Greater Hispanic outreach can improve take-up of earned income tax credit

The Earned Income Tax Credit (EITC) is one of the largest antipoverty programs in the nation and the most extensive targeting low-income workers. It provides work incentives and helps to lift working families out of poverty. Despite the EITC’s many benefits, a large percentage of qualified workers do not claim it.

Reasons people in need miss out on the tax credit include program complexity, lack of awareness and insufficient income to file taxes. In exploring “the puzzle of incomplete take-up,” we find in our research that language barriers factor heavily into the EITC underclaim. Among all racial/ethnic groups in this study, low take-up is most prominent among low-income Hispanic workers who are not proficient in English.

As the nation recovers from an economically painful pandemic, government and social service agencies are conducting informational campaigns to ensure that more qualifying families file for the EITC during the 2022 tax season. Increased efforts to reach growing Hispanic populations in states that include Texas, Louisiana and New Mexico could go a long way toward improving take-up of the EITC.

What Is the EITC?

The EITC is a key component of the U.S. welfare system, trailing only Medicaid and food stamps (SNAP) in size.

Essentially, the EITC “tops up” the wages of low-income workers, ensuring they receive more per hour than their employer is willing to pay. The intent is to better reward work without making workers costlier for firms to employ, which might inadvertently discourage some firms from hiring. The result is a program that has one eye on equity and the other on efficiency, which has historically given the EITC a measure of bipartisan support.

While the EITC is a federal program administered through the IRS, 30 states and Washington, D.C., offer (or will soon offer) their own EITC supplements to complement these federal dollars. The generosity of the EITC varies drastically. In the Federal Reserve’s Eleventh District, qualified New Mexico and Louisiana families can receive additional, state-refundable EITC-related credits for 2021. Texas does not have a state income tax and, thus, has no supplemental EITC tax benefit.

Because the EITC is a tax credit, it does not require an independent bureaucracy to assess eligibility or an administrative apparatus to disburse checks. As a result, it is one of the nation’s least expensive antipoverty programs.

Based on estimates from Bastian and Jones (2021), for every $100 in EITC spending, the federal government collects $83 in taxes and savings in government spending within a year.[1] Other research supports the EITC’s added benefit of generating tax revenue by nudging its recipients, especially single mothers, to work.

By design, the EITC is most generous to working single parents with children. Comparing two filers with incomes around the federal poverty line in 2020, a woman without children would qualify for a maximum EITC of $538, whereas a single working mother with two children could receive $5,920. (The difference is reduced temporarily by the American Rescue Plan Act, a pandemic relief measure that tripled EITC benefits for those without children for 2021.)

The program’s labor-supply effect on single mothers is well-known and widely supported by economic studies. But its impact on, and contribution to, an economic recovery that is inclusive across racial and ethnic groups isn’t as well-understood. Our research (Jiao, Lu and Zhang, 2022) sheds more light on the employment response to the EITC by race/ethnicity, a subject we will address in greater depth in a future article.

Many eligible families fail to claim EITC

Because the EITC plays an important role in helping low-income households and can be claimed without navigating government bureaucracy, one might think there would be 100 percent participation among eligible households. In tax year 2015, over 27 million taxpayers received $67 billion in EITC benefits, according to a 2018 Treasury Inspector General’s report. However, the IRS has said that roughly 20 percent of those eligible do not claim the EITC, losing $7.3 billion in benefits each year.

Chart 1 shows annual EITC take-up rates by state for tax years 2011–18, based on data from the IRS. Take-up rates in 2018 varied from approximately 70 percent in Alaska, Oregon and California to more than 82 percent in South Dakota. Take-up rates in Texas, Louisiana and New Mexico were 78.1, 78.2 and 78.5 percent, respectively.

Chart 1 EITC Take-Up Among Eligible Workers Varies by State and over Time

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NOTES: The dynamic U.S. map scrolls through Earned Income Tax Credit (EITC) take-up rates by state for tax years 2011 through 2018. The take-up rate is calculated as the percent of eligible households that claim EITC benefits (100=100 percent). In the legend, percentages on the left begin each range. Washington, D.C., is included in the results. SOURCE: IRS.

Who fails to claim the EITC?

Language barriers could explain why some workers who are eligible might struggle with program complexity and understanding. It’s also likely that many workers without sufficient income to file a tax form are unaware that they can still qualify for the EITC.

Research from the Census Bureau found that, among all eligible individuals, Hispanic workers had lower take-up rates compared with non-Hispanic white workers in 2009. Our more recent analysis finds that both state and county-level take-up rates are negatively associated with the percentage of Hispanic and low-income populations. Low-income families are defined as those earning less than 200 percent of the federal poverty line.

To determine whether Hispanic households are less likely than the households of other racial/ethnic groups to claim EITC benefits, we conducted a county-level analysis of the correlation between socioeconomic factors and EITC take-up. The 2014–15 IRS EITC filing information and American Community Survey information on 444 counties across the United States were used in our study. The research methodology is available in the technical appendix.

We find EITC take-up is lower in counties with a greater share of low-income Hispanic residents. Further analysis shows that the gap between the Hispanic and white populations closes once the language barriers are removed. These results are robust even after removing the inherent differences of county or year.

The analysis helps explain why take-up rates are lower for Hispanic households than for other traditionally disadvantaged groups that may also face systemic barriers but are less likely statistically to cite limited English proficiency as a feature of their households.

Remedies to problem of low EITC take-up

Multiple large-scale efforts have been implemented to improve awareness and take-up of EITC benefits. Still, many were not as effective as hoped, including the 2018-19 California text message experiment, a 2011 outreach experiment in Virginia and the EITC notification laws. With millions spent on EITC promotion and billions of dollars in unclaimed benefits each year, what more can be done?

One answer is to redouble efforts to educate workers on the benefits of the EITC, particularly qualifying nonfilers. A single working-age parent is not required to file a tax form if their income is less than $12,550. This family qualifies for the EITC, yet it will not receive the benefit without filing the form.

Another answer is to increase outreach to those who have difficulty understanding the tax system. Filing for taxes can be challenging for anyone—but particularly for those who face language barriers (though tax forms are provided in multiple languages). While the IRS lists “language barrier” as a potential hurdle to EITC awareness, our county-level analysis suggests that language could be a significant barrier for Spanish-speaking households.

Assistance programs can help

Texas is leading the country in transitioning to a majority-minority state. Moreover, 30 percent of its Hispanic residents do not speak English well, according to the American Community Survey (2018).

Resources are available to help those with difficulty understanding the EITC’s benefits and perceived risks, such as flagging an audit. One option is the IRS's Volunteer Income Tax Assistance (VITA) program, which supports free tax preparation for limited-English-speaking filers as well as low-income, disabled and elderly taxpayers.

In Texas, for example, there are six VITA programs in the Dallas–Fort Worth area, four in San Antonio and one in El Paso. However, the number of assistance programs falls far short of the need.

To be sure, programs such as VITA cannot completely close the longstanding income and wealth gaps in American society. But greater outreach to Hispanic families—and indeed all taxpayers who qualify for the EITC—to help them claim the benefits to which they are legally entitled can play an important role in lifting families out of poverty and promoting inclusive economic growth.

Notes

1. A summary of the social value of the EITC and other social programs is provided by Opportunity Insights, a research and policy institute based at Harvard University.