Rethinking the EITC: Lump Sum vs Periodic Payments
Many families can receive an amount equal upwards to 43% of their annual income in a tax refund. Due to this, within a few months of receiving the credit many families have spent it. However, they continue to have income constraints for the remainder of the year. These constraints can cause families to utilize short-term, high cost credit – payday and auto title loans – or even forego paying bills which can result in expensive late and reconnection fees.Problem
The EITC is received only by those that work and even if you are working you receive this tax credit 3 to 6 months after you file your taxes.
Recognizing these limitations of the EITC as a lump-sum payment, CEP proposes a periodic payment option to disburse a portion of the EITC during the year it is earned. By having a portion of the federal EITC paid out in four installments in the year it is earned rather than as a lump sum claimed in the subsequent year when a tax return is filed, CEP believes that recipients will be able to ease liquidity constraints and allow families to save for larger purchases and investments.
CEP is currently testing this hypothesis in Chicago through its Chicago Periodic EITC Payment Pilot. This pilot is a research collaboration with the City of Chicago and the University of Illinois at Urbana Champaign.
Center for Economic Progress – Rethinking the EITC