Six Tax Reforms to Increase Economic Security for All
Ivan and Sandra Silva of South San Francisco paid off debts and bought government bonds with a $6,000 federal tax refund they received last year thanks to a tax credit for low- and moderate-wage workers. The Silvas, who have four grown children, serve to illustrate how progressive tax code reforms can help all people, including low-income people of color, save and build the assets that are essential for upward mobility.
“We saved because you never know what can happen,” said Ivan Silva, an airline baggage handler who immigrated to the United States from Nicaragua. His wife is a home caregiver and an immigrant from El Salvador. Together they earn less than $50,000 a year. “Our savings is not for ourselves but for whichever one of our children needs anything,” he said.
A new national initiative is calling for a more inclusive and equitable tax code — one that provides fair benefits for all. Led by a network of grantmakers, the Tax Policy Project is pulling together asset-building and equity advocates, researchers and tax experts, and organizations with deep roots in communities of color, including PolicyLink, to push for changes in a tax code that has become a driving force behind the nation’s soaring inequality.
Last year, more than half of the nearly $1 trillion that the federal government spent on tax benefits for households went to the wealthiest fifth of the country. The benefits — written into the tax code as deductions, exclusions, credits, and preferential rates — subsidize higher-income households to build wealth, while offering few opportunities for lower-income households, disproportionately of color. build the long-term financial security of all American families and contribute to economic stability and growth.
Most of these benefits are designed to advance worthy goals such as buying a home, encouraging college education, or supporting secure retirement. In other words, these benefits should build the long-term financial security of all American families and contribute to economic stability and growth.
But as structured, many tax benefits are out of reach for the people who need them most. If families do not own homes — and fewer than half of all households of color do — they are cut off from the benefits of home mortgage and property tax deductions. If workers do not have access to an employer-sponsored retirement savings plan — and only 40 percent to 50 percent of employees of color do — they cannot take advantage of tax benefits to encourage retirement savings.
And if low-wage workers lack access to high-quality tax assistance, they often cannot take advantage of the few benefits designed specifically to help them, including the Earned Income Tax Credit (EITC).
That’s what happened to Ivan and Sandra Silva. For years they paid a commercial tax preparer who never told them about the credit. They learned about it only after they turned to the Mission Economic Development Agency (MEDA) in San Francisco, a community-based organization that offers free tax assistance and financial services as part of a comprehensive approach to economic justice and neighborhood economic development in the Mission district and other low-wealth neighborhoods.
Federal policies and investments can create an equitable tax code that helps all taxpayers to invest in themselves, their children, and their communities. Here are six policy changes prioritized by the Tax Policy Project to make taxes work for low-income families:
- Expand tax incentives that are accessible to working families. In 2012, the EITC lifted 6.5 million people out of poverty. But millions of families may lose their benefits if improvements passed by Congress in 2009 expire in 2017. These improvements must be made permanent, and the benefits must be expanded to more people, especially low-income workers who aren’t raising children. Take a look at our infographic below to learn more about federal initiatives to expand the EITC.
- Replace current home mortgage deduction with tax savings for all low-income households. Tax incentives for homeownership cost the federal government almost $200 billion in 2013, but 70 percent of these tax benefits went to the wealthiest 20 percent of households and almost nothing to the bottom 40 percent. The majority of people of color don’t benefit because they don’t own a home or they don’t itemize on their tax returns. Turning the home mortgage deduction into a tax credit would make it more equitable because households could claim it even if they don’t itemize. But this doesn’t address the issue that a mortgage credit still encourages families to take on debt rather than build wealth through homeownership. Several policies targeted to building wealth for low-income households are gaining attention; read about them here. A comparable credit for renters is also needed to make sure those who can’t afford to buy a home aren’t locked out of receiving wealth-building tax benefits.
- Target higher education tax incentives to lower-income families. Higher education offers a critical pathway to prosperity for youth by increasing their earning potential. That’s why tax code provisions help families save and pay for college. These tax benefits — not Pell grants — are the largest form of federal student aid, and they go mostly to higher-income students. One exception is the American Opportunity Tax Credit (AOTC), which is accessible to more low- and moderate-income households. Tax code provisions that disproportionately benefit wealthier households should be streamlined, and the savings used to make the AOTC fully refundable and permanent, in order to reach more youth in need.
- Support children’s savings accounts. Research shows that children with savings in their name are much more likely to succeed, particularly children of color and children from low-income families. One promising approach to supporting child savings is the ASPIRE Act, which has been proposed in prior sessions of Congress with bipartisan support. The Act would seed a savings account for every newborn child, providing an initial deposit and progressively matching contributions. Savings would grow tax free and could be used for post-secondary education, homeownership, or retirement. Cities, counties, and states are already taking the initiative; MEDA, the community-based agency in San Francisco, has partnered with the mayor’s office to provide accounts for every child in the city, and Cuyahoga County, Ohio, has launched universal accounts, as well.
- Make retirement savings available to more workers. Millions of American workers are headed toward poverty in retirement because their employers don’t offer retirement plans and they earn too little to save through Individual Retirement Accounts (IRAs). Automatic IRAs are one solution. The basic idea is to require all employers who don’t offer a retirement plan for their employees to set up an automatic IRA savings plan that would allow people to access tax benefits for retirement savings. Several states, including California, are pursuing similar approaches, and it has been proposed by federal legislators and the Obama administration.
- Provide tax incentives for flexible savings. Families need savings that can be easily accessed to handle financial emergencies — a broken-down car, an unusually high heating bill, or the death of a family member — and prevent a downward financial spiral. These sort of “flexible” savings are particularly important for households of color, who are unlikely to have any resources to address short-term emergencies. The Financial Security Credit Act of 2013 offers lower-income households a refundable tax credit (like the EITC) if they deposit their tax refund into an eligible savings account. If passed, it would help more families weather short-term financial crises and save for longer-term investments.
In addition to these tax reforms, Congress should pass the Voluntary Income Tax Assistance (VITA) Act, which would extend a program that supports organizations like MEDA to provide reliable, timely tax preparation services at no cost to low-income households, enabling millions to claim the benefits to which they are entitled.
To keep abreast of these initiatives and other policy developments, check out the Tax Policy Project website and read about how closing the racial wealth gap will help grow the economy in the previous issue of the America’s Tomorrow newsletter.