Up to $133 Million in Earned Income Tax Credit may be ‘Left on Table,’ According to UA Researcher

TUSCALOOSA, Ala. – The Earned Income Tax Credit, or EITC, is a refundable federal income tax credit for working individuals and families with low to moderate incomes.

Congress originally approved the tax credit legislation in 1975, in part to offset the burden of Social Security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit, according to an Internal Revenue Service Web site.

In other words, the EITC is intended to give a break to the working poor, encouraging them to remain employed. Former President Ronald Reagan called EITC “the best antipoverty, the best pro-family, the best job creation measure to come out of Congress.”

Dr. Gary Hoover would agree. Hoover is associate professor of economics at the Culverhouse College of Commerce at The University of Alabama. Hoover and Sarah Louise Smith, SaveFirst Coordinator for Impact Alabama, recently completed a research project on the impact of the Earned Income Tax Credit in Alabama, and the results are eye-opening.

“The EITC represents a $1 billion annual investment in Alabama’s low-income, working families,” Hoover said, “which translates into economic output of up to $2 billion through increased spending in the retail, services utilities and other sectors.”

However, Hoover said, a lot of those benefits, as much as $133 million, may be “left on the table” by Alabama households that are eligible for the credit but don’t claim it.

“If everyone eligible participated,” Hoover said, “the overall economic impact would be considerable, creating $189 million in total economic activity and $61 million in labor income.”

Hoover said a single parent raising two or more children and earning between $12,050 and $15,750 in 2008 was eligible for the maximum EITC of $4,824, a 30 to 40 percent increase in the family’s annual income.

“The money returned through the EITC is usually spent in the communities where the people who receive it live,” Hoover said. “They use it to pay off debt, send their kids to school and live in better housing. It also has a multiplier effect on the local economy.”

But there is another aspect to the EITC issue, Hoover said.

“Most low-income, working families get help in preparing their tax returns, and the process of filing for the EITC can be difficult for people whose level of literacy is limited. In fact, in Alabama in 2005, more than 76 percent of ETIC recipients paid to have their returns prepared, and that significantly cut the benefit of the credit to those families.”

Hoover said many of the families in Alabama who claim the EITC pay from $200 to $300 to commercial tax preparers to file their taxes. During this process, loans are sometimes made to the taxpayers, based on the anticipated refunds, carrying annual percentage rates from 70 percent to more than 700 percent.

“The loans are usually not made by the person who does the taxes, but from a separate lender, usually a bank,” Hoover said. “The tax preparers facilitate the loans in a partnership with the banks.”

“A lot of taxpayers think the loans are just quick returns and don’t understand that they are actually loans,” Hoover said. “Also, sometimes the tax payers don’t understand that they have to repay the full amount of the loan, even if the IRS disallows a deduction or if someone takes part of the loan for child support or to pay off another loan.”

“And another thing,” Hoover said, “a lot of these taxpayers don’t have the $120 or so in cash on hand to pay for tax preparation or don’t have a bank account where the IRS can directly deposit the refund, so the tax preparation fees come out of the refund loan.”

Hoover said there are no educational qualifications, no training standards, and no licensing requirements that have to be met to become a commercial tax preparer in Alabama.

“Anyone who wants to can rent a storefront or pass out flyers from their home and run a tax preparation business,” Hoover said. “There are a lot of knowledgeable and competent paid preparers out there who operate with integrity, but there are always people who try to take advantage of the situation and who are not interested in the best interests of their clients.”

Over the past six months, University of Alabama students working with the UA Center for Ethics & Social Responsibility conducted research and helped draft needed reforms. A coalition of college students from more than 10 campuses statewide was organized to raise awareness and gain support from the Legislature and governor to pass reforms. More than 5,000 student letters supporting this legislation were written to legislators across the state.

Under the leadership of state Sen. Quinton Ross, Rep. Tammy Irons and a bipartisan coalition of legislators, the Alabama Taxpayer Protection and Assistance Act was filed in both chambers of the Legislature.

The act would require individual tax preparers to pass a proficiency exam, obtain a license and fulfill a continuing education requirement (excluding CPAs, enrolled agents and lawyers already required to obtain licenses). It would also use a portion of the licensing fees to expand informational outreach efforts to individuals eligible for the EITC and provide grant support to IRS-certified free Volunteer Income Tax Assistance nonprofit sites throughout state.

The Culverhouse College of Commerce and Business Administration was established in 1919, and, in 1929, it became the 38th school to earn admission into the American Association of Collegiate Schools of Business. The excellence of the UA business school has been acknowledged on a national level. The undergraduate program is ranked 29th among public universities by U.S. News, and the Culverhouse School of Accountancy is ranked 15th among public universities by U.S. News. The graduate accounting program is ranked 15th, and the undergraduate program 14th, by Public Accounting Report, and the entrepreneurship program is ranked 20th.