publication . Preprint . 2013

Refundable Tax Credits

Congressional Budget Office;
Open Access
  • Published: 24 Jan 2013
Abstract
In 1975, the first refundable tax credit—the earned income tax credit (EITC)—took effect. Since then, the number and cost of refundable tax credits—credits that can result in net payments from the government—have grown considerably. Those credits will cost $149 billion in 2013, CBO estimates, mostly for the EITC and the child tax credit.
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1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Congressional Budget Office.

Notes: Date labels refer to the beginning of the calendar year. Most refundable credits took effect on January 1 and expired on December 31 of the applicable year. For credits that took effect or expired on different dates, see Table A-1. COBRA = Consolidated Omnibus Budget Reconciliation Act.

a. The original legislation also allowed corporations to claim a refundable research credit under certain circumstances. That provision expired on December 31, 2009.

10. See Dennis J. Ventry Jr., “The Collision of Tax and Welfare Politics: The Political History of the Earned Income Tax Credit,” in Bruce D. Meyer and Douglas Holtz-Eakin, eds., Making Work Pay: The Earned Income Tax Credit and Its Impact on America's Families (Russell Sage Foundation, 2002), pp. 15-66, www.russellsage.org/publications/making-work-pay.

12. See House Committee on Ways and Means, Tax Reduction Act of 1975, Report 94-19 (February 25, 1975); and Senate Committee on Finance, Tax Reduction Act of 1975, Report 94-36 (March 12, 1975).

18. The exchanges will group health plans into four tiers labeled “bronze,” “silver,” “gold,” and “platinum.” Each tier will cover a specified set of benefits, paying (on average) 60 percent, 70 percent, 80 percent, or 90 percent, respectively, of a beneficiary's claims. The reference premium is the cost of the silver plan with the second-lowest cost in the locality. For more information, see Congressional Budget Office, Additional Information About CBO's Baseline Projections of Federal Subsidies for Health Insurance Provided Through Exchanges (May 2011), www.cbo.gov/publication/ 41464.

19. Another development since 2008 was the creation of “bond credits.” The prototype (and, with costs of $3 billion a year, the largest by far) was the Build America Bond program created by ARRA. Under that program, state and local governments receive direct payments from the federal government to reimburse them for the amounts they pay to holders of certain types of bonds. Although the credits are defined in the tax code as refundable, they are identical to other federal grants to state governments. For that reason, bond credits are not discussed in this report.

22. See Bruce D. Meyer and Dan T. Rosenbaum, “Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers,” Quarterly Journal of Economics, vol. 116, no. 3 (2001), pp. 1063-1114, http://qje.oxfordjournals.org/content/116/3/ 1063.abstract.

23. See Jeffrey Grogger, “The Effects of Time Limits, the EITC, and Other Policy Changes on Welfare Use, Work, and Income Among Female-Headed Families,” Review of Economics and Statistics, vol. 85, no. 2 (May 2003), pp. 394-408.

24. See Lily L. Batchelder, Fred T. Goldberg Jr., and Peter R. Orszag, “Efficiency and Tax Incentives: The Case for Refundable Tax Credits,” Stanford Law Review, vol. 59, no. 23 (2006), pp. 23-76.

25. Quintiles, or fifths, are created by ranking households by their before-tax income. Quintiles contain equal numbers of people. A household consists of the people who share a housing unit, regardless of their relationship.

27. See Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2008 and 2009 (July 2012), www.cbo.gov/publication/43373.

28. The Worker, Homeownership, and Business Assistance Act of 2009 extended a scaled-back version of the first-time homebuyer credit to certain homebuyers who already owned a home and purchased a new home after November 6, 2009. To qualify, those homebuyers had to have lived in their home for five consecutive years during the eight years before closing on the new home. The first-time homebuyer credit-including the provision applying to some homeowners-expired on April 31, 2010, for most people.

29. See Jennifer P. Stuber and others, Beyond Stigma: What Barriers Actually Affect the Decisions of Low-Income Families to Enroll in Medicaid? Issue Brief (George Washington University Medical Center, July 2000), http://sphhs.gwu.edu/departments/ healthpolicy/CHPR/downloads/beyond_stigma_no3.pdf; and Janet Currie and Jeffrey Grogger, “Explaining Recent Declines in Food Stamp Program Participation,” in Janet Rothenberg Pack and William G. Gale, eds., Brookings-Wharton Papers on Urban Affairs: 2001 (2001), pp. 203-244, www.jstor.org/stable/10.2307/ 25058786.

30. General assistance programs are operated and funded by states. Those programs typically provide cash and in-kind benefits to people who are not eligible for federal programs, such as TANF.

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