July 22, 2020

A report from Boston Indicators in partnership with the Massachusetts Budget and Policy Center and the Economic Security Project.

Authors

Trevor Mattos and Luc Schuster, Boston Indicators

Phineas Baxandall, Massachusetts Budget and Policy Center

Madeline Neighly, Economic Security Project

Editor

Sandy Kendall, The Boston Foundation

Designer

Kaajal Asher

Tax Modeling

Aidan Davis and colleagues, The Institute on Taxation and Economic Policy

Acknowledgements

The authors are grateful for the thoughtful feedback and substantive contributions from Pedro Morillas of the Economic Security Project and members of the Healthy Families EITC Coalition.

Introduction

“I am now convinced that the simplest approach will prove to be the most effective—the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income.”

– Dr. Martin Luther King, Jr., Where Do We Go from Here: Chaos or Community? (1967)

In rich countries like ours we ought to, at a minimum, be able to guarantee a basic standard of living for all. This simple idea has led to various movements over many decades pushing government to give people money so that everyone has a minimum guaranteed income. In recent years, our state economy was booming and, yet, it was failing to deliver for far too many households. While top earners saw their wages surge, low- and middle-income households, who are disproportionately people of color, saw their incomes increase very little. This lingering economic fragility led to renewed interest in the idea of government making unconditional cash payments—this time usually characterized as a “universal basic income” or “guaranteed income.” Then the COVID crisis hit and millions of households that had been teetering on the brink began falling into deeper economic hardship. In Massachusetts alone, more than one million people filed for unemployment over the course of two short months. This unimaginable job loss further highlighted the need for guaranteed income approaches and pushed federal lawmakers toward a consensus that direct cash payments needed to be part of the short-term recovery effort. Unconditional cash payments have now been sent to a majority of American households, but the total amount of money was small and some households, including many immigrant workers, were excluded from the payments. Additionally, expanded unemployment insurance has helped many families stay afloat, but this support is scheduled to start phasing out at the end of this month and also does not cover many immigrant workers who have lost their jobs. Even if the federal government takes further action, it likely will not address the structural inequality and widespread economic insecurity we had before this recent crisis hit.

That’s where our work comes in. Independent of what the federal government does, we in Massachusetts should start working to build a more balanced, resilient economy for the long term. Short-term response to the COVID-19 pandemic is appropriately the focus of our legislature right now, and it's undeniable that the COVID crisis is already leading to large state budget shortfalls. But we can use this moment to start planning for an inclusive economic recovery and a broader restructuring that we so desperately need.

The Big Idea in Brief

(Organized by Report Section)

The Problem

• Our state economy has failed to deliver for far too many households. While top earners saw their wages surge in recent years, low- and middle-income households, who are disproportionately people of color, saw their incomes increase very little.
• Simultaneously, Massachusetts has become one of the most expensive places in the country to live, with increasing housing, child care, and higher education costs eating into what modest income gains many people have seen.
• The COVID-19 crisis further exacerbated these existing problems and has led to record job losses, especially for low-income workers and people of color.
• Federal-level Economic Impact Payments and expanded Unemployment Insurance have helped mitigate immediate economic pain, but these supports are slated to run out before economic hardship subsides, and some important categories of people were excluded.
  

A Bold Solution

• Adopt five key reforms to the state’s Earned Income Tax Credit so that it provides all families earning up to $70,000 a cash credit of at least $1,200 a year. The reforms would:
  1. Increase the state match rate from 30 to 50 percent of the federal EITC.
  2. Provide a minimum $1,200 credit to extremely low-income and no-income households.
  3. Extend income eligibility to include middle-income families (with annual household income up to $75,000).
  4. Expand eligibility to previously excluded groups (e.g., unpaid caregivers, immigrants who pay taxes with an Individual Taxpayer Identification Number).
  5. Increase the impact of the EITC by expanding access to free tax preparation services and providing more frequent payments.

The Impact and the Costs

• The average state EITC benefit would increase by about $700 annually (from $685 to $1,386).
• New cash assistance would extend to an additional 906,000 Massachusetts residents. Due to a legacy of economic exclusion and structural racism, lower-income EITC recipients in Massachusetts are disproportionately residents of color.
• We estimate that these reforms would cost $1.09 billion a year, roughly the same amount the state currently spends on special business tax breaks

How to Pay for It

• Ensuring that new revenues are raised through a progressive tax structure would help minimize tax increases on the very lower-income households that the EITC is designed to support. Progressive state-level revenue options include raising the income tax, increasing wealth taxes and reducing special business tax breaks.
• Massachusetts is about as well positioned as any state to provide expanded support to low- and moderate-income households; If Massachusetts were a country, it would rank 5^th richest in the world.

Case Studies: Guaranteed Income Programs and Task Forces from around the US

• In addition to new cash payments that were part of the federal COVID crisis response, a growing number of cities and states have been experimenting with direct cash transfer programs. We can learn from these recent efforts in considering expanding this work here in Massachusetts.

Until recently, the United States was in the midst of the longest economic expansion on record. The economy was growing and unemployment was near record lows. But for far too many American households, and especially lower-income people and people of color, the booming economy of the 2010s did not bring real economic security. In many metro areas like Boston rising housing costs have consumed growing shares of family income. And high housing costs aren’t the only problem–child care, health care and higher education costs have all shot up faster than inflation, at the same time that wages for the majority of working Americans have only inched up modestly. Even as our economy expanded, most income gains went to the top, and many of the rest of us have been left living paycheck to paycheck.

For the top 1 percent of households, inflation-adjusted incomes have increased more than 350 percent since 1980, while incomes at the median have increased by just 20 percent. Incomes for the bottom 20 percent of households have basically not risen at all since 1980. These underlying structural problems lingered through the “good times,” especially affecting people of color who, due to a legacy of systemic discrimination and structural racism, have long been excluded from economic opportunity. 

