The Rainy Day Refund Act gives low income taxpayers who use the Earned Income Tax Credit a 50 percent “savings match” if they opt to save a portion of their refund for a “rainy day” by deferring part of their refund for six months. Deferring and increasing the refund amount is an evidence-based approach that lifts more taxpayers out of poverty by encouraging savings and helping families weather unpredictable fluctuations in income.
The bill is co-introduced by Councilmembers Elissa Silverman, Robert White, and Trayon White, and co-introduced by Councilmember David Grosso.
“This legislation empowers residents who are struggling to make ends meet to set aside savings for a rainy day,” said Councilmember Nadeau. “The District has one of the highest rates of income inequality in the nation. This bill helps improve one of the District’s most successful programs to help put more money in the pockets of our low-income residents.”
The Act improves upon the DC State Earned Income Tax Credit (EITC), a proven pro-work policy utilized by nearly one in five District taxpayers. Eligible taxpayers would be given the option to defer payment of 30 percent of their DC EITC for 6 months with a 50 percent “savings match” (a 15 percent increase in the total refund amount). The table below provides an example, using a sample household of one adult with two dependents with an earned income that would max out their DC EITC. Deferred refunds are an evidence-based policy rooted in research that seeks to diagnose and address the real, day-to-day needs of low- and moderate-income households. Similar programs exist in Australia, New Zealand, and Canada, and a successful pilot was recently implemented for residents of public housing in Chicago.
While the DC EITC is a powerful tool that helps lift working families out of poverty, it’s also a blunt tool. The EITC hasn’t adjusted to some of the unfortunate new realities of the labor market – contract work, contingent labor and shifting schedules often create major fluctuations in income. More than 1/3 of households nationally have volatile incomes (a shift of more than 25 percent month-to-month), and the poorest households can lose up to 66 percent of their income from one month to the next.
|Example Household: Adult with 2 Children, $14,290 Yearly Income|
|Standard DC EITC||$2,286|
|Expanded EITC w/ Rainy Day Refund||
“More than one in three households in Washington are living just one economic shock away from poverty,” said Andrea Levere, President of Prosperity Now. “We believe the Rainy Day Refund Act of 2018 will ensure working families in DC can weather these potential storms with real savings and avoid falling off a financial cliff. Research-driven proposals like this, built upon the foundation of the District’s strong EITC, will continue to help all families have a clear path to financial security, wealth and prosperity.”
Behind healthcare subsidies and SNAP (“Food Stamps”), the EITC is the widest-serving public assistance program in the District’s toolbox. The EITC is meant to bridge the gap between income and the total cost of living, but for nearly every household that receives it, the gap is not fully closed.
“Earned Income Tax Credits can be a significant source of income for low- and middle-income workers,” saidElaine Maag of Urban Institute’s Tax Policy Center. “Using the EITC to encourage savings could provide a critical cushion for unexpected expenses that occur outside of tax time and be a powerful tool to help families make important longer-term investments in college or housing.”
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