Hope You Aren't Counting on Getting a Tax Refund This Winter

With the holidays behind them, millions of Americans are putting a new priority on the calendar: getting caught up on the heating bill. Since most states have laws prohibiting utilities from disconnecting the gas during the winter, households struggling to juggle their expenses sometimes let this one lapse. When the new year arrives, so does help, in the form of the Earned Income Tax Credit.

Families rely on the Earned Income Tax Credit (EITC) for a vital infusion of cash after the holiday season. More than 25 million low- and moderate-income tax filers claimed the EITC last year—a total of 18 percent of all tax returns. In 2018, these tax filers saw an average return of $2,488—which helps to explain why households claiming the EITC (or the refundable Child Tax Credit) are among the earliest households to file their taxes every year.

This year may be different, thanks to the ongoing federal government shutdown. While the Trump administration has pledged that the Internal Revenue Service will still issue tax refunds, recent changes to the tax code will make that promise difficult to keep, especially with regard to these critical refunds. As the shutdown stretches on, people who depend on the EITC for relief may face serious hardship.

“Although the federal government has indicated they want to send out refunds on time, it’s questionable to me whether that’s a realistic goal,” says Elaine Maag, a senior research associate in the Urban–Brookings Tax Policy Center at the Urban Institute.

Changes to the tax code passed as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015 require the IRS to delay issuing tax refunds for filers who claim either the EITC or the Additional Child Tax Credit (ACTC). This delay enables the IRS to verify wage data for families filing EITC or ACTC refunds. Maag says that this delay represents a burden for low-income families with children, since the income test falls on them alone, forcing them to stretch their budgets.

With the federal government on ice, this income verification process could take much longer. The IRS has a few weeks to verify wage data provided by the Social Security Administration (which is not subject to the shutdown); the agency can begin issuing EITC or CTC refunds on February 15. But if there are no staff in place to process these wage data, then the IRS must either delay these refunds or issue them without the verification required by the PATH Act.

The IRS declined to answer whether appropriate staff will be in place to verify income data for these refunds beginning in late January. The Treasury Department announced on Tuesday that more than half of IRS employees will return to work later this month despite the shutdown. But the department also signaled that the agency wouldn’t be performing some key functions, such as audits. Fewer than 10,000 IRS workers—roughly 12 percent of the total workforce—have been left to staff the giant agency since the shutdown began in December. The National Treasury Employees Union has sued the Trump administration for forcing tens of thousands of federal staffers to work without pay.

“There are very few people working at the IRS right now,” Maag says. “Not only that, but they require a fairly substantial temporary workforce to get through the filing season. That workforce has not been hired yet.”

Last year, the IRS issued some $300 billion in tax refunds. This year, that figure stands to be even larger: Another change in the tax code means that more families will be claiming the Child Tax Credit (CTC) than in the past. Previously, the credit applied to families with children ages 16 or below; this year, families with children 17 and up as well as certain households with adult dependents will also qualify. That’s a new complication, on top of what promises to be an already-challenging year for tax preparers adjusting to tax reforms passed by the GOP-controlled Congress.

“The tax law is different, which makes filing more difficult, typically,” Maag says.

Households who receive refunds through the EITC or CTC put this money right to work. Research by Maag and others shows that in 2015, more than half of EITC claims were filed before February 15. A survey of early-filing taxpayers with children who claimed the EITC or CTC asked how they intended to spend their refunds; the most common response was to pay overdue bills.     

For some low-income households, refunds can amount to more than an entire month’s income. Early-to-file families with children who claim the EITC have an average of $400 in liquid cash and some $2,000 in credit-card debt when they file, according to Maag’s work.

So even a delay of just a few weeks has potentially serious implications. A recent study by the Federal Reserve shows that EITC recipients spend about 15 cents of every dollar from their refunds at retail and grocery stores or restaurants. There’s a spike in American spending that follows tax refunds. When that means buying a new Instant Pot, eh, a delay’s a delay. But when it involves spending on food or utilities, a delay means an increase in food insecurity or other forms of hardship.

“Whereas durable purchases such as electronics can often be delayed without significantly reducing households’ well-being, that is generally not the case for nondurable necessities purchased at grocery stores,” the Fed study finds. “As such, our results further suggest that EITC households’ well-being may have been negatively affected by the disruption to income resulting from the refund delay.”

According to Bloomberg Opinion columnist Noah Smith, the ultimate goal of the EITC is to “simply to lift poor people out of poverty as quickly and effectively as possible.” He cites studies that show the EITC boosts employment and wages for single mothers and improves health outcomes for their children. It’s also a program that largely pays for itself. Democrats in Congress (including possible 2020 presidential candidate Senator Sherrod Brown) are now proposing to double the maximum EITC refund for households with children—an idea that Smith calls an “excellent way to expand the social safety net.”

At the moment, however, that net faces a severe test. Funding for  Section 8 housing assistance and the Supplemental Nutrition Assistance Program will run out next month, and federal contracts for landlords who provide housing for seniors, disabled Americans, and extremely low income housing are already expiring, putting the housing status of these vulnerable households at risk. If EITC and CTC refunds are stalled by the shutdown, it will add to the uncertainty that low-income families already face.

“We definitely know [the IRS] wants to do it. And they plan to do it,” Maag says. “But how is completely unclear to me.”