This problem of wage stagnation looks even worse when we disaggregate by race. Even as the aggregate economy continued to grow, workers in the middle lagged behind and the racial wage gap widened. Wage growth for workers of all races has been much lower at the median, but White workers at the median still have seen some increases since 1979. By contrast, Black and Latinx workers at the median saw almost no wage growth at all. The most important driver of this inequality is historic, persistent and systemic racism. Workers of color, and particularly Black workers, have long been excluded from benefiting equally in the American economy. Black Americans face disparities in educational and training opportunities and are paid less than White Americans at every level of education. All this, combined with the erosion of worker bargaining power, has hindered people of color from experiencing strong wage growth, even in the best of times.

Now, the coronavirus pandemic and the economic shutdown that followed have further exacerbated these inequities. As the public health emergency unfolded, states restricted economic activity and millions lost jobs each week. In a month, the United States saw 10 years of job gains disappear, many of which were jobs held by low-income workers and people of color. This almost instantaneous economic shutdown revealed the inadequacy of our country’s public assistance infrastructure, which had been gradually eroded over the past couple of decades since welfare reform in the mid-1990s. What’s left is a patchwork of means-tested programs that phase out quickly, are hard to apply for, and are often contingent on work. All of this meant that these programs were ill equipped to serve families hit by an economic collapse of the speed and scale of what COVID-19 created.

Remarkably, the COVID crisis led Congressional leaders to pass bi-partisan recovery bills that have included cash payments as a central strategy for stemming the immediate economic pain. As part of its $2 trillion CARES Act, Congress provided cash assistance to households in the form of an “Economic Impact Payment” ($1,200 for most adults earning $75,000 or less per year plus an extra $500 per child). Importantly, these payments were not dependent upon work and didn’t phase-in; even families earning $0 in income last year received a full payment. Cash assistance, whether through stimulus payments or unemployment insurance, was essential for its flexibility (recipients can choose to spend on things they deem most essential), which is particularly important during a crisis, when it is tough to precisely target assistance.ⁱ

In reality, by far the most significant cash support provided under the CARES Act came in the form of expanded Unemployment Insurance (UI), which added $600 per week to traditional UI benefits through the Pandemic Unemployment Compensation provision. Expanded UI also extended payments by 13 weeks after a person’s state benefits were set to run out (typically after 26 weeks)—totaling up to 39 weeks of benefits paid at half the state average UI payment.ⁱⁱ During the crisis, the new Pandemic Unemployment Assistance (PUA) broadened eligibility for unemployment insurance to traditionally ineligible workers who are part-time, self-employed or independent contractors. These forms of pandemic unemployment assistance have been invaluable in keeping our economy afloat despite months of record unemployment.

Taken altogether, the federal government’s response provided vital cash support to many, but still fell short in some ways:

The attention received by these federal COVID recovery measures, especially the inclusion of one-time Economic Impact Payments, has been helpful in advancing the public understanding of the important role that direct cash payments can play. In discussing necessary next steps, for instance, House Speaker Nancy Pelosi signaled interest in considering a broader guaranteed income approach, saying, “Others have suggested a minimum income, a guaranteed income for people. Is that worthy of attention now? Perhaps so. Because there are many more people than just in small business and hired by small business… that may need some assistance as well.” But this is not a consensus view in Congress right now, especially in the Senate. Even if Congress passes another recovery bill that includes some cash payments to families, it is likely that the long-term effects of the economic crisis will outlast federal interventions. This is partly because staggering levels of income inequality and economic insecurity predated the current crisis. Therefore, state governments should not sit back and wait, but instead should work to do everything in their local control to increase long-term economic security in their communities.

Our big idea: Let’s not wait for a national guaranteed income, but get started right now in the Commonwealth. Specifically, we detail and analyze below a package of five big reforms to the Massachusetts Earned Income Tax Credit (EITC) that would help it to function more like a minimum guaranteed income for Massachusetts.

Taken together, these reforms would provide all families earning up to $70,000 a credit of at least $1,200 a year (and often much more), and they would cover households with no income at all who are currently excluded from the state EITC.

While it has received increased attention in recent years, the concept of a guaranteed income actually has deep roots in the civil rights movement.

As part of his “Poor People’s Campaign,” Dr. Martin Luther King, Jr. championed the idea that “the curse of poverty has no justification in our age.” King pointed out that a market economy—even a thriving one—does not ensure the elimination of poverty. So, to rectify the problem of poverty, King advocated giving cash directly to those in need.

Direct cash assistance treats people with dignity, trusting them to do what is best for themselves and their families. Some families most need support paying the rent, while others need help buying groceries, getting new clothes for their children or paying for transportation to work. Giving people cash allows them to determine this for themselves and to do it immediately, which is much more efficient than many existing approaches. Government has a role to play, because it’s the only institution with sufficient size and scope to meet the basic needs of all families. A true guaranteed income program does have large up-front costs, but this spending is partially offset by the economic stimulus that it provides; most of the money disbursed is spent at local businesses and generates new tax revenue. For example, one study from the city of San Antonio found that each additional $1 in EITC payments produced $1.58 in local economic output and that each additional $37,000 created a permanent job.ⁱⁱⁱ Not to mention the hard-to-measure savings realized when people are healthier and have stable housing.

With so many Americans squeezed financially in recent years, even as the aggregate economy was doing quite well, new advocates have taken up the call for the creation of a universal basic income program (UBI) in the United States. These more recent pushes for UBI were powered by a broad range of advocates motivated by a variety of concerns. Former Service Employees International Union President Andy Stern promoted the idea through his 2016 book, Raising the Floor. More recently, presidential candidate and entrepreneur Andrew Yang centered his campaign around a proposal to give every American adult a $1,000 per month basic income.

