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Op-Ed: Expand economic opportunities by enhancing the Earned Income Tax Credit

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By: Kevin Seifert

As the nation responds to the economic turbulence caused by COVID-19, Congress should build on elements of the American Rescue Plan by further reforming and expanding the Earned Income Tax Credit (EITC). Since 1975, the Earned Income Tax Credit has proven to be one of the federal government’s most effective poverty-fighting programs and enhancing the credit is one of the best ways Congress can ensure a strong, bottom-up recovery from the pandemic.

A common-sense expansion of the EITC is precisely the medicine the U.S. economy needs to return to full health. The economy is still 6.7 million jobs short of its February 2020 levels but as the American Enterprise Institute’s Survey Center on American Life reported this month, 3 in 4 individuals who have been unemployed for less than two years are currently looking or planning to look for work. Correspondingly, employers are hungry for workers and need them to keep up with rising demand for goods and services.

Unfortunately, during the pandemic, the federal government erected new short-term disincentives – most notably through enhanced unemployment benefits and other direct payment programs, that have slowed individuals’ re-entry into the workforce. While stabilizing measures were necessary at the pandemic’s outset, Congress needs to shift from emergency responses to policies that help individuals and families over the long-term. An expansion of the Earned Income Credit will accomplish this by incentivizing labor-force participation and targeting benefits to those individuals and families most in-need.

As the American Enterprise Institute’s Michael Strain succinctly stated: “If you want more of something, subsidize it.” The EITC benefit is equal to a percentage of annual earnings and determined by the number of children living in the household. In short, it is a tax credit that subsidizes work. For millions of Americans with lower-incomes, because of the Earned Income Tax Credit, the more they earn, the larger the benefit they receive. The EITC’s intentional design not only helps employers and their employees but it directly aids families and their children as well. The benefit helps society’s most vulnerableand because it is tied to earnings, it reinforces the values that come with a steady paycheck.

The effectiveness of the EITC is precisely why Members of Congress already agreed to expand the benefit via the American Rescue Plan. The recent reforms extended the benefit to Americans aged 19 to 24, increasing the credit’s maximum value and the income cap for adults without children. According to the Center for Budget and Policy Priorities, these reforms will help over 17 million low-income Americans.

In a time of legislative gridlock, these changes made to the EITC via the American Rescue Plan were a meaningful step in the right direction, but Congress should not stop there.

Congress can easily address the significant marriage penalty associated with the current Earned Income Tax Credit. Many low-income families are faced with a choice of remaining unmarried or losing EITC benefits. Congress can fix this “benefit cliff” by increasing the income limit where the EITC begins to phase-out and by reducing the phase-out rate. This would help lawmakers achieve the dual goals of incentivizing work and encouraging family formation.

Though the Earned Income Tax Credit has been historically focused on individuals with children, further increasing the overall amount of the credit for single individuals would promote work among younger Americans and assist a wider array of people battling poverty. There are 5.8 million working age adults  without children, including 1.5 million Latino and 1 million Black workers, who stand to benefit from a more expansive EITC. And given those who lost jobs during COVID-19 generally skew younger, an EITC expansion for single individuals would give this cohort a timely boost, pushing job-seekers into the workforce and incentivizing continued employment.

The EITC is already one of the largest federal safety-net programs and these potential enhancements are not without costs, which is why legislators should scour the federal budget to identify offsets. One option, long supported by both conservatives and good-government advocates, is reducing the billions in improper payments associated with the IRS’ processing of the EITC. Another approach is to reduce spending on ineffective federal poverty-fighting programs that lack the evidence and data to justify continued funding. The federal government could reallocate funds from under-performing social programs and put them towards an enhanced EITC. The federal government spends hundreds of billions of dollars annually on fighting-poverty and it should be prioritizing programs that actually improve outcomes. The EITC has demonstrated its effectiveness over decades and expanding the program would be consistent with taking an evidence-based approach to battling poverty.

An enhanced tax credit that reduces the marriage penalty, fixes the “benefit cliffs” and increases benefits for single individuals would address our labor-force participation issues and would assist those battling persistent poverty or temporary financial difficulties related to COVID-19. It would help families, job-seekers, and job-creators alike.

A more generous Earned Income Tax Credit is not a silver bullet to alleviate poverty, but it does represent one of the most powerful tools at the federal government’s disposal. It has already done a great deal to help Americans economically and if Congress continues to sensibly build on the program, it will benefit even more in the future.

Kevin Seifert is the Vice President of the American Idea Foundation, a non-profit headed by former Speaker of the House Paul Ryan committed to promoting evidence-based public policies and programs that expand economic opportunities and fight poverty. This op-ed originally appeared in The Hill. 

