By the time you read this post, Donna* (not her real name) and her 11 year daughter will be homeless.
Donna is one of millions of taxpayers who rely on a tax refund each year. This year, for some reason, her refund isn’t available as promised. The Internal Revenue Service “Where’s My Refund?” tool had indicated a deposit on February 6, 2014, a promise that Donna counted on when she asked her landlord for a few more days to make the rent. Now, her grace period with the landlord is up and there’s still no refund. Despite making a number of inquiries, Donna has no explanation for the delay and worse, no updated refund date.
She’s not alone. I’ve been inundated with inquiries from taxpayers asking about delayed refunds.
Statistically, taxpayers who file early do so because they are expecting a refund. Expecting may be a bit understated. Many taxpayers count on their refunds each year in order to pay bills and catch up on obligations.
That’s the case with Donna. She owns a higher end antique/vintage store that also takes consignments. She did pretty well, averaging, she says, sales of $150/day or so, and was moving the store online onto Etsy when sales slowed. She can pinpoint the exact moment that business turned: the government shutdown. After the shutdown, she says, “Nothing.” Sales plummeted. October, she says, was brutal, “I did $325.00 for the entire month of October in the store.” People were, she explained, “scared and would not spend on a penny on what they considered luxury items or extras that were not a necessity.”
Donna continued to plug away, hoping that business would rebound. It took a month for business to pick up as customers responded to the 16 day shutdown and worries about the economy. She figures she lost $3,000 in income in October alone. After the dip, business improved but she didn’t see sales at the same levels as before. The initial transition to Etsy was promising and she figured she would be fine, just as soon as she could catch up.
The lost income was tough. Like most Americans, Donna lives paycheck to paycheck. A $3,000 deficit was pretty difficult to overcome – especially during a cold winter. Extraordinary heating bills due to the bitter cold have added to her woes. Her gas and electric bills over the winter have been more than twice her rent payments: about $900/month.
As the bills piled up, Donna was unable to make her $400 rent payment. She had hope, though. She knew that she would get a boost from her refund check. This year, her expected refund check was $3,784.00, about the same as her lost revenue in October. It would be enough to pay off her obligations and get a new start. She had intended to put some of the money down on a trailer and move it to a local trailer park. The bonus: electric would be included in the rent at the new space.
It’s a familiar dance for Donna. She files for her refund every year using a free online provider and has done so since the IRS started offering online filing. Her refund is tied to the Earned Income Tax Credit (EITC) and has helped her, in previous years, stay on her feet. This year is different. “Without the refund,” she says, “I don’t know. I have no options. I have no money.”
The EITC is a refundable tax credit which means that you can get a tax refund even if you didn’t have any tax obligation. The intention of the EITC is to provide assistance to the working poor as an alternative to traditional welfare programs and has generally been supported by liberals and conservatives. It was signed into law in the mid-1970s under President Ford as a temporary measure under the Tax Reduction Act of 1975. It was made permanent in 1978 under President Carter and has been expanded a number of times, including as part of the Reagan Tax Reform Act of 1986 where it was cheered by Republicans and Democrats alike. President Reagan referred to the program as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”
To qualify for the EITC, you have to work, like Donna. The credit incentivizes work in a way that many other assistance programs do not. In fact, the amount of the credit is based on earned income but not unearned income which means that taxpayers who rely on dividends and interest don’t qualify – only those who actually work for a living.
The program costs about $61 billion a year. Critics lament that the number is high but it’s still much lower than the $431 billion cost of Medicaid and the $78 billion attributable to food stamps. It’s also less than the cost of the mortgage interest deduction which totals about $70 billion.
That $61 billion is paid out to millions of working families. The original program is said to lift 5.4 million families out of poverty each year. Recent expansions of the program, together with growing the Child Tax Credit, are thought to have kept another 1.7 million families above the poverty line. Millions more taxpayers who are entitled to the credit don’t collect, usually because they don’t understand that they are eligible for the program. The numbers aren’t impressive: despite all of the publicity, the program doesn’t appear to be terribly effective at doing what it was created to do. It’s estimated that nearly 1/4 of eligible taxpayers aren’t getting the assistance that Congress believes that they need.
That’s just one reason why I’m not a huge fan of the EITC.
It’s also not simple. It’s based on a system dependent on income, filing status and number of children. There are phase-outs and varying criteria. The definitions have changed over the years and figuring out who is a qualifying child can be difficult in nontraditional families.
Neither is it fast. To claim the EITC, you have to file a form 1040 or form 1040A – but not a form 1040-EZ. There’s a specific schedule to complete and now, additional due diligence that’s required. The credit adds layers to compliance which adds hours to the preparation of returns.
And despite its original intent, if the idea is to encourage taxpayers to work more, the current iteration of the EITC fails miserably. As you earn more, your benefits go down, not up. At some point, the incentive to work more is mitigated by the specter of a lesser credit.
I don’t believe that we should be attempting to resolve economic policy through our existing Tax Code. It’s bloated enough. And attempting to create permanent economic policy through an ever-changing tax system results in unintended consequences.
But here’s the reality: if we’re going to go down that road – and since 1975, we’ve decided that’s what we’re going to do – then we need to be prepared to do it right. That means getting taxpayers their money when promised. It means being prepared to answer questions about why refunds are delayed. Taxpayers feel cheated, like Donna who says, “I counted on that money being there.” She says she kept up her end of the bargain, telling me, “I worked very hard for every dollar I earned and paid my taxes. I am entitled to my refund.”
As she hears more stories of taxpayers with delayed refunds, Donna wonders why Congress isn’t doing more to help out. And she wonders if it might not get worse. She worries, “[i]f they do not resolve the budget issue there will be millions who do not see refunds for a very long time.” I know some worry that might happen.
This isn’t just a mere inconvenience for some taxpayers. It’s the difference between making the rent and not. Between getting needed meds and not. Between having enough to eat and not. If we’re designing a system to protect those in fragile economic circumstances, to pull some up from poverty and keep others from falling into poverty, the system ought to work.
As for Donna, I couldn’t stop thinking about the fact that her daughter is just eleven, the same age as my oldest daughter. I worried where they might go after she’s evicted. “[T]here are,” she says, “so many homeless that actually live in the woods. Did you know that?” I didn’t. I asked about legal aid and other ways to get help but she is resigned, “There is no help to get.”