Still, no major direct program had emerged until the federal government included cash payments as part of the 2020 CARES Act. We in Massachusetts can build on that action and the momentum in favor of this idea, in turn helping rebalance our economy for the long term. We attempt to outline that approach in this section. There are many different ways the state could distribute more regular cash payments, but because there’s an infrastructure in place for the EITC, we use it as the base for this set of reforms/expansions. The Ford administration created the federal EITC in 1975 as a temporary measure to offset the rising cost of living, and then Congress later made it permanent and expanded it several times.^iv The EITC functions as a refundable tax credit designed to aid low- and moderate-income working families. Support comes through the annual income tax return process, providing a cash refund when taxes owed are lower than the value of the credit.

Cash assistance through the EITC helps improve family outcomes across a few key dimensions. First, the EITC helps families make ends meet and save for emergencies or future goals, ultimately lifting many of them out of poverty.^v Second, the economic impact extends outside of individual households and helps to stimulate local economic activity. Most EITC dollars are spent locally and help create jobs and grow the economy.^vi Third, the tax credit increases the well-being and health of families by helping people access better health care and healthier food. Specifically, the EITC is linked to higher birth weights and increased life expectancy.^vii Fourth, data show that the economic stability provided by the EITC even helps improve educational outcomes like test scores, graduation rates and college enrollment.^viii

In recent years, dozens of states, including Massachusetts, have created their own complement to the federal EITC, often matching a portion of the federal credit for residents who claim it.

The five big reforms for improving the Massachusetts Earned Income Tax Credit that we model in this paper are:

1. Give people more money by increasing the state EITC match rate from 30 percent to 50 percent of the federal EITC (for those who qualify for the federal EITC).^ix
2. Establish a minimum $1,200 credit for extremely low-income households, including households with no income.^x
3. Extend eligibility to include middle-income families earning up to $75,000 a year, and provide a minimum credit of $1,200 for families earning up to $70,200 (by contrast, the current EITC ends at about $50,000 a year, depending on household size).
4. Expand eligibility to previously excluded groups of people, including low-income college students, people who do unpaid work caring for family members, immigrants who pay taxes but don’t have a Social Security number, and adults without children ages 18–24 and 65 and over who do not have children.
5. Increase the impact of the EITC by expanding access to free tax preparation services and providing more frequent payments.

According to our modeling, adopting this package of expansions to the state EITC would help increase economic security for an additional 906,000 people statewide. This would increase the average cash assistance amount from $685 to $1,386 and it would cost an extra $1.09 billion more than the current state EITC annually to implement. It’s important to note that while taking these steps would provide critical, regular cash support to hundreds of thousands of low and moderate-income residents, it still only goes partway to providing a truly guaranteed minimum standard of living for all. We would likely need federal leadership to make investments of that scale, but these local reforms could encourage nationwide uptake of the idea, and get Massachusetts out in front of the problem.

Reform 1: Increase the state match rate from 30 to 50 percent of the federal EITC.

State EITCs typically mirror the eligibility requirements set forth by the federal EITC and simply match a percentage of the federal credit (almost always less than half) for households that claim it. The maximum federal EITC is $6,660 per year, but most households receive less because the credit varies with household size and is designed to increase with income up to a point (the phase in), and then decrease for people with relatively higher incomes (the phase out). Massachusetts currently matches 30 percent of the federal EITC (up from 23 percent prior to FY 2019), making it one of the stronger state EITC programs.^xi Even still, states like New Jersey (which matches 40 percent of the federal EITC) and California (which matches 85 percent of the federal EITC for very low-income households) offer examples of how some high-cost states do even more.

We estimate that under the current EITC structure, the average 2020 federal EITC for Massachusetts residents would be $2,283, and the average state EITC would be a relatively small $685.^xii The vast majority of households that receive the EITC earn less than $50,000 in taxable income per year, with the highest concentration of recipients being among households that earn less than $26,000 per year. Yet for all the good that the EITC does for these households, it is still limited by how many EITC dollars households actually receive. The Massachusetts EITC could do a lot more for people by simply raising the match rate.

Through this model, we propose raising the match rate from 30 percent to 50 percent of the federal EITC. We also considered increases to 75 percent and 100 percent of the federal EITC (and the related impact and costs are detailed in Appendix B), but the 50 percent match rate is quite ambitious and yet still a realistic goal for the near term. An increase of this magnitude also fits with ongoing advocacy work driven by the Healthy Families EITC Coalition, a group of more than 40 organizations across Massachusetts that championed the most recent increase in the match rate from 23 to 30 percent.

Reform 2: Provide a minimum $1,200 credit to extremely low-income and no-income households.

Both the Massachusetts and the federal EITC have a phase-in, meaning that the amount of the credit increases gradually with household income until the maximum credit is reached. For example, a two-parent household with two children and $5,000 in taxable income would receive about $2,000 from the federal EITC, while the same household earning $15,000 would receive just under $6,000. The rationale behind the phase-in is that this structure encourages people to work more hours, or seek higher-paid work, in order to receive a larger EITC.

The phase-in of benefits is part of why it has maintained strong bipartisan support over the years. People perceive it less as a “hand-out” and more as a work incentive. A longstanding body of evidence has supported the idea that the EITC encourages work,^xiv although recent research has partially called this into question. One reason the work incentive might not work smoothly in practice is that there’s a disconnect between one’s weekly paycheck and the EITC benefit received through the annual tax return process. Rather than immediately boosting wages the moment someone undertakes new work—so that, for instance, someone earns $11 an hour instead of $10—the EITC benefit is actually not delivered to the worker for months and sometimes upwards of a year.

