Coronavirus, refundable tax credits and the poverty line

Imagine a single parent — we’ll call her Grace — with two young children and a job paying $18,000 a year, well below the federal poverty line for a family of three. If she had worked for all of 2020 — as she had expected to do at the beginning of the year — she would have been entitled to a refundable earned income tax credit (EITC) of $5,920 and a refundable child tax credit (CTC) of $2,325. 

The EITC, one of the largest federal antipoverty programs in the country, combined with the CTC, would have raised Grace’s family above the poverty line. If Grace were like many parents receiving the EITC, she would have used the money to pay off debt and current bills, like rent. But suppose her job is in one of the numerous sectors of the economy heavily impacted by the coronavirus pandemic — perhaps she works in a restaurant — and as a result she is able to work for only a third of the year and to earn only $6,000.  

Both the EITC and the refundable portion of the CTC are designed to encourage work; a person with no earned income qualifies for neither credit, and a person with very low income qualifies for very small credits. With earned income of $6,000 she would qualify for an EITC of only $2,400 and a CTC of only $525. Considering the two tax benefits together, her involuntary underemployment has cost her $5,320 in tax credits ($8,245 minus $2,925). Although Grace received a coronavirus economic impact payment of $2,200 ($1,200 for herself, and $500 for each child), that falls more than $3,000 short of replacing her lost credits. Coming on top of her lost wages (to the extent her lost wages are not replaced by unemployment benefits), this can only be devastating.

In an ordinary year, in a good economy, larger tax credits for higher earners may make sense as a way of encouraging low-wage earners to work more hours. But the results described above make no sense when there is no work to be had. So what can be done? As it happens, Congress has a well-designed approach to this problem, ready to be taken off the shelf and applied to pandemic-related unemployment and underemployment. Section 204(c) of the Taxpayer Certainty and Disaster Relief Tax Act of 2019 (part of the Further Consolidated Appropriations Act) provides that a person living in a presidentially-declared disaster area, with respect to a disaster that occurred in 2018 or 2019, can elect to calculate her EITC and refundable CTC based on her earned income of the previous year, rather than that of the disaster year. (The use of the previous year’s income is elective, not mandatory, because disaster-year income will produce larger credit amounts in some circumstances.) If this option were available to Grace, and if her 2019 earned income had been in the neighborhood of $18,000, this would solve her disappearing credit problem. 

When one thinks of presidentially-declared disasters, one usually thinks of hurricanes, earthquakes and wildfires, rather than pandemics, but every state is now a presidentially-declared pandemic disaster area. In fact, the only reason the 2019 legislation does not already entitle Grace to 2020 tax credits based on her 2019 earned income is the time limitation on the legislation. From a drafting perspective, all Congress needs to do to help Grace (and perhaps millions in comparable circumstances) is to extend the effective date of the existing legislation. If Congress is going to enact a second round of economic impact payments — as we believe it should — some of the relief should be precisely aimed at Grace’s predicament. 

Sara S. Greene is a professor of law at Duke University School of Law and is an expert in poverty law and consumer bankruptcy and debt. Follow her on Twitter @SaraJSGreene.

Lawrence A. Zelenak is the Pamela B. Gann professor of law at Duke University School of Law and is an expert on federal tax law.