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Friday, March 29, 2013

The Earned Income Tax Credit (EITC): An Overview

Christine Scott
Specialist in Social Policy

The Earned Income Tax Credit (EITC or EIC) began in 1975 as a temporary program to return a portion of the Social Security tax paid by lower-income taxpayers, and was made permanent in 1978. In the 1990s, the program became a major component of federal efforts to reduce poverty, and is now the largest anti-poverty cash entitlement program. Childless adults in 2010 (the latest year for which data are available) received an average EITC of $264, families with one child received an average EITC of $2,101, families with two children received an average EITC of $3,354, and families with three or more children received an average EITC of $3,603.

A low-income worker must file an annual income tax return to receive the EITC and meet certain requirements for income and age. A tax filer cannot be a dependent of another tax filer and must be a resident of the United States unless overseas because of military duty. The EITC is based on income and whether the tax filer has a qualifying child.

The EITC interacts with several nonrefundable federal tax credits to the extent lower-income workers can utilize the credits to reduce tax liability before the EITC. Income from the credit is not used to determine eligibility or benefits for means tested programs.

Policy issues for the EITC, which reflect either the structure, impact, or administration of the credit, include the work incentive effects of the credit; the marriage penalty for couples filing joint tax returns; the anti-poverty effectiveness of the credit (primarily a family size issue); and potential abuse (i.e., compliance with credit law and regulations).

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-116) made several changes to the credit, including simplifying the definition of earned income to reflect only compensation included in gross income; basing the phase-out of the credit on adjusted gross income instead of expanded (or modified) gross income; and eliminating the reduction in the EITC for the alternative minimum tax.

The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) created the category for families with three or more children, with a credit rate of 45%, for tax years 2009 and 2010 only. The ARRA also increased the phase-in amount for married couples filing joint tax returns so that it is $5,000 higher than for unmarried taxpayers in tax year 2009, and indexed for later tax years.

The changes to the credit made by EGTRRA and ARRA were scheduled to expire on December 31, 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended the EGTRRA and ARRA provisions for two years (through 2012). The American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240) made permanent the EGTRRA changes and extended the ARRA changes five years (through tax year 2017).

Date of Report: March 20, 2013
Number of Pages: 35
Order Number: RL31768
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Budget “Sequestration” and Selected Program Exemptions and Special Rules

Karen Spar, Coordinator
Specialist in Domestic Social Policy and Division Research Coordinator

“Sequestration” is a process of automatic, largely across-the-board spending reductions under which budgetary resources are permanently canceled to enforce certain budget policy goals. It was first authorized by the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA, Title II of P.L. 99-177, commonly known as the Gramm-Rudman-Hollings Act).

Sequestration is of current interest because it has been triggered as an enforcement tool under the Budget Control Act of 2011 (BCA, P.L. 112-25). Sequestration can also occur under the Statutory Pay-As-You-Go Act of 2010 (Statutory PAYGO, Title I of P.L. 111-139). In either case, certain programs are exempt from sequestration, and special rules govern the effects of sequestration on others. Most of these provisions are found in Sections 255 and 256 of BBEDCA, as amended.

Two provisions were included in the BCA that could result in automatic sequestration:

  • Establishment of discretionary spending limits, or caps, for each of FY2012- FY2021. If Congress appropriates more than allowed under these limits in any given year, sequestration would cancel the excess amount. 
  • Failure of Congress to enact legislation developed by a Joint Select Committee on Deficit Reduction, by January 15, 2012, to reduce the deficit by at least $1.2 trillion. The BCA provided that such failure would trigger a series of automatic spending reductions, including sequestration of mandatory spending in each of FY2013-FY2021, a one-year sequestration of discretionary spending for FY2013, and lower discretionary spending limits for each of FY2014-FY2021. 

In fact, the Joint Committee did not develop the necessary legislation and Congress did not meet the January 15, 2012, deadline. Thus, automatic spending cuts under the BCA were triggered, with the first originally scheduled for January 2, 2013. P.L. 112-240 subsequently delayed this until March 1, 2013, and President Obama signed a sequestration order on that date.

Under the Statutory PAYGO Act, sequestration is part of a budget enforcement mechanism that is intended to prevent enactment of mandatory spending and revenue legislation that would increase the federal deficit. This act requires the Office of Management and Budget (OMB) to track costs and savings associated with enacted legislation and to determine at the end of each congressional session if net total costs exceed net total savings. If so, a sequestration will be triggered.