One important new study found that of the four major increases in the amount of the federal EITC, only one led to an increase in employment–the 1993 reform. By comparing labor force participation and employment before and after each year of a major reform, the analysis shows that there was a 3 percentage point increase in employment after the 1993 EITC expansion (and no statistically significant positive change in the other years), but suggests this may have had more to do with welfare reforms happening at that time than the EITC expansion itself.^xv Intuitively, the EITC’s phase-up in benefits does seem like it would have some work incentive; it’s just hard to know how strong that incentive is in practice because the research on it is somewhat mixed. The EITC’s work incentive has been the core justification for largely excluding the lowest-income residents, but if that incentive isn’t as strong as policymakers had thought, then it makes less sense to continue with this phase-in, especially during economic downturns when very few employers are hiring.

With all of that in mind, this approach to overhauling the Massachusetts EITC establishes a $1,200 minimum credit for extremely low-income households, including those with no income at all. While this amount is still far from guaranteeing a sufficient minimum income to fully live on, it would make a measurable difference in people’s lives. In this way, establishing a minimum credit is a critical step toward a minimum guaranteed income, and by simultaneously offering larger credit to households with more earned income (up to a point), the program would still retain some of its original work incentive structure.

Policymakers could also adopt a modified version of this minimum credit whereby it would only be triggered during economic downturns when there are more jobseekers than job openings.^xvi This would ensure that the intended work incentive is only in place when there are actually jobs available for people to seek. Here we include the minimum credit unconditionally and model its cost because more often than not there are more unemployed people than job openings. Extending the credit would also have a particularly positive impact on people of color, who experience discrimination in the labor market and are thus more likely to lose their job early in a recession and not be hired until well into the recovery.

Among the five reforms outlined in this paper, this reform is likely among the most targeted towards households of color. Due to a legacy of structural racism, lower-income residents of Massachusetts are more likely to be residents of color, especially when compared to the slightly higher-income residents earning between roughly $50,000 and $70,000, who would also receive a base credit of $1,200 under these reforms (described in the next section below).

Under this approach Massachusetts wouldn’t be the only state to target more resources to those who need it most. In 2015, California established the CalEITC and has since dramatically expanded its impact on extremely low-income households. In order to offset the regressive effect of the federal EITC’s phase-in for the lowest-income families, California actually targets more of its state EITC support for these lowest-income families. In 2018, the state established a $1,000 add-on to the credit for any family raising a child under the age of six, and it is given to any household with at least $1 in earnings.^xvii The CalEITC gives the largest refundable state EITC in the country, matching 85 percent of the federal EITC, but it has a much lower income cap ($30,000) than most other states and the federal EITC. Overall, the CalEITC does a lot for very low-income households, though it does very little for more moderate-income families.

Reform 3: Extend income eligibility to include middle-income families.

Much in the same way that very low-income recipients of the EITC receive smaller credits due to the phase-in, middle-income recipients receive very little under the current policy due to the phase-out. While the EITC increases with earnings for lower-income working families, the credit begins to decrease with earnings after the maximum credit is reached. For example, a two-parent household with two children would receive a maximum state EITC of $1,776 if they earn $15,000. However, the amount of the credit begins to decrease with earnings over $25,000 and fall to zero when earnings reach $53,330. For context, top levels for receiving the current EITC are well below median household income in Massachusetts, which was roughly $80,000 in 2018.

The phase-out is designed to target assistance to lower-income families, and rather than having the credit disappear altogether once income reaches a certain threshold, the phase-out makes sure workers don’t automatically lose income if they earn slightly more money. The problem with the current phase-out is simply that it begins at too low a level and therefore reduces the size of the credit for many working families that still are living paycheck-to-paycheck. With the cost of housing and child care higher in Massachusetts than in most parts of the country, middle-income families here also need greater levels of support.

While phasing out the EITC at a certain point makes good policy sense, we could increase the economic security of many more working families by shifting up where the phase-out begins. Rather than phasing out the EITC completely for families earning more than $57,000 (the maximum credit for two-parent household with 3+ children), our plan increases the maximum household income to $75,000 for all households with children. This higher phase-out level is close to, but still below, median household income in Massachusetts.

Reform 4: Expand eligibility to previously excluded groups.

The EITC is designed to allocate the most assistance to low-income working families, who are often shut out of other supports. A full-time minimum-wage worker with children, for example, could increase their household income by 15 percent or more through the combined federal and state EITC. However, a critical shortcoming is that it entirely excludes several groups of people.^xviii These people, who often struggle to afford basic necessities, make vital contributions to the economy and our society in general just like current EITC recipients, but some don’t have any earned income or meet other eligibility requirements. Here in Massachusetts we can provide much greater support to financially vulnerable households by extending eligibility to these previously excluded groups:

