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, such as those provided in New York and the District of Columbia, work to reduce this disparity and to increase incentives for work and payment of child support. An NCP EITC thus works side by side with the child-based EITC, so that both low-income noncustodial and low-income custodial parents are encouraged to work and support their children. Custodial families would also benefit from the increased child support payments produced in response to the incentives generated by an NCP EITC.
We examine three options for an NCP EITC, based on credits proposed in S. 1626 and adopted by New York and Washington, D.C., which range from a credit equal to twice an expanded childless EITC to the full child-based EITC. We estimate that as many as 645,000 noncustodial parents would be eligible for an NCP EITC, depending on the policy option selected. 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. The total estimated costs of the NCP EITC policies examined here range from under $100 million to $1.1 billion (2004 dollars), depending on the eligible age range and NCP EITC formula for the policy in question. Not all those eligible would claim the credit, so actual costs would be lower. However, if the incentives generated by the credit cause more noncustodial parents to pay their child support in full, then costs would increase.
We have reviewed several key design and implementation issues that should be considered when enacting an NCP EITC. We summarize these findings here.
- Limiting an NCP EITC to those in the child support enforcement program, as is done in New York and Washington, D.C., can simplify administration, but some people who pay the full amount of their child support order will 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 also be considered. If a noncustodial parent’s tax refund is intercepted to pay child support arrears, then custodial families and the government would benefit, but incentives to work and pay child support would be lower than if the noncustodial parent received the full credit.
- There are important steps that the government can take to encourage participation in an NCP EITC. If child support agencies pre-certify noncustodial parents 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 were taken in New York or Washington, D.C., but they 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. Combining an NCP EITC with employment and training programs for unemployed noncustodial parents, as New York does, would complement an NCP EITC by helping noncustodial parents find work. Modifying child support orders when necessary to ensure that they are realistic would further reduce the likelihood that low-income noncustodial parents will be impoverished as they work and pay child support, and would encourage work and child support payment among other low-income noncustodial parents. All of these policies are likely to benefit custodial families because of the increased child support payments that they produce.