In this work, I examine the impact of state-level regulation of Refund Anticipation Loans (RALs) on the increase in the use of Refund Anticipation Checks (RACs) and on taxpayer outcomes. Both RALs and RACs are products offered by tax-preparers that provide taxpayers with an earlier refund (in the case of a RAL) or a temporary bank account from which tax preparation fees can be deducted (in the case of a RAC). Each product is costly compared with the value of the refund, and they are often marketed to low-income taxpayers who may be liquidity constrained or unbanked. States have responded to the potentially predatory nature of RALs through regulation, leading to a switch to RACs. Using zip-code-level tax data, I examine the effects of various state-level policies on RAL activity and the transition of tax-preparers to RACs. I then specifically analyze New Jersey's interest rate cap on RALs, a regulation that was accompanied by greater enforcement of existing tax-preparer regulations. Employing an empirical strategy that uses variation in taxpayer location, which should be uninfluenced by tax preparers' decisions to provide these products and a state's decision to regulate them, I find increases in RAL and RAC use for taxpayers living near New Jersey's border with another state. Furthermore, I find that these same border taxpayers reported more social program use and more persons per household - a finding that is in line with the results of similar research into the effects of short-term borrowing on family finances.
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Tax Preparers, Refund Anticipation Products, and EITC Noncompliance
December 2017
Working Paper Number:
carra-2017-10
This work examines whether the availability of tax refund anticipation products (either in the form of a loan or a temporary bank account) is associated with higher non-compliance rates for the Earned Income Tax Credit (EITC). Refund anticipation products are offered by tax preparers as a way for taxpayers to receive a refund faster or to have the tax preparation fee paid from the refund (or both). These products are, on average, costly for taxpayers compared with the average value of a refund, and they are often marketed to low-income taxpayers who may be liquidity constrained or unbanked. Both tax preparers and taxpayers have perverse incentives to use these products, and the temptation of a large refund (for the taxpayer) and added fees and interest (for the tax preparer) may induce erroneous claiming of credits. The paper examines the association between refund anticipation product use and the overpayment of EITC using tax records and survey data linked at the individual level. For taxpayers in the Current Population Survey Annual and Social Economic Supplement, EITC eligibility is estimated based on household characteristics and combined survey and administrative income information; the data include EITC credit receipt, the use of paid tax preparation or online filing, and the receipt of a refund anticipation product. Both the incorrect payment of EITC and the value of EITC overpayment are associated with preparer use, and to a lesser extent with the use of online filing, when compared with paper filing. Incorrect payment is exacerbated for preparer and online filing when a refund anticipation product is purchased. Finally, an exogenous price shock to the tax preparation industry occurred in 2010. This allows for separately identifying a 'preparer effect' on EITC noncompliance. The rate of incorrect payment and the dollar value of overpayment increased in the tax year of the shock for those using a preparer and buying a product.
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The EITC over the business cycle: Who benefits?
December 2014
Working Paper Number:
carra-2014-15
In this paper, I examine the impact of the Great Recession on Earned Income Tax Credit (EITC) eligibility. Because the EITC is structurally tied to earnings, the direction of this impact is not immediately obvious. Families who experience complete job loss for an entire tax year lose eligibility, while those experiencing underemployment (part-year employment, a reduction in hours, or spousal unemployment in married households) may become eligible. Determining the direction and magnitude of the impact is important for a number of reasons. The EITC has become the largest cash-transfer program in the U.S., and many low-earning families rely on it as a means of support in tough times. The program has largely been viewed as a replacement for welfare, enticing former welfare recipients into the labor force. However, the effectiveness of the EITC during a period of very high unemployment has not been assessed. To answer these questions, I first use the Current Population Survey (CPS) matched to Internal Revenue Service data from tax years 2005 to 2010 to assess patterns of employment and eligibility over the Great Recession for different labor-force groups. Results indicate that overall, EITC eligibility increased over the recession, but only among groups that were cushioned from total household earnings loss by marriage. I also use the 2006 CPS matched to tax data from 2005 through 2011 to examine changes in eligibility experienced by individuals over time. In assessing three competing causes of eligibility loss, I find that less-educated, unmarried women experienced a greater hazard of eligibility loss due a yearlong lack of earnings compared with other labor-market groups. I discuss the implications of these findings on the view of the EITC as a safety-net program.