• Unpaid caregivers who support dependent children or disabled family members: The COVID-19 crisis has revealed how much we rely on this critical type of labor. Even though these caregivers do not receive earnings for their work, what they do is extremely valuable and it enables others to participate in the labor force. Providing caregivers a credit from the EITC validates the work they do, broadens the definition of work, and permits other people to engage in wage-earning labor. Under our plan, unpaid caregivers receive a credit of $1,200. If the household has earnings from another adult, the household would receive either this base $1,200 credit or the credit that they’d be eligible for based on the earnings of that other adult, whichever is greater. The caregiver credit would phase out completely as household earnings reach $75,000 per year.
• Immigrants who pay taxes using Individual Taxpayer Identification Numbers (ITINs): Many immigrants, who for various reasons may not have permanent residency or work authorization, voluntarily request an ITIN from the IRS for the purpose of paying federal, state and local taxes. Most workers who pay taxes using an ITIN are undocumented immigrants, although not all. These immigrants tend to be younger and have lower wages, but help power a variety of industries, including the service sector. Immigrants who pay taxes with an ITIN would qualify for the new expanded EITC under this reform proposal and receive a credit according to their household size and income level.  Because there is an active effort to extend current EITC eligibility to these families, we include later in “The Impact and the Costs” section of this paper some modeling of this expansion as a standalone measure.
• College students from low-income families: Students who struggle to pay for food, housing or books would benefit, as they work toward their degree and eventually graduate and enter knowledge-intensive, productive industries in the Commonwealth. Our plan provides an automatic credit of $1,200 to low-income college students, unless they are also working parents and have earnings that would qualify them for a larger credit. The student credit does not phase out, but rather goes to zero with household earnings above $50,000. 
• Younger workers (under the age of 25) and older workers (ages 65+): Younger workers often have low wages, little labor market experience and oppressive student debt. Similarly, there are lots of lower-income seniors, and many who do not receive enough from retirement income. The expanded EITC would provide a $1,200 credit to younger and older workers with incomes under $37,500. Notably, the same $1,200 credit would go to adults ages 25–64 without children. These working age adults without children are currently eligible for the EITC, but they receive an especially small EITC compared to families with children. The gap between the EITC for adults with no children and those with children is much larger than the differences among households with different numbers of children. This disproportionately low EITC for adults without children renders the credit relatively ineffective for this group. Giving all working adults without children, regardless of age, a $1,200 credit leads to a very large increase in the credit for currently eligible adults with no children. This helps to close the gap somewhat in the average EITC between families with children and adults without children.

Through this reform package, each of these categories of people would become eligible for the Massachusetts EITC. Changes like these are not entirely unprecedented. Massachusetts recently expanded eligibility to domestic abuse survivors who are married, living apart from their spouse, and file separate tax returns.^xix Previously, domestic abuse survivors who separated from their abusive spouse would lose eligibility for the EITC. This reform helps provide economic security to survivors and ensures they need not risk further abuse to obtain vital assistance through the EITC.

The expansion of EITC benefits to previously excluded groups also has precedent in other states. In 2019, Maine significantly expanded its state EITC program, which had previously been one of the least generous in the country. The Maine EITC previously matched only 5 percent of the federal EITC. Starting in 2020, the match rate increases to 12 percent for families with children. The state simultaneously increased the match rate for adults without children from 5 percent to 25 percent, as a way to close the gap between what families with children receive and what working adults with no children get. It also expanded eligibility to young adults ages 18 to 24 who do not have any children (an estimated 16,000 additional people now qualify under this provision).^xx California has taken similar action, with a 2017 reform that extended the credit to self-employed workers and raised income eligibility substantially. A year later, California expanded eligibility further to include workers ages 18 to 24 or 65 and older, and also boosted income eligibility further to include more moderate-income households.

Reform 5: Increase the impact of the EITC by expanding access to free tax preparation services and providing more frequent payments.

While the EITC provides really important financial support to many families, the way it’s administered leads to many challenges accessing the credit and making the most of it. To receive the federal and state EITC requires not just that a person or household meet all the eligibility requirements, but they must also proactively claim the credit on their annual tax return. The Internal Revenue Service (IRS) estimates that 22 percent of people nationwide who are eligible for the EITC don’t actually claim it, meaning that they miss out on this important form of cash support.

Other means-tested poverty-reduction programs (e.g., Supplemental Nutrition Assistance Program, TAFDC) require lots of administrative resources to distribute aid. By contrast, the vehicle for administering and delivering the EITC serves many other purposes besides the EITC, which increases administrative efficiency and reduces associated costs for the government. However, directing cash assistance to low- and moderate-income families through the tax code also has some downsides.

Many people who file taxes on their own make mistakes during the process and many others (e.g., an estimated 60 percent of EITC recipients) pay for private tax preparation services that charge fees that diminish any Earned Income Tax Credit by between 13 and 22 percent.^xxi Preparers take money directly from many people’s refund checks, and often intentionally locate in areas with many EITC recipients.^xxii Additionally, the power of the cash payments of the EITC is often obscured because of how EITC calculations are wrapped up with other steps in the tax return process; many filers don’t even know that they’re receiving the EITC. Of those who do, many do not know the actual amount since a portion of their tax return is simply a reimbursement for overpayment of taxes during the year rather than new cash support from the EITC. Finally, because recipients get their credit in one annual payment, later in the subsequent year, it can be difficult to budget for receipt of the credit or to use it for monthly expenses.^xxiii 

Our plan includes two strategies to address these issues with the EITC. First, we could increase access to free tax preparation services. The best way to do this is to increase funding to support Volunteer Income Tax Assistance (VITA) sites across the state. VITA sites provide free tax return preparation and other professional tax and financial counseling services to low-income taxpayers. There are 80 VITA sites statewide that serve more than 30,000 low- and moderate-income people each year, bringing $60 million in tax credits and $9 million in savings on tax preparation services to the state. By increasing the state funding of VITA sites by $800,000, many sites could increase their hours of operation, recruit and manage more certified volunteers, and pay for needed equipment. The result: More people would benefit and more tax refund dollars would come into the state. The second strategy to increase the efficacy of the EITC is to distribute the tax credit in monthly or quarterly installments. This would help recipients smooth their income and more easily budget for monthly expenses.

Adopting the five key reforms outlined above would completely overhaul the current state EITC, providing much more support to current EITC recipients and directing new assistance to people who don’t currently qualify. The maximum credit received by families with children from the state EITC would increase by more than $1,300. Individuals without children, who have traditionally received extremely small credits, would see their credit increase by more than $1,000. This money could help families pay for food, clothing or other basic necessities, and it would also help create jobs in the local economy. For someone like "John" (story described above), who currently does not qualify for the EITC, the five reforms included here could lead to his family’s receiving $2,660 from the state EITC (refer to Appendix B for the structure of the expanded EITC for joint tax filers).

