Association for Public Policy Analysis & Management

Background: Offering up to $6,318 in 2018, the federal Earned Income Tax Credit (EITC) is one of the most effective cash assistance programs for lower-income working families. While EITC benefits can be generous relative to income, it is also estimated that up to a quarter of all EITC claims are erroneous or fraudulent (Internal Revenue Service, 2018). Addressing the issues of tax errors and fraud, a new law—the Protecting Americans from Tax Hikes (PATH) Act of 2015—now requires the IRS to spend additional time reviewing and processing early tax returns that claim the EITC or the Additional Child Tax Credit (ACTC). Beginning in 2017, tax filers claiming the EITC or ACTC early in the tax season do not get their tax refunds issued until February 15^th and therefore may experience multiple-week delays in receiving their refunds. This research (i) investigates how delayed tax refunds affected low- and moderate-income (LMI) households’ accumulation of unsecured debt and their ability to cover basic needs; and (ii) explores the extent to which LMI households adjusted their tax-filing behaviors one year after the introduction of the new rules.

Data and Method: This paper leverages a unique dataset combining administrative income and tax records with survey data on LMI tax filers between 2017 and 2018. These data are very well-suited to explore the consequences of tax refund delays on the financial well-being of LMI recipients because administrative records include precise measures of incomes, EITC and ACTC amounts, and the dates of tax-filing. The survey data—collected immediately after tax filing and six months later—contain information on sociodemographic characteristics and key study outcomes, which includes self-reported incidence of hardships and unsecured debt.

To examine how PATH Act rules affected the incidence of hardships and debt levels among LMI tax filers, we use data for 2017 and conduct a regression discontinuity analysis comparing the changes in outcomes for EITC/ACTC recipients who filed taxes very early in the tax season and those who completed taxes immediately after February 15^th. Furthermore, limiting the sample to LMI households that appeared in both 2017 and 2018, we compare the dates of tax-filing to explore the extent to which these households have adjusted their tax-filing behaviors one year after the new policy went into effect.

Preliminary Findings: In 2017, households receiving EITCs tended to file their taxes earlier: 38 percent of EITC recipients and 25 percent of non-EITC recipients filed their taxes before February 8^th. Among EITC recipients (N=1,443), preliminary findings show that the changes in debt incidence remained largely similar over time between the early and late filers, although early filers showed increases in the amount of credit card debt, student loans, loans from friends/family, and outstanding bills during the six-month period, relative to later filers. Findings for the changes in hardships are mixed.

Significance: Given the greater risks of financial volatility among EITC recipients, this research provides timely evidence on the potential repercussions of recent changes in tax laws on financial well-being of lower-income households.