Under sequestration—triggered either by the BCA or Statutory PAYGO Act—the exemptions and special rules of Sections 255 and 256 of BBEDCA apply. Most exempt programs are mandatory, and include Social Security and Medicaid; refundable tax credits to individuals; and low-income programs such as the Children’s Health Insurance Program, Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families, and Supplemental Security Income. Some discretionary programs also are exempt, notably all programs administered by the Department of Veterans Affairs. Also, subject to notification of Congress by the President, military personnel accounts may either be exempt or reduced by a lower percentage.

Special rules also apply to several, primarily mandatory, programs. For example, under Section 256 of BBEDCA, Medicare may not be sequestered by more than 4%. However, under a BCAtriggered sequester, reduction of Medicare is limited to no more than 2%.

Date of Report: March 22, 2013
Number of Pages: 29
Order Number: R42050
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Thursday, March 28, 2013

Government Assistance for AIG: Summary and Cost

Baird Webel
Specialist in Financial Economics

American International Group (AIG), one of the world’s major insurers, was the largest direct recipient of government financial assistance during the recent financial crisis. At the maximum, the Federal Reserve (Fed) and the Treasury committed approximately $182.3 billion in specific extraordinary assistance for AIG and another $15.9 billion through a more widely available lending facility. The amount actually disbursed to assist AIG reached a maximum of $184.6 billion in April 2009. In return, AIG paid interest and dividends on the funding and the U.S. Treasury ultimately received a 92% ownership share in the company. As of December 14, 2012, the government assistance for AIG ended. All Federal Reserve loans have been repaid and the Treasury has sold all of the common equity that resulted from the assistance.

Going into the financial crisis, the overarching AIG holding company was regulated by the Office of Thrift Supervision (OTS), but most of its U.S. operating subsidiaries were regulated by various states. Because AIG was primarily an insurer, it was largely outside of the normal Federal Reserve facilities that lend to thrifts facing liquidity difficulties and it was also outside of the normal Federal Deposit Insurance Corporation (FDIC) receivership provisions that apply to banking institutions. September 2008 saw a panic in financial markets marked by the failure of large financial institutions, such as Fannie Mae, Freddie Mac, and Lehman Brothers. In addition to suffering from the general market downturn, AIG faced extraordinary losses resulting largely from two sources: (1) the AIG Financial Products subsidiary, which specialized in financial derivatives and was primarily the regulatory responsibility of the OTS; and (2) a securities lending program, which used securities originating in the state-regulated insurance subsidiaries. In the panic conditions prevailing at the time, the Federal Reserve determined that “a disorderly failure of AIG could add to already significant levels of financial market fragility” and stepped in to support the company. Had AIG not been given assistance by the government, bankruptcy seemed a near certainty. The Federal Reserve support was later supplemented and ultimately replaced by assistance from the U.S. Treasury’s Troubled Asset Relief Program (TARP).

The AIG rescue produced unexpected financial returns for the government. The Fed loans were completely repaid and it directly received $18.1 billion in interest, dividends, and capital gains. In addition, another $17.5 billion in capital gains from the Fed assistance accrued to the Treasury. The $67.8 billion in TARP assistance, however, resulted in a negative return to the government, as only $54.4 billion was recouped from asset sales and $0.9 billion was received in dividend payments. If one offsets the negative return to TARP of $12.5 billion with the $35.6 billion in positive returns for the Fed assistance, the entire assistance for AIG showed a positive return of approximately $23.1 billion. It should be noted that these figures are the simple cash returns from the AIG transactions and do not take into account the full economic costs of the assistance. Fully accounting for these costs would result in lower returns to the government, although no agency has performed such a full assessment of the AIG assistance. The latest Congressional Budget Office (CBO) estimate of the budgetary cost of the TARP assistance for AIG, which is a broader economic analysis of the cost, found a loss of $14 billion compared with the $12.5 billion cash loss. CBO does not, however, regularly perform cost estimates on Federal Reserve actions.

Congressional interest in the AIG intervention relates to oversight of the Federal Reserve and TARP, as well as general policy measures to promote financial stability. Specific attention has focused on perceived corporate profligacy, particularly compensation for AIG employees, which was the subject of a hearing in the 113
th Congress and legislation in the 111th Congress.