Given that lower-income families are more concentrated in communities of color, the EITC especially benefits economically disadvantaged people of color. The graph below illustrates this by comparing the racial and ethnic composition of the Massachusetts population overall to the composition of current EITC beneficiaries. While we do not have estimates of the exact racial and ethnic makeup of households that would receive our expanded state EITC, it is likely that implementing the five reforms in this paper would make the EITC even more effective in reducing racial disparities than it is currently. Among the five reforms, the one that is likely most targeted towards households of color is the one providing a minimum $1,200 credit to the lowest-income households, even those who have no taxable earnings. Due to a legacy of systemic discrimination and structural racism, the lowest-income residents of Massachusetts are more likely to be residents of color, especially when compared to the slightly higher-income residents earning between roughly $50,000 and $70,000, who would also receive a base credit of $1,200.

All in all, expanding the state EITC so that it begins to work more like a minimum guaranteed income would cover an additional 906,000 Massachusetts residents, including 271,000 children. The proposed expansions would have the greatest impact on low-income households in the bottom 20 percent of the income distribution, who would receive 53 percent of Massachusetts EITC dollars. The new average credit would be $1,386 (representing an increase of more than 100 percent).

Enacting the reforms would cost an extra $1.09 billion annually.^xxiv For comparison, this is roughly equivalent to what the state spends on special business tax breaks that go to local companies involved in manufacturing, mutual funds and the film industry.^xxv While all state budgeting involves balancing competing priorities, it’s clear that we as a state have the financial resources, even during the midst of the COVID crisis, to consider making this new level of cash support for struggling families a priority.

The Cost of Extending the EITC to Immigrants Who Pay Taxes with an Individual Taxpayer Identification Number

Because there are active efforts to extend current EITC eligibility to immigrants without Social Security numbers who pay taxes using an Individual Taxpayer Identification Number, we have also modeled this expansion as a standalone measure. We estimate that there are 18,515 households that file taxes with an ITIN in Massachusetts that would be income-eligible for the current state EITC. These households are especially vulnerable to economic hardship because they do not qualify for unemployment insurance, or a variety of other social safety net programs that their tax dollars help to support. Our estimates suggest that the total cost of extending the current state EITC to ITIN households would be $13.1 million, assuming all eligible ITIN filers claimed the credit. This single expansion would increase the total cost of providing the EITC by just 5 percent and would direct assistance to almost 60,000 individuals, including nearly 15,000 children. Applying the expanded EITC income eligibility (based on the five reforms described above) increases the total number of eligible ITIN filers to 20,000, and pushes up the cost of the ITIN expansion to $26.1 million, or 10 percent more than the cost of the current state EITC . In modeling our five reforms to the state EITC, the Institute for Taxation and Economic Policy (ITEP) included the cost of the 20,000 ITIN households.

It’s important to note that the federal government is far better positioned to implement cash transfer programs than state and local governments. The federal government can deficit-spend, meaning that it can spend much more money than it brings in annually through taxes. State government, by contrast, for the most part cannot spend more than it brings in over the course of a year. The ability to deficit-spend is especially critical during an economic collapse, since tax revenues typically plummet as economic activity declines.

Regardless of what the federal government does, though, we cannot sit idly by and just wait for more robust federal assistance. In fact, Massachusetts is about as well positioned as any state to provide expanded support to low- and moderate-income households. At the start of 2020, the Massachusetts economy was in good shape overall, with record low unemployment and booming construction in Greater Boston. If Massachusetts were a country, it would have ranked fifth richest in the world (higher than Switzerland or the United Arab Emirates), with a GDP per capita of $86,407.^xxvi Our state has the necessary resources; they are simply not equitably distributed.

Even though the COVID-19 crisis is already leading to state budget shortfalls, now is not the time to cut funding for social assistance. If anything, low-income families that were struggling before the crisis need cash assistance now more than ever, and ensuring they receive it will also hasten the economic recovery. Since providing this broad income support will require significant sums of additional revenue, the way those revenues are collected will make a big difference in how much the livelihood of low- and moderate-income people could ultimately be improved.

Raising taxes that fall hardest on low- and moderate-income people could unintentionally worsen the economic standing of people we’re aiming to help. On the other hand, it’s possible to structure taxes in a way that helps turn our tax system right side up.

This concern is particularly pressing because under Massachusetts’ current system of state and local taxes, low- and moderate-income taxpayers contribute a greater share of their income than do high-income people. Long before the coronavirus, this has been a factor compounding inequality in the Commonwealth and making it more difficult for lower-income families to get by, much less get ahead. Based on 2018 estimates, households in the lowest-income 20 percent in Massachusetts pay the largest share: 10 percent of their incomes in state and local taxes. The highest-income 1 percent of taxpayers pay less than 7 percent of their incomes, the smallest share of any group. Those in the middle pay amounts in between.^xxvii

Many taxes and fees are “regressive” this way because they tax consumption. High-income people tend to spend a smaller portion of their income on goods and services, while economically struggling people may consume more than their entire income because they often are compelled to spend savings or go into debt to finance basic necessities. Although many kinds of goods and services are consumed more by high-income people, the differences rarely are so lopsided as the differences in income between Massachusetts households. For example, even if a person making $500,000 a year spends twice as much on gas taxes as a person making $50,000 a year, the lower income person will still be paying a much bigger portion of their total income on gas taxes than the higher income person.

Moreover, the upside-down structure of our tax system is particularly detrimental to Black and Latinx communities. Due to a long history of systemic barriers to opportunity, Black and Latinx households are over-represented in lower-income groups (the groups paying more of their income in taxes) and under-represented in high-income groups (the groups paying a smaller share of their income in taxes).^xxviii

In general, only taxes or fees on wealth, individual income or corporate income end up being “progressive.” By establishing higher tax rates on wealth or income for more affluent people, we could ensure that higher income or wealthier households pay a greater share of their income or wealth than those barely making ends meet. Corporate ownership is heavily concentrated among those with the highest incomes, so corporate taxes similarly should place responsibility on upper-income households to pay a greater portion of their wealth or income in these taxes.