Lessons from the Front-Lines: Touring Opportunity Zones & Nurse-Family Partnerships in Charleston, SC

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By: AIF Staff

In late June, former Speaker of the House Paul Ryan was joined by Senator Tim Scott and Representatives Ralph Norman and Joe Wilson of South Carolina on a visit to the Charleston Digital Corridor, a 92,000 sq. foot workspace and incubator for local businesses based in the center of a burgeoning Opportunity Zone.

The South Carolina site visits, coordinated by the American Idea Foundation, gave current and former legislators a chance to talk with employers and community-leaders about the progress being made in one of the state’s Opportunity Zones.

Created as part of the Tax Cuts & Jobs Act of 2017, Opportunity Zones are a poverty-fighting tool that provides tax incentives for long-term investments in specific Census tracts. Speaker Ryan and Senator Scott have both been long-time advocates of the policy which aims to revitalize economically-distressed areas through capital incentives. Ryan and the South Carolina legislators talked with some of the 37 job-creators headquartered in the Charleston Tech Center about how Opportunity Zones have spurred business growth in a part of the state where poverty has been persistent.

As Speaker Ryan said during the visit: “The big benefit of Senator Scott‘s [Opportunity Zone] legislation is it has brought tens of billions of dollars of capital into the poorest communities of America. That’s money that would’ve never come otherwise. It’s also brought in the private sector and the public sector to focus on getting people out of poverty.”

Senator Scott added: “This has to be a win-win. A win for investors, a win for citizens, and a win for America and so far, so good.” 

While in South Carolina, Speaker Ryan also had the opportunity to meet with the leaders of the McLeod Health Clarendon’s Nurse-Family Partnership, which empowers first-time mothers by pairing them with trained nurses who provide health care and other social services from their pregnancy to their child’s 2nd birthday.  

Ryan had a moving conversation with program administrators and new mothers who detailed the relationships they formed with medical professionals and discussed how the wrap-around services helped their children and families.

As the local paper, The Sumter Item, reported:

 “Since former Speaker of the House Paul Ryan has left Washington, he founded the American Idea Foundation, a nonprofit that promotes poverty-fighting programs and policy to help Americans achieve their idea of the American Dream.

“To further those efforts, he visited McLeod Health Clarendon on Friday to learn about the Manning hospital’s Nurse Family Partnership program.

“The program connects expectant, first-time mothers with a nurse, who helps guide them through the physical, financial and emotional journeys that come with pregnancy and motherhood…. The program has been proven to improve health, economic and parental outcomes, and Paul Ryan held roundtable discussions with hospital leaders, nurses and mothers to learn more.”

The Item went on to cover the visit and its importance, saying in part:

“Nurses in a pregnancy and motherhood program at the county’s only hospital know their work goes beyond health care, breaking barriers between provider and patient, outsider and friend. Now, their stories have reached the ears of who was once one of Congress’ top leaders.

“Children played in the next room last week as McLeod Health Clarendon’s private dining room, which had just the day before hosted a reception marking the hospital’s 70th anniversary, hosted a roundtable discussion about the Nurse-Family Partnership program. Attending were mothers, nurses, hospital executives and former Speaker of the House Paul Ryan.

***

“Four mothers took turns telling their story, their nurses by their side, to Ryan. He heard about the mother who was sick her entire pregnancy and had her texts answered late at night. He heard about the nurse who ensured her mothers were signed up for COVID-19 relief payments. And the nurse who started educating a mother’s young sister on how to care for a newborn when COVID-19 put the mom on a ventilator.

“What Ryan learned from the mothers, nurses and program and hospital leaders was why this program works.

“It’s more than health care,” he said.

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“If Ryan was looking for evidence-based solutions, he came to the right place when he visited the rural hospital in Manning. As Frank Daidone, CEO of the national NFP, put it, McLeod’s program is the most efficiently run and best performing NFP in the country.”

Since 2014, the Nurse-Family Partnership at McLeod Health has served more than 1,000 families in South Carolina and made over 33,000 home visits. It is an example of the impact that the Nurse-Family Partnership program can have in communities around the country. The program is evidence-based, has been expanded under both Republican and Democratic Administrations, and as Speaker Ryan observed on his visit, it is changing lives on a daily basis.

These site visits are the first of many to be conducted by the American Idea Foundation and are premised on the belief that impactful public policies can be shaped by identifying front-line organizations tackling tough issues, validating their efforts through evidence, and showing lawmakers first-hand how they are expanding opportunities to those in need. 

