Association for Public Policy Analysis & Management

The Earned Income Tax Credit (EITC) is the federal government's largest cash-assistance program for low-income working families. The EITC is often the biggest lump sum amount working families with low-incomes receive throughout the year. In one recent study in Boston of EITC recipients, refunds at tax time represented 20 percent of their annual earned income, and also found that EITC recipients often treat their tax-time payment as forced savings. Currently, when low-income working families run into unexpected expenses that they cannot afford, they often turn to high-interest payday loans or credit cards. The current EITC is a refundable income tax credit and when claimed by eligible taxpayers, it is issued as part of a tax refund once a year. The status quo of the policy only allows taxpayers to access this benefit once a year when they file their taxes.

The “Rainy Day EITC” proposed policy was developed by the Corporation for Enterprise Development (CFED), and offers EITC recipients the option to defer 20 percent of their refundable credit for six months in return for a savings bonus of 50 percent of their saved amount. For example, if a taxpayer was supposed to receive $2000 in a refundable EITC, they could defer $400 for six months and then receive a total of $600 at the six-month mark ($400 set-aside plus $200 bonus).

This analysis is an ex ante cost-benefit analysis of the Rainy Day EITC policy proposal. While there is a wealth of literature on the EITC, including many economic analyses, there are almost no published cost-benefit analyses related to the EITC. This analytical framework could contribute to the evidence base for the EITC policy and is a helpful tool for providing a better understanding of the efficiency of this proposed policy. I have chosen to examine costs and benefits for the policy for a 10 year time frame. The results of my analysis reveal that in the base case, the policy is estimated to produce net benefits of $9.9 billion. Under the worst case scenario, the policy also results in net benefits of $7.2 billion, while in the best case scenario, net benefits are estimated at $18.5 billion, demonstrating that, if adopted, this policy would be efficient.