Personal Income Taxes

Current state law requires the personal income tax to have a single, uniform rate, applied to all levels of income (unlike the federal income tax system which applies higher tax rates to higher levels of income).^xxix Nonetheless, it is a progressive source of revenue for the state because despite the flat rate, owing to a variety of exemptions and credits for lower-income filers, higher-income households pay a larger share of their income toward this tax than do middle- and low- income households.

There are four ways to progressively raise more revenue from this source.

1. Raise the rate.
2. Through a constitutional amendment, the income tax can be graduated as it is at the federal level or a single additional tax only on very high incomes can be created, such as the Fair Share Amendment or “millionaire’s tax.”
3. Curtail tax deductions that favor high-income households and increase those that predominantly benefit low-income households.
4. Create different rates for different types of income. Massachusetts defines several different types of personal income, distinguishing wage and salary income from capital gains or dividend and interest income. These latter forms of income–especially income derived from stocks, bonds and other financial assets–go overwhelmingly to households with the top 1 percent of incomes.^xxx Increasing tax rates specifically for these types of income would generate significant revenue largely from households with the greatest means to pay.

Wealth Taxes

Wealth is distributed even more unequally than income. This is especially manifest along racial lines. Examining the Greater Boston area, the Federal Reserve Bank of Boston reports: “Overall, a typical black household earns roughly 60 percent of the typical white household but has only 5–10 percent of its wealth.”^xxxi

Taxes on wealth, especially on large concentrations of wealth, tend to be highly progressive.

• The state’s most progressive wealth tax is the estate tax. By raising estate tax rates, especially for the highest-valued estates, the Commonwealth could generate significant additional revenue.
• Separate from the estate tax, the Commonwealth could raise revenue by ending “step up in basis,” a long-established tax exemption for capital gains on inherited wealth. According to the Governor’s Tax Expenditure Budget, the anticipated revenue increase from the “nontaxation of capital gains at death” would result in $961 million in foregone revenue for the Commonwealth in FY 2021.^xxxii
• The state could progressively tap housing wealth by increasing real estate transfer fees only on multi-million-dollar transactions.^xxxiii

Corporate Taxes

Shares of corporate ownership are highly concentrated among the nation’s highest-income households. Raising taxes on corporate profits therefore tends to impact the richest households the most. For example:

• As part of a tax package that closed a number of corporate tax loopholes, the corporate excise rate in Massachusetts was reduced from 9.5 percent to 8.0 percent between 2009 and 2012.^xxxiv Restoring a higher rate would progressively raise significant revenue.
• Another option is to raise the corporate minimum tax for larger corporations, the way some other states have tiered rate structures.^xxxv A minimum corporate excise tax provides a kind of “tax backstop” by ensuring that all corporations pay some income tax, regardless of the strategies they use to avoid these taxes. The state’s $456 minimum tax hasn’t been increased for 30 years. Targeting increases to the largest companies could yield significant revenue.
• Reducing or eliminating special business tax breaks in the Massachusetts tax code could yield hundreds of millions of dollars. While many such tax breaks are available to businesses generally, a subset of several dozen are focused narrowly on particular industries or special types of business activity.^xxxvi
• GILTI (Global Intangible Low Tax Income) is identified and taxed by federal tax law as a way to recapture tax revenues that are shifted offshore through aggressive corporate tax avoidance strategies through tax havens like the Cayman Islands. Massachusetts initially would have taxed these profits too, but under current law instead exempts 95 percent of this income from state taxation.^xxxvii According to estimates by the Wharton Budget Project at the University of Pennsylvania, realigning to federal policy would place an additional $12 billion a year under state taxation. Taxes on these profits would be paid only by multinational corporations that aggressively practice offshore tax avoidance.

Enacting a collection of these tax changes could more than cover the cost of these five EITC expansions, and would ensure that the money is raised largely from people with the greatest ability to pay.

A growing number of states and localities have taken steps toward developing minimum guaranteed income programs. Some have done so through their state EITCs and others have launched alternative programs in partnership with private philanthropy. These programs illustrate the value of directing cash to people and communities who struggle to make ends meet. The interventions give us crucial insight into the way economic insecurity impacts many facets of life, and how cash assistance both reduces poverty and increases well-being more broadly.

Stockton Economic Empowerment Demonstration (SEED)

Stockton, California, is home to the country’s first mayor-led guaranteed income demonstration. The Stockton Economic Empowerment Demonstration (SEED) is a publicly operated, privately funded pilot aimed at testing unrestricted cash transfers as a solution to poverty and inequality. Beginning February 2019, the demonstration provided $500/month for 18 months to 125 randomly selected Stocktonians in neighborhoods with a median household income of $46,000 or less. The cash is unconditional, meaning there are no work requirements or restrictions on how the money can be spent.

The study is being evaluated by two independent researchers, who seek to understand how the additional income impacts recipients’ financial well-being, psychological distress and physical functioning. As a part of the program, recipients have agreed to share their stories in order to confront, address and humanize inequality, income volatility and poverty.

Early data from SEED confirms the premise that people were working but the pre-COVID economy was not. SEED recipients spent the disbursements on their most basic needs: food, transportation, utilities and rent. And, as the coronavirus pandemic reached the US, data from February and March 2020 highlight how receiving unconditional recurring cash payments enabled people to prepare for and get through the first months of social distancing; SEED participants decreased their spending on merchandise and increased their spending on food.