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Measuring the Effects of the Tipped Minimum Wage Using W-2 Data
June 2016
Working Paper Number:
carra-2016-03
While an extensive literature exists on the effects of federal and state minimum wages, the minimum wage received by tipped workers has received less attention. Researchers have found it difficult to capture the hourly wages of tipped workers and thus assess the economic effects of the tipped minimum wage. In this paper, I present a new measure of hourly wages for tipped servers (wait staff and bartenders) using linked W-2 and survey data. I estimate the effect of tipped minimum wages on the wages and hourly tips of servers, as well as server employment and hours worked. I find that higher mandatory tipped minimum wages increase that portion of wages paid by employers, but decrease tip income by a similar percentage. I also find evidence that employment increases over lower values of the tipped minimum wage and then decreases at higher values. These results are consistent with a monopsony model of server employment. The wide variance of tipped minimum wages compared to non-tipped minimums provide insight into monopsony effects that may not be discernible over a smaller range of minimum wage values.
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Spillovers From Costly Credit
March 2013
Working Paper Number:
CES-13-11
Recent research on the effects of credit access among low- and moderate-income households finds that high-cost payday loans exacerbate, rather than alleviate, financial distress for a subset of borrowers (Melzer 2011; Skiba and Tobacman 2011). In this study I find that others, outside the borrowing household, bear a portion of these costs too: households with payday loan access are 20% more likely to use food assistance benefits and 10% less likely to make child support payments required of non-resident parents. These findings suggest that as borrowers accommodate interest and principal payments on payday loan debt, they prioritize loan payments over other liabilities like child support payments and they turn to transfer programs like food stamps to supplement the household's resources. To establish this finding, the analysis uses a measure of payday loan access that is robust to the concern that lender location decisions and state policies governing payday lending are endogenous relative to household financial condition. The analysis also confirms that the effect is absent in the mid-1990s, prior to the spread of payday lending, and that the effect grows over time, in parallel with the growth of payday lending.
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The EITC and Intergenerational Mobility
November 2020
Working Paper Number:
CES-20-35
We study how the largest federal tax-based policy intended to promote work and increase incomes among the poor'the Earned Income Tax Credit (EITC)'affects the socioeconomic standing of children who grew up in households affected by the policy. Using the universe of tax filer records for children linked to their parents, matched with demographic and household information from the decennial Census and American Community Survey data, we exploit exogenous differences by children's ages in the births and 'aging out' of siblings to assess the effect of EITC generosity on child outcomes. We focus on assessing mobility in the child income distribution, conditional on the parents' position in the parental income distribution. Our findings suggest significant and mostly positive effects of more generous EITC refunds on the next generation that vary substantially depending on the child's household type (single-mother or married family) and by the child's gender. All children except White children from single-mother households experience increases in cohort-specific income rank, own family income, and the probability of working at ages 25'26 in response to greater EITC generosity. Children from married households show a considerably stronger response on these measures than do children from single-mother households. Because of the concentration of family types within race groups, the more positive response among children from married households suggests the EITC might lead to higher within-generation racial income inequality. Finally, we examine how the impact of EITC generosity varies by the age at which children are exposed to higher benefits. These results suggest that children who first receive the more generous two-child treatment at later ages have a stronger positive response in terms of rank and family income than children exposed at younger ages.
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CTC and ACTC Participation Results and IRS-Census Match Methodology, Tax Year 2020
December 2024
Working Paper Number:
CES-24-76
The Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC) offer assistance to help ease the financial burden of families with children. This paper provides taxpayer and dollar participation estimates for the CTC and ACTC covering tax year 2020. The estimates derive from an approach that relies on linking the 2021 Current Population Survey Annual Social and Economic Supplement (CPS ASEC) to IRS administrative data. This approach, called the Exact Match, uses survey data to identify CTC/ACTC eligible taxpayers and IRS administrative data to indicate which eligible taxpayers claimed and received the credit. Overall in tax year 2020, eligible taxpayers participated in the CTC and ACTC program at a rate of 93 percent while dollar participation was 91 percent.