Date of Report: March 11, 2013
Number of Pages: 21
Order Number: R42953
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Unemployment Insurance: Legislative Issues in the 113th Congress

Julie M. Whittaker
Specialist in Income Security

Katelin P. Isaacs
Analyst in Income Security

The 113th Congress may face a number of issues related to currently available unemployment insurance programs: Unemployment Compensation (UC), temporary Emergency Unemployment Compensation (EUC08), and Extended Benefits (EB). With the national unemployment rate decreasing but still high, the weekly demand for regular and extended unemployment benefits continues at high levels. Congress deliberated multiple times on whether to extend the authorization for several key temporary unemployment insurance provisions in the 112th Congress and may do so again in the 113th Congress. The signing of P.L. 112-240 on January 2, 2013, now means that the EUC08 program expires the week ending on or before January 1, 2014. The 100% federal financing of the EB program expires on December 31, 2013. In addition, the option for states to use three-year EB trigger lookbacks (the period of time considered in determining an active EB program within a state) expires the week ending on or before December 31, 2013.

The 113
th Congress will face these expirations as well as likely unemployment insurance policy issues, including unemployment insurance financing. Among other items, policy discussions may focus on the appropriate length and availability of unemployment benefits.

This report provides a brief overview of the three unemployment insurance programs—UC, EUC08, and EB—that may currently pay benefits to eligible unemployed workers.

This report includes descriptions of the unemployment insurance provisions within H.R. 51 and S. 18.

Date of Report: March 12, 2013
Number of Pages: 19
Order Number: R42936
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Temporary Assistance for Needy Families: Welfare Waivers

Gene Falk
Specialist in Social Policy

The Department of Health and Human Services (HHS) announced that it is willing to waive certain federal work participation standards under the Temporary Assistance for Needy Families (TANF) block grant to permit states to experiment with “alternative and innovative strategies, policies, and procedures that are designed to improve employment outcomes for needy families.” HHS announced this initiative on July 12, 2012.

The major provision that HHS would waive is the numerical performance standards that states must meet or risk being penalized through a reduction in their TANF block grant. TANF statute provides that 50% of all families and 90% of two-parent families included in a participation rate are required to be engaged in work, though few states have ever faced the full standard because this percentage is reduced for certain credits. For all years from FY2002 through FY2006 and in FY2008 and FY2009, the majority of states had an effective (after-credit) TANF work participation standard of 25% or less. In FY2009, 22 states had their 50% all family standards reduced to 0% because of these credits. Additionally, many states have avoided the two-parent standard altogether by assisting that portion of their caseload with state funds not subject to TANF work standards.

To be considered engaged in work under the TANF standard, a family must either be working or in specified welfare-to-work activities for a minimum number of hours per week. Preemployment activities such as job search, rehabilitative activities, and education count for a limited period of time or under limited circumstances. Though these counting rules do not apply directly to individual recipients, they may influence how a state designs its welfare-to-work program. States that allow participation in activities that cannot be counted (e.g., job search or education in excess of their limits) do not receive credit for that participation and potentially risk failing the work standard.

The new waivers would permit states to have welfare-to-work initiatives assessed using different measures than the TANF work participation rate. Thus, states could test alternative welfare-towork approaches by engaging recipients in activities currently not countable without risk of losing block grant funds. States would have to apply for waivers, which must be approved by HHS and the Office of Management and Budget (OMB). States would also be required to monitor performance measures and evaluate the alternative welfare-to-work program. HHS also indicated it might waive some requirements that apply to states for verifying work activities. As of February 27, 2013, no state had requested a waiver.

H.R. 890 as passed by the House on March 13, 2013, would prohibit the Secretary of HHS from issuing any waivers of TANF work participation standards, and would rescind any waivers granted prior to enactment. The bill also included an extension of TANF funding through December 31, 2013.

The legislative authority cited by HHS to grant waivers in public assistance programs dates back to 1962, although the new initiative would allow the first new waivers to test welfare-to-work strategies in more than 15 years. “Waivers” have historically been important in welfare reform, and TANF let states continue their pre-1996 waivers until their expiration. The last such waiver expired in 2007.

Date of Report: March 14, 2013
Number of Pages: 33
Order Number: R42627
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