Initial data from the demonstration is available on the SEED Dashboard, and more information about the study design and goals may be found in the SEED Discussion Paper.

Magnolia Mothers Trust

Magnolia Mothers Trust, a program of Springboard to Opportunities in Jackson, Mississippi, provided $1,000/month to 20 Black mothers living in extreme poverty during its first pilot year. In the beginning of 2020, a second program year began with 80 Black mothers receiving $1,000/month. By placing Black women at the center of solutions, the program seeks to address the racial and gender-based elements of poverty.

Results from the first year showed extremely promising effects on families, including more than double the number of households preparing the majority of their food at home and recipients collectively paying off more than $10,000 in predatory debt.

According to Aisha Nyandoro, director of the program, participating mothers report that, despite COVID-related job loss or reduction in hours, they know that they’ll be able to take care of themselves and their families and “weather this storm for the duration of the storm.” For more information on the results of the first year, see the Initial Pilot Report.

Y Combinator Research Basic Income Demonstration

Y Combinator Research is testing and refining a pilot design that will include 3,000 basic income recipients—1,000 people in the treatment cohort will receive $1,000/month and 2,000 people in the control group will receive $50/month. As the largest basic income pilot in the US, the Y Combinator Research demonstration is privately funded, utilizing a randomized controlled trial, and will be launched in multiple locations. Independent researchers from the University of Michigan’s Survey Research Center will study the effects of the cash transfer along eight parameters: time use, mental and physical health, subjective well-being, financial health, decision making, crime, and effects on children. For more information on the program design, see the Basic Income Project Proposal.

Baby’s First Years

Baby’s First Years is a National Institutes of Health and philanthropically funded study on the impact of monthly, unconditional cash transfers to low-income mothers and their children during the first  three years of the child’s life. One thousand mothers have been recruited in four sites—New York City, Greater New Orleans, the Twin Cities, and the Omaha metropolitan area—at the time of their child’s birth. The mothers in the study receive $333/month ($20/month for the control group) for the first 40 months of their child’s life. Quantitative data is being collected just after the child’s birth and again when the child is 12, 24 and 36 months old. The purpose of the study is to identify whether reducing poverty can affect early childhood development and the family processes that support children’s development. For more information, see the Baby’s First Years website.

Alaska Permanent Fund

In response to the large uptick in revenue from oil in the 1970s, Alaska created the Alaska Permanent Fund. Since 1982, the Alaska Permanent Fund Dividend has provided each Alaskan resident with a percentage of the state’s oil profits. There are only two basic requirements for recipients: They must be residents of Alaska and must have not been incarcerated (or sentenced to be incarcerated) in the preceding year. The Alaska fund provides an average of $1,000-$2,000 dollars annually and lifts between 15,000 and 25,000 Alaskans above the poverty line each year. The state distributes the dividends much like a universal basic income payment, so that all residents regardless of age, family type, employment status or earned income benefit from the program. Undocumented immigrants, however, are not eligible. Because the dividend payments are made annually rather than monthly, it is possible to see the effect the payments have on consumption. Recipients of the fund consume significantly more on non-durables and services the month they receive the dividend. People who receive the EITC similarly spend much of their one-time payment on larger expenses, which demonstrates how more regular distributions could help smooth income and aid families in budgeting.

Negative Income Tax Experiments

Between 1968 and 1982, the federal government ran randomized control trials in six states to test the impact of a negative income tax (NIT). The experiments took place in urban and rural areas across the country. Envisioned as a way to provide a guaranteed income floor to participants, the NIT experiments ensured that recipients received up to $25,900 in today’s dollars. The program also imposed high tax rates on earned income and reduced the benefit the more recipients earned. The results in two rural states showed positive impacts on the quality of nutrition, suggesting an increase in spending on food. Data on other consumption was not collected. Other benefits included higher school attendance, grades and test scores for the children of NIT recipients, with increases seen most especially in younger and poorer children. Research on cash transfers generally finds that the largest gains are experienced by the poorest, most vulnerable households and consistent, long-term cash transfers have been shown to be more beneficial than short-term programs.

Chicago Resilient Families Task Force

The Chicago Resilient Families Task Force brought together nearly 30 members across the city, including policymakers, labor, service and faith-based organizations, and academics. Tasked with assessing and determining the scope of a guaranteed income pilot as well as solutions to modernize the Earned Income Tax Credit (EITC), the Task Force released its final report in February 2019. Finding deep racial and gender inequality, steadily widening income inequality, and erosion of the middle class, the Task Force suggested the following interventions: (1) expanding and modernizing the EITC on both the city and state level; (2) launching a guaranteed income pilot project in Chicago; and (3) a suite of non-cash based policy interventions to increase work stability and economic security, including strengthening the current safety net, bolstering consumer protections, increasing economic mobility and more.

Given the groundwork laid by the task force, Illinois was positioned to move fast on cash transfer programs when the coronavirus pandemic hit. In particular, several nonprofit organizations quickly formed the Illinois.

Cash Coalition and developed the #GiveTogetherNowChicago fund offering one-time $500 cash infusions to effected hospitality workers, seniors and those with underlying medical issues.

For more information about the task force, see Big Shoulders, Big Solutions: Economic Security for Chicagoans. For more information about the fund, see #GiveTogetherNowChicago.

Newark Guaranteed Income Task Force

In July 2019, Newark, New Jersey, launched its Guaranteed Income Task Force at the behest of Mayor Ras Baraka. Convening representatives from the mayor’s office, service and faith-based organizations, and foundations, the Task Force is now preparing to release its final report. In addition, the Mayor has publicly stated his commitment to developing a guaranteed income pilot program. The report is expected to be released in June 2020.

Appendix A: Standard EITC and Expanded EITC Income Eligibility and Credit Amount by Household Size for Joint Filers