Pandemic Relief: Are Welfare States Converging?

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Starting this year, I will cover law review articles of interest to PT readers. The goal of my coverage is not to provide a critical review, but rather to make you all aware of thought-provoking research that may serve as an inspiration or enhancement to your own work.

I start with Converging Welfare States, a 2018 keynote address by Prof. Susannah Camic Tahk for the “Always with Us? Taxes, Poverty and Social Policy” symposium at Washington and Lee University, published in the Washington and Lee Journal of Civil Rights and Social Justice (available here.)   She looks at the trajectories of direct-spending welfare programs and tax antipoverty programs, and asks “To what extent can we expect tax programs become more like direct-spending programs, or ‘welfare’ over time?”

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As tax practitioners, we are typically more familiar with tax antipoverty programs, like the earned income credit (“EITC”) and the child tax credit (“CTC”), and less familiar with direct-spending welfare programs, like Temporary Assistance to Needy Families (“TANF”), the Supplemental Nutrition Assistance Program (“SNAP”), and the now repealed Aid to Families with Dependent Children (“AFDC”). In the low-income taxpayer world, our clients can benefit from both types of programs.

In her address, Prof. Tahk asks, “Will the trajectories of the tax antipoverty programs and the direct-spending programs converge?” In light of recently proposed Covid-relief legislation, tax antipoverty programs may start to look more like direct-spending welfare while retaining the hallmarks and benefits of living within the tax code… at least, for now.

The House proposed bills last week included a provision (here at page 22) to make the child tax credit refundable with the option of being paid in advance on a monthly basis for 12 months (but there is already buzz around the idea of making it permanent). The child tax credit changes will purportedly have the effect of decreasing the number of children in poverty by more than 40%.

There is another provision that expands the EITC (here at page 45), with a key aspect that it makes it more generous to childless taxpayers. PT has covered some general EITC issues here and here.

In her address, Prof. Tahk asserts that differences in public opinion, legal framework and administration make tax antipoverty programs more popular, effective and sustainable than direct-spending welfare programs. And she asks if that popularity, effectiveness and sustainability is threatened when tax programs begin to look more like direct-spending welfare?

People may be supportive of programs in which they are more likely to receive the benefit themselves. The House proposal doesn’t alter the TCJA change which made the Child Tax Credit available to those with higher incomes, so joint filers with adjusted gross incomes up to $400,000 would still be entitled to a $2,000 credit. It does, however, impose lower limits on the proposed additional amount of $1,000 to $1,600 per child, i.e. joint filers with adjusted gross incomes of $150,000 begin to be phased out of that portion. Even with a lower limit for the additional amount, a lot of taxpayers will still be eligible.

Prof. Tahk suggests that, “If tax antipoverty programs are popular because they are widely available, more growth to these programs may in fact enhance, rather than diminish, their relative popularity.” 

Many tax antipoverty programs are framed as tax cuts, which Prof. Tahk thinks may also be why the general public is supportive of them. On the other hand, she cites research by others that suggests people don’t mind paying taxes, are proud to do so, and prefer refundable tax credits to direct-spending programs, even when they are explicitly made aware of the welfare-like nature and purpose of refundable tax credits. So, what does that mean for an advanced monthly payment of a tax credit?

Congress has heavily relied upon the tax system to deliver money to people throughout the pandemic. Procedurally Taxing has covered may of the administrative and procedural concerns this creates. In a PT post on the differences between the EIP and the Recovery Rebate Credit (here), Les begins to contemplate the issues that may arise as, “Congress considers the possibility of using the tax system in additional ways to deliver regular benefits in advance of (or even in the absence of) filing a tax return.“

The disproportionate effect the pandemic has had on low income Americans is hard to deny, which is why relief legislation is being used to expand upon existing tax antipoverty programs. But it begs the question, is the tax code the right place for the government to advance its antipoverty agenda?

Prof. Tahk points out that there are more substantial procedural rights found in the tax code than there are in many traditional poverty means-tested  laws, which have eroded over time. For example a 1996 welfare statute banned federally funded legal-services organizations from “participat[ing] in litigation, lobbying or rulemaking involving an effort to reform a Federal or State welfare system,” which has made it far more challenging for poverty law attorneys to assert and expand rights related to direct-spending welfare.

The Taxpayer Bill of Rights and the statutorily rooted protections akin to due process notice and hearing rights found in the tax law, automatically bestow certain rights on recipients of tax antipoverty programs. Additionally, it is significant to Prof. Tahk that the “tax legal framework continues to develop under circumstances where it affects everyone who interacts with the tax code, business and nonbusiness, rich and poor,” because taxpayers with resources can hire attorneys who can defend, assert and expand tax-based rights.

Prof. Tahk is careful to point out that some tax antipoverty provisions are treated differently than other sections of the code, such as the EITC ban under section 32(k) (which PT has covered here and here) and delayed refunds for EITC and CTC recipients. If the trend continues, she postulates, even tax antipoverty law could become its own area of law, but it would still be different from the law that governs direct-spending welfare programs.

Legislated exceptions have already been created for some pandemic-relief provisions, but so far, in ways that benefit taxpayers. Take, for example, carve outs related to Payroll Protection Program loans- forgiven loans are not included as income and expenses paid for with forgiven loans can be deducted. This treatment is contrary to well-established principles in the code under I.R.C. §§ 61(a)(11) and 265.  The provision that prevented EIPs from being offset, except for past due child support, is another example, and could have implications for the treatment of tax antipoverty payments going forward.

It has yet to be seen whether the IRS can or will collect on erroneous Economic Impact Payments, but Caleb has some compelling analysis about it here. Unlike the EIP, the House proposal includes safeguards that protect low-income taxpayers by limiting the amount they are required to repay if advanced CTC payments are erroneously received.

We’ve seen that the IRS is relatively well-suited to deliver cash to people quickly, and it also has data at its disposal (including cross-agency date from the SSA and VA) which can be used to determine eligibility. It’s not perfect, of course, but nothing is. Prof. Tahk also points that there are ways in which the IRS’s infrastructure can be used to reduce problems with noncompliance or improper payments, referencing research and work done by Nina and others in the EITC realm.

If you are interested in more of Prof. Tahk’s research and analysis in the area, I encourage you to read her keynote address and check out her other work.

About Samantha Galvin

Samantha Galvin is an Associate Professor of the Practice of Taxation and the Director of the Low Income Taxpayer Clinic (LITC) at the University of Denver. Professor Galvin has been teaching full-time at the University of Denver since October of 2013 and teaches courses in tax controversy representation, individual income tax, and tax research and writing. In the LITC, she teaches, supervises and assists students representing low income taxpayers with controversy and collection issues.

Comments

  1. Larry Hess CPA | Albuquerque NM says

    A painful consequence of tax anti-poverty programs is that IRS audits and fraud detection initiatives have become focused disproportionately on recipients of such benefits who are particularly unable to afford representation in the delays receiving their benefits caused by IRS actions.

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