the CTC.
While most rural taxpayers received less than $3,000, 7 percent received between $3,000 and $5,000, and 4 percent—or about 1 million rural taxpayers—received more than $5,000.
Households receiving more than $5,000 received an estimated total of $5.2 billion in either reduced taxes or cash payments.
Child Care and Education
Compared with the EITC and the CTC, the child care, education, and saver’s credits benefit a relatively small share of rural taxpayers with relatively small amounts. These credits combined provided less than $1.8 billion to rural taxpayers in 2008.
A larger share of urban taxpayers received the education and child care credits, while a larger share of rural taxpayers received the saver’s credit.
Only about 4.4 percent of rural taxpayers received the education credit in 2008, for an average benefit of $981. An even smaller share of rural taxpayers claimed the child care credit, with 3.6 percent of rural taxpayers receiving an average credit of $487.
A slightly higher share of rural taxpayers claimed the saver’s credit—5.6 percent compared with 3.9 percent for urban taxpayers. However, the average credit amount for rural taxpayers was only $171.
Low Income Programs
The three largest Federal income support programs for low-income households are the EITC, Supplemental Nutrition Assistance Program (SNAP—formerly food stamps), and Temporary Assistance to Needy Families (TANF—formerly Aid to Families with Dependent Children).
Prior to 1990, the Federal outlay for the EITC was substantially below that for SNAP and TANF. Expansions to the EITC that occurred in 1990 and that have since continued have resulted in tax code program expenditures now rivaling those of the more traditional welfare expenditure programs.
For example, based on the 2012 Federal Budget, the actual EITC outlay for 2008 was slightly larger (by 3.3 percent) than SNAP and significantly larger (by 86.1 percent) than TANF.
Refundable tax credits, especially the EITC, have lifted a significant number of households above the poverty line. As noted, for taxpayers with children, the income tax threshold with the EITC and CTC has increased from at or below the poverty level in 1985 to more than twice the poverty level by 2005.
In 2005, the EITC lifted an estimated 5.1 million individuals above the poverty level, including 2.6 million children. This was more than any other single program, including SNAP and the TANF program.
While the official measure of poverty does not include the EITC as a form of income, the Census Bureau publishes information on poverty under various alternative definitions. Comparing the poverty rate under the definition of income for various support programs and the EITC with the official poverty estimates for 2006 suggests a reduction in the rural poverty rate from 15.1 percent to 11.1 percent. The EITC alone was responsible for a reduction of 1.7 percentage points in the rural poverty rate.
This suggests that in 2006, the EITC lifted an estimated 800,000 rural residents above the poverty line.
Given the expansions in the EITC and refundability of the CTC that have occurred since 2006, as well as increases in the number of states that offer EITC benefits supplemental to the federal benefit, the current impact on rural poverty is likely to be even greater.
The impact of the expanded EITC on the rural poor is indicated in part by the geographic distribution and share of tax return filers receiving the credit. The percentage of rural taxpayers who received the EITC in 2007 was greatest in the South, where a large percentage of the nation’s rural poor has historically resided.
The median rate of the EITC receipt for southern states is 21.2 percent of rural households that filed a tax return. This compares with 13 percent of rural households in northeastern states and 15 percent in the Midwest and the West.
These differences reflect higher average income levels in rural areas outside of the South, particularly in the Northeast.