Antipoverty Tax Program Offers Relief

DURHAM, N.C. ? Karen Spain spent several long months before receiving her tax refund this year in a state of suspended panic. The rent was three months late. Her car?s brakes were shot. And she could no longer afford to pay her electricity bill.

So when the refund finally arrived ? a $7,200 cash infusion that was about a third of what she earned all last year as an assistant manager at an auto parts store ? it brought a certain measure of relief, both financial and psychological. That did not last long.

?Did we celebrate?? said Ms. Spain, a 49-year-old mother of two. ?No. We maintain, that?s all we do. We are just trying to keep our heads above water.?

It is tax time, the season when the country?s largest antipoverty program, the earned income tax credit, plows billions of dollars into mailboxes and bank accounts of low-income working Americans like Ms. Spain. It is the most important financial moment of the year for many people in the bottom half of the wage bracket, a time to pay off old bills, make car repairs, buy children clothes and maybe make a big purchase like a refrigerator or a TV.

As incomes among the country?s lowest wage earners continue to stagnate, the credit has played a critical role in smoothing the hard edges of an unforgiving labor market for the country?s most vulnerable workers and helping stem the tide of income inequality that has been rising among Americans in recent decades.

Nearly one in five filers now receive the credit ? about 28 million returns in the 2010 tax year, the most recent year figures are available ? representing the highest percentage since the program began in the 1970s, according to the Brookings Institution.

The effect has been significant. The Center on Budget and Policy Priorities, a research group based in Washington, estimates the credit lifted about six million Americans out of poverty last year.

?We find clear evidence that the E.I.T.C. has significantly reduced poverty rates and income inequality,? said Raj Chetty, an economist at Harvard who has studied the subsidy?s effect across cities. ?The program is pulling up the lower end of the income distribution.?

The credit also seems to have an important psychological side effect: It makes people feel middle class.

?You get this feeling of, ?Hey, I?m like them now,? ? said Wesley Rouse, 27, a property manager in Durham.

But the boost is often temporary. Many people who receive the credit fall back into poverty over the course of the year, caught in the same cycle of low-wage work and reliance on credit that put them there in the first place.

One problem is the form the credit takes. The refund can pay as much as 40 percent of a family?s annual income at once, a windfall that many experts are now arguing should be changed by paying the refund in installments over the year.

?It?s feast or famine,? said Mae Watson Grote, director of the Financial Clinic, a New York-based group that teaches financial planning to low-income New Yorkers. ?It?s very hard to manage when it?s a windfall.?

That cycle has the natural force of a tide at National Pawn, a shop in a working-class area of north Raleigh.

?We?re all cleaned out,? said Sundeep Joshi, the store?s manager, waving his hand toward empty shelves, reflecting a whirlwind of recent purchases. But people will start to bring things back to sell as their budgets get squeezed, he said. By July, the back room is usually packed with pawned items. ?That?s the story every year,? he said.

Kathryn Edin, a professor of public policy at Harvard whose coming book, ?It?s Not Like I?m Poor: How Working Families Make Ends Meet in a Post-Welfare World,? finds that recipients spent the subsidy overwhelmingly on bills and current expenses. Less than 10 percent of the money paid out was saved, she found. ?The E.I.T.C. is one of the best social policies we?ve ever devised, but it does not solve the fundamental problem that you still can?t live on your wages,? she said.

For Ms. Spain, the subsidy was a lifeline. Together with other tax credits, it pushed her family income up to about $27,000, above the federal poverty threshold of $22,800 for a family of four in 2011. (Her husband, an unemployed cook, did not earn much income.)

But the money went fast. Rent ate up a third. Then came brakes and a new bumper for her 1998 Honda Civic. She paid the overdue electricity bill, reactivated her car insurance and bought some new clothes for her two girls, ages 8 and 9.

?You get these large sums, but you have to repair things, and pay back rent, and you owe on all your bills,? Ms. Spain said. ?I?m not at the point where I can put $500 aside and just let it sit there and grow.?

That economic vulnerability has spawned an industry of lenders who hawk short-term loans at exorbitant rates to tide people over until tax time, said Peter Skillern, executive director of Reinvestment Partners, a nonprofit organization in Durham that helps low-income families file their taxes. The practice, known as ?refund anticipation lending,? was effectively banned by federal regulators this month, but low-income filers still face an abundance of rip-off schemes and high tax preparation fees, he said.

?It?s ?What can I get today versus what?s coming tomorrow,? ? said Brenda Dozier, a payroll specialist who said her sister has relied on refund anticipation loans. ?I tell people, ?You made it this far, just hold on.? ?

Ms. Spain said she paid a company $550 to do her taxes last year so she could get them ? and the refund ? back fast, an expenditure she now regrets.

The credit may not permanently change people?s circumstances, but researchers are finding evidence that many who receive it do not do so for very long. One recent study found that 60 percent of those who got the benefit stopped claiming it after two years. That is because people?s finances tend to be fluid, moving them in and out of the program, said John Horowitz, an economist at Ball State University in Indiana, one of the authors of the study, which examined tax records from 1989 to 2006. One in two American families with children received the credit at least once during that period, he said.

Ms. Spain yearns for a time when she will no longer be eligible for the credit because she is earning more money. She remembers wistfully her former job at Nortel that paid $85,000 a year and the feeling of going to a restaurant or a movie without worrying about her budget.

?Someday we?ll wait and file in April,? she said. ?And if we need money before then, we?ll just go to the bank.?