The state of New York and the District of Columbia are the first jurisdictions to implement an innovative policy—an earned income tax credit (EITC) for low-income noncustodial parents who work and pay their child support in full. A similar tax credit was introduced by Senator Bayh and then-Senator Obama in 2007 (S. 1626). A noncustodial parent (NCP) EITC operates like the child-based EITC, which provides a refundable tax credit to low-income working families with children and encourages work. Under current federal income tax rules, low-income noncustodial parents are ineligible for the EITC benefits available to low-income families with children, even when they support their children through full payment of child support. While the EITC and child support have successfully removed many low-income working families from poverty, the combined effect of taxes and child support payments can impoverish noncustodial parents working at or near the minimum wage. NCP EITC policies work to reduce this disparity and to increase incentives for work and payment of child support.
We examine three policy scenarios for a national NCP EITC, which are based on the NCP credits adopted by New York and Washington, D.C. and proposed in S. 1626. Based on the NCP EITC policies examined here, we estimate that as many as 645,000 noncustodial parents (5 percent of all noncustodial parents) would be eligible for an NCP EITC, depending on the age and income criteria for the credit. On average, these policies would increase the annual incomes of eligible noncustodial parents by between $500 and $1,900—an increase of 6 to 12 percent in income after taxes and payment of child support. Estimated costs for an NCP EITC range from under $100 million to $1.1 billion (in 2004 dollars) depending on the policy option chosen.
We review several key design and implementation issues that should be considered when enacting an NCP EITC. Specifically, we note the following:
- Limiting an NCP EITC to those in the child support enforcement program, as is done in New York and Washington, D.C., would simplify the administration of an NCP EITC, but some people who pay the full amount of their child support order would not be eligible.
- New York and Washington, D.C. limit eligibility to noncustodial parents who pay at least the amount of current support due during the tax year. Requiring that each month’s payment be made on time or that the noncustodial parent have no child support arrears could substantially reduce eligibility. Eligibility could be expanded by providing a partial credit to those paying some, but not all, of the amount due.
- Because many noncustodial parents are eligible for the child-based EITC, policymakers should consider whether these parents should be eligible for both a child-based EITC and an NCP EITC. In New York, noncustodial parents can only receive one credit.
- The interaction of the NCP EITC with federal and state tax intercept programs should be considered. If a noncustodial parent’s tax refund is intercepted to pay child support arrears, as is done in New York and Washington, D.C., then custodial families and the government would benefit, but incentives to work and pay child support would be lower than if the credit were not intercepted.
- There are important steps that the government can take to encourage participation in an NCP EITC. If child support enforcement agencies pre-certify that noncustodial parents are eligible for the credit, then applications can be kept simple (for example, by not requiring Social Security numbers for the children) and noncustodial parents can be notified that they meet the child support criteria for the credit. Neither of these steps was taken in New York or Washington, D.C., but these steps would likely increase participation in an NCP EITC.
An NCP EITC provides an additional tool for encouraging child support payments by low-income noncustodial parents. Modifying and establishing child support orders that reflect the circumstances of low-income noncustodial parents would further reduce the likelihood that low-income noncustodial parents are impoverished as they work and pay child support. Custodial families would also benefit from the increased child support payments produced in response to the incentives generated by an NCP EITC.