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EITC Participation Results and IRS-Census Match Methodology, Tax Year 2021
December 2024
Working Paper Number:
CES-24-75
The Earned Income Tax Credit (EITC), enacted in 1975, offers a refundable tax credit to low income working families. This paper provides taxpayer and dollar participation estimates for the EITC covering tax year 2021. The estimates derive from an approach that relies on linking the 2022 Current Population Survey Annual Social and Economic Supplement (CPS ASEC) to IRS administrative data. This approach, called the Exact Match, uses survey data to identify EITC eligible taxpayers and IRS administrative data to indicate which eligible taxpayers claimed and received the credit. Overall in tax year 2021 eligible taxpayers participated in the EITC program at a rate of 78 percent while dollar participation was 81 percent.
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Changes in EITC Eligibility and Participation, 2005'2009
July 2014
Working Paper Number:
carra-2014-04
The rate of participation in the Earned Income Tax Credit (EITC) has been widely studied, but changes over time in eligibility for the credit have received less attention. One question of importance to policy-makers is whether (or by how much) eligibility might increase during economic downturns. The EITC is fundamentally tied to work. During periods of high unemployment, eligibility may decrease due to a lower number of workers - especially low-skilled workers - filing for a given tax year. On the other hand, family structure and underemployment may lead to increases in eligibility. For example, earners may become eligible when a two-earner family loses one job or when an earner works part of the year or fewer hours. Using IRS tax data linked with the Current Population Survey Annual Social and Economic Supplement (CPS ASEC), I examine changes in EITC eligibility and take-up between tax years 2005 and 2009, during which time the Great Recession began and ended. Employing fixed-effects models, I assess patterns of eligibility among demographic groups based on characteristics that also predict labor market outcomes. Results indicate that, in a period when overall EITC eligibility rates increased, the state unemployment rate had a significant positive effect on eligibility and a significant negative effect on take-up. Meanwhile, although joint filers, those with more children, and men experienced increasing rates of eligibility, those with less education experienced decreasing rates. Results point to the possibility that labor market groups who experienced the highest rates of unemployment in the recession may have become ineligible due to full-year job loss.
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More than Chance: The Local Labor Market Effects of Tribal Gaming
April 2023
Working Paper Number:
CES-23-22
Casino-style gaming is an important economic development strategy for many American Indian tribes throughout the United States. Using confidential Census microdata and a database
of tribal government-owned casinos, I examine the local labor market effects of tribal gaming on different markets, over different time horizons, and for different subgroups. I find that tribal gaming is responsible for sustained improvements in employment and wages on reservations and that American Indians benefit the most. I also find that tribal gaming increases the average rental price of housing but by an amount smaller than the average wage increase, suggesting net local benefits.
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Labor Market Effects of the Affordable Care Act: Evidence from a Tax Notch
July 2017
Working Paper Number:
carra-2017-07
States that declined to raise their Medicaid income eligibility cutoffs to 138 percent of the federal poverty level (FPL) under the Affordable Care Act (ACA) created a "coverage gap'' between their existing, often much lower Medicaid eligibility cutoffs and the FPL, the lowest level of income at which the ACA provides refundable, advanceable "premium tax credits'' to subsidize the purchase of private insurance. Lacking access to any form of subsidized health insurance, residents of those states with income in that range face a strong incentive, in the form of a large, discrete increase in post-tax income (i.e. an upward notch) at the FPL, to increase their earnings and obtain the premium tax credit. We investigate the extent to which they respond to that incentive. Using the universe of tax returns, we document excess mass, or bunching, in the income distribution surrounding this notch. Consistent with Saez (2010), we find that bunching occurs only among filers with self-employment income. Specifically, filers without children and married filers with three or fewer children exhibit significant bunching. Analysis of tax data linked to labor supply measures from the American Community Survey, however, suggests that this bunching likely reflects a change in reported income rather than a change in true labor supply. We find no evidence that wage and salary workers adjust their labor supply in response to increased availability of directly purchased health insurance.
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