WASHINGTON – President Barack Obama mentioned House Speaker Paul Ryan only once in his last State of the Union address – when he raised their shared goal of tackling poverty.
The two men don’t agree on much. But the idea of expanding the Earned Income Tax Credit, a program that provides tax breaks and refunds to low income workers, is one area of common ground.
But what could’ve been a moment of cooperation to increase support for a program that has the support of policy-makers on both sides of the aisle has threatened to stall over disagreements about how much fraud is in the system, and how best to address it.
Many experts from across the ideological spectrum agree that the EITC is one the country’s most successful poverty-fighting programs. But government analyses say it’s also one of the country’s most wasteful programs.
The Government Accountability Office says the EITC accounts for 11 percent of all improper payments the federal government made in 2015. That’s a significant percentage but it’s less than the Medicare Fee for Service program which 32 percent of those payments, and Medicaid, which made 21 percent.
The program dates back to the 1970s when it was the brainchild of Milton Friedman, one of the fathers of modern conservative economic thought. The credit is designed to supplement wages and target those making the lowest amounts – the working poor. Payments go up as income rises and then fall after it reaches a certain threshold. Because the EITC only pays out to people who work, Republicans prefer it to other benefit programs.
In 2014 the program paid out $66.7 billion to 27.5 million taxpayers — anywhere from $2 to $6,200 — depending on income and number of children. However, the Treasury Department estimated that between 25 percent and 30 percent of payments that year were improper — the result of a combination of confusion, system flaws and fraud. But there is no official breakdown of how much of the waste is the result of unscrupulous filers.
The liberal-leaning Center on Budget and Policy Priorities argues that the improper payment rate is overstated and that many those errors are the result of an overly complicated system.
For instance, the credit pays out depending on the number of children a parent has, but the rules can get confusing for non-traditional family structures. Questions like what family members can claim a child for purposes of the EITC do not always have easy or simple answers.
But not all observers see the improper payment as the result of simple confusion.
“I think most of it is intentional fraud. I think almost of all it is,” said Robert Rector, a senior fellow at the conservative Heritage Foundation who studies the EITC.
Rector sees the claiming rules for complicated families as an area ripe for abuse. It would be easy, he said, to say children live with an aunt who makes more money, instead of their mother, in order to increase the family’s payout.
Additionally, many of the folks who file for the EITC claim difficult to verify self-employment income. Rector said this is an easy way for people to boost their credit by claiming additional income.
An IRS analysis of 2006 through 2008 returns found that two-thirds of erroneous EITC claims resulted from over representing income, with the most significant amount of that chunk from people claiming self-employment. However, the report did not say whether those claims were fraudulent.
Ryan in the past has spoken out against what he views as the program’s excessive fraud – telling MSNBC in January 2015, “I think the EITC, if done correctly and reformed and the fraud is taken out of it, is a really good thing.”
Under existing law any fraud is hard to stop because the IRS is required to payout EITC claims, even if they seem fishy.
Both sides of the debate agree that rules for families need to be simplified. Beyond that there is much disagreement over how to solve the problem.
The Center for Budget and Policy Priorities argues that the real problem is a lack of IRS enforcement ability. The center criticizes Congress for cutting IRS enforcement funding by 18 percent since 2010, adjusted for inflation.
Robert Rector calls that argument a “red herring.”
For him, the solution is a change in rules: require people who claim self-employed income to have sufficient documentation, and don’t force the IRS to issue refunds if auditors have doubts about the veracity of a claim.
This disagreement might be what scuttles a generally popular proposal to expand the credit, especially to childless adults.
Republican lawmakers like Ryan and Rep. Kevin Brady, R-Texas, who chairs the Ways and Means Committee which controls taxation, have in the past conditioned any expansion of the EITC on the inclusion of fraud reduction measures.
But in a 2015 blog post the budget center’s Chuck Marr called such requirements hypocritical. He cites Republican expansions of tax breaks for businesses, a category with greater revenue losses to the Treasury due to unreported income.
“These developments highlight an egregious double standard in how lawmakers view tax compliance, depending on whether low-income working families or small businesses are at issue,” Marr wrote.
Many Democrats similarly find Republican requirements for fraud prevention problematic.
“For years, Republicans have deliberately cut funding for enforcement at the IRS while at the same time complaining that the agency isn’t doing more to address fraud and errors. It’s clear that Republicans are trying to have their cake and eat it too,” said a spokesman for Ways and Means Democrats. “To tackle fraud and errors in the tax code, Congress should work to strengthen IRS enforcement, not undermine it.”
In his State of the Union however, Obama hit a more optimistic note.
“I also know Speaker Ryan has talked about his interest in tackling poverty,” he said. “I’d welcome a serious discussion about strategies we can all support, like expanding tax cuts for low-income workers without kids.”
The President’s fiscal year 2017 budget, which he announced in February, includes an expansion of the EITC. But with that budget unlikely to gain traction during the administration’s final year, it’s more likely an EITC expansion would come from separate legislation.