Extending the EITC to Noncustodial Parents: Potential Impacts and Design Considerations. V. Estimated Impact of Different NCP EITCs

05/23/2009

Holding the eligible age range constant, the S. 1626-based NCP EITC policy (which is equal to twice an expanded childless EITC) would cost the least, reach the smallest number of noncustodial parents, and yield the smallest average increase in EITC benefits. If all noncustodial parents age 18 or older who paid their full child support were eligible, then an estimated 162,000 noncustodial parents would qualify for an average $541 increase in EITC benefits for a total $87 million in additional benefits (table 4).[16] As illustrated in figure 1, the New York– and D.C.-based scenarios extend NCP EITC eligibility higher up into the earnings range than the S. 1626-based policy, increasing the number of eligible noncustodial parents to 521,000 under the New York–based scenario (which sets the NCP EITC equal to two-thirds the child-based EITC for one qualifying child) and 645,000 under the D.C.-based scenario (which provides the same benefit level as the child-based EITC). Eligible noncustodial parents would qualify for an average $894 increase in benefits under the New York–based scenario and $1,732 increase in benefits under the D.C.-based scenario. The total estimated costs of the New York– and D.C.-based scenarios are $466 million and $1.1 billion, respectively.

Table 4.
Tax Units Eligible for the NCP EITC, Under Three Alternative Scenarios, by Eligible Age Range (All results are shown in 2004 dollars)
NCP EITC Scenario Tax Units Eligible for NCP EITC (thousands) Average After-Tax Income (Before EITC)1 Average Annual Child Support Paid Average EITC Average Percent Increase in Income after Child Support, Taxes, & EITC Estimated Cost (millions)
Under Current Rules Under Modeled Scenario Average Increase
Twice the Expanded Childless EITC (based on S.1626) 18+  162 11,854 2,821 44 585 541 6% 87
18-30 36 11,739 2,488 21 646 625 7% 23
25-642 136 11,990 2,991 53 566 513 6% 70
2/3 EITC for Single Filer/One Child (based on NY policy) 18+2 521 18,773 3,807 14 908 894 6% 466
18-30 115 17,712 3,046 7 979 972 7% 112
25-64 485 19,161 3,919 15 871 856 6% 415
Full Qualifying Child EITC (based on DC policy) 18+ 645 20,354 4,080 94 1,826 1,732 11% 1,117
18-302 131 18,723 3,310 101 1,985 1,884 12% 246
25-64 604 20,675 4,194 96 1,792 1,696 10% 1,025
Source: TRIM3 Microsimulation Model Using Data from the 2005 ASEC. Taxes and EITC eligibility are estimated on 2004 income using 2008 rules deflated to 2004 dollars.
1 After-tax income is equal to cash income, less the employee share of payroll taxes, less federal income
  taxes (excluding the EITC).
2 Indicates the actual eligible age range for the policy on which this scenario is based.

Imposing an age limit would reduce the eligibility and costs of an NCP EITC, especially if it is limited to noncustodial parents between the ages of 18 and 30. Restricting the D.C.-based scenario, for example, to those between 18 and 30 (rather than 18 and older) would reduce the number of noncustodial parents eligible for the credit from 645,000 to 131,000 and would reduce the cost from $1.1 billion to $246 million. This is because most noncustodial parents are over 30 years old and an even higher percentage of noncustodial parents who pay their full child support are over 30. Restricting eligibility to those age 25 to 64 would also reduce eligibility and costs, but by a relatively modest amount (i.e., around 10 to 20 percent).

The NCP EITC policies examined here would increase the annual incomes of eligible noncustodial parents by between $500 and $1,900 on average, depending on the policy and eligible age range. This represents an increase of between 6 and 12 percent in average income after taxes and payment of child support. The highest dollar and percentage increases in income occur under the D.C.-based scenario. The New York–based scenario increases the average dollar amount of income by more than the S. 1626-based scenario, but both have similar effects on the percentage of income. This occurs because the New York–based scenario has a larger eligible income range than the S. 1626-based scenario.

Table 5 shows the distribution of eligible noncustodial parents and NCP EITC benefits by earnings level. Nearly all the noncustodial parents eligible for the S. 1626-based NCP EITC have earnings below $20,000, and most (79 percent) have earnings between $10,000 and $19,999.[17] Because eligibility under the New York– and D.C.-based scenarios extends further up the income range, over half of noncustodial parents eligible under these scenarios have earnings above $20,000. Virtually all of eligible benefits accrue to noncustodial parents with earnings less than $20,000 under the S. 1626-based policy, compared with 62 percent and 50 percent, respectively, under the New York– and D.C.-based scenarios.

Table 5:
Distribution of NCP EITC Eligibility and Benefits Under Three Scenarios
(Assuming Eligibility Extends to Noncustodial Parents Aged 18 and Above)
  Noncustodial Parents (thousands) Benefits (millions of 2004 dollars)
NCP EITC Scenario (Age 18+ Eligible) Twice Expanded Childless EITC ("S.1626") 2/3 EITC Single Filer/One Child       ("NY") Full Qualifying Child EITC ("DC") Twice Expanded Childless EITC ("S.1626") 2/3 EITC Single Filer/One Child       ("NY") Full Qualifying Child EITC ("DC")
Total 162 521 645 $87 $466 $1,117
Earnings Level1 $1 - $9,999 19% 6% 5% 21% 8% 6%
$10,000 - $19,999 79% 31% 26% 79% 54% 44%
$20,000 - $29,999 2% 56% 51% 0% 37% 45%
$30,000 - $39,999 0% 6% 18% 0% 1% 5%
Source: TRIM3 Microsimulation Model Using Data from the 2005 ASEC. EITC eligibility is estimated on 2004 income using 2008 rules deflated to 2004 dollars.
1 Earnings include earnings of a spouse, if present.
2 The income to poverty is calculated under the official poverty definition and includes the income of family members with whom the noncustodial parent resides.

The numbers presented here are estimates of eligibility. The number of noncustodial parents claiming the NCP EITC could be substantially smaller. Our estimates do not capture all nuances regarding eligibility,[18] and they do not capture the additional work and child support payments that might be generated in response to the incentives produced by the credit. Finally, the estimates assume full compliance with tax rules. IRS compliance studies show that a common source of EITC error involves claiming children who fail to meet residency requirements.[19] Under an NCP EITC, noncustodial parents who inappropriately claim the child-based EITC on behalf of children living elsewhere might continue to do so (so there would be no increase in EITC costs for these noncustodial parents) or they might switch from the child-based EITC to the NCP EITC (which could reduce EITC costs if the NCP EITC is smaller than the child-based EITC).

View full report

Preview
Download

"report.pdf" (pdf, 143.26Kb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®