Buying Outcomes: Lessons from the Past

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By: AIF Staff

In 2014, a year that coincided with the 50th Anniversary of the War on Poverty, then-Chairman of the House Budget Committee Paul Ryan conducted a review of the federal government’s poverty-fighting efforts and disappointingly found that federal programs often fail to align dollars spent with outcomes achieved. All too frequently, well-intended federal programs did not meet their stated aims and as a result, communities and participants suffered due to lack-luster performances.  

The 2014 assessment of the federal government’s poverty-fighting efforts revealed a simple truth: For decades, the federal government has attempted to structure large-scale programs in a way that achieves positive employment outcomes and there are lessons, both good and bad, to be learned from these efforts.

The desire to improve the federal government’s poverty-fighting efforts so they better assist more Americans is why Speaker Ryan and the American Idea Foundation participated in a project, led by Social Finance and conducted in partnership with the Federal Reserves of Philadelphia, Atlanta, and San Francisco, to identify incentive models that have demonstrated track records of success.

The result of this project was a book, Workforce Realigned: How New Partnerships are Advancing Economic Mobility, that contains a series of 19 case studies about how results-based financing can create benefits to the government, employers, service providers, and participants. Speaker Ryan’s chapter focused specifically on the mixed results of past performance-based programs and on a promising new innovation in this space, Social Impact Bonds.

Key excerpts from Speaker Ryan’s chapter follows. You can read his chapter in its entirety here.

An Introduction to Performance-Based Contracting

America is at a moment of great need and great opportunity in the fight against poverty. Amid a global pandemic and recession, the importance of disrupting the stale institutions in place to tackle these challenges has become clearer than ever before…

Our efforts have too often originated in Washington D.C. with little input from the individuals on the ground working to expand opportunity and those with lived experience, leading to approaches that further displace and marginalize those living in poverty. It’s when we innovate together to solve this problem–combining the vibrancy of community-based solutions, the know-how of the private sector, and the scale of government policy–that we have the greatest potential to make a difference.

Social impact bonds bring together the best of the public and private sectors to address the most critical issues our country is facing. The goal of a social public good–a world in which far fewer Americans live in poverty–is central to their execution. So too is the expertise and capital of the private sector, which provides the funding, the strategic thinking, and the energy to deploy resources where most needed. When executed properly, programs like these have enormous promise.

Unfortunately, the long history of performance-based contracting in American civic life includes frequent examples of programs that have not achieved their desired results. Over the past four decades, the government has attempted to structure several programs that offer payouts based on provider performance to drive better outcomes. Although these programs have been created with the best intentions, they have driven little improvement to the status quo. Identifying and addressing the challenges they have faced will be critical to designing the next generation of performance-based contracts….

When performance-based contracts are set up well, shortfalls are mitigated and the programs have significant potential to improve lives. Well-executed performance-based contracting offers benefits for all parties involved, by shifting spending risk away from governments, creating positive feedback loops based on provider effectiveness, and facilitating the collection of data on intervention outcomes.

As the next generation of performance-based contracts takes hold–strengthened by groundbreaking federal legislation, such as the Social Impact Partnerships to Pay for Results Act–it is essential that we learn from the challenges that past initiatives have faced. Historical examples from workforce development and health care offer lessons on how to mitigate typical shortcomings and fully unlock the potential of performance-based contracting.

The Job Training Partnership Act (1982)

Going back to the 1980s, federal legislation has tied payments to employment outcomes achieved by program participants…. The Job Training Partnership Act (JTPA) of 1982 was one such program. Developed through a bipartisan effort led by Senators Dan Quayle, Edward Kennedy, Paula Hawkins, and Claiborne Pell and by Representatives Augustus Hawkins and James Jeffords, it was signed into law by then President Reagan. The bill aimed to improve employment rates for low-income Americans by providing budgetary rewards and sanctions to jurisdictions based on the near-term labor market outcome levels achieved by participants.

To carry out its purpose, the JTPA established federal assistance for adult and youth programs, federally administered programs (such as training for migrant workers and veterans), summer youth employment and training programs, and training assistance for workers affected by layoffs.  The program established a performance management system that provided rankings of 620 Service Delivery Areas (SDAs) and set aside funding to reward SDAs that performed particularly well relative to the overall labor market.

To evaluate outcomes, JTPA originally considered four performance measures: rate of entering employment, average wage at placement, cost per participant who entered employment, and rate of entering employment among welfare recipients. However, states were given considerable flexibility to select comparison data and define favorable terms. Where improved results existed, it became clear that they had been driven by the selection of participants who had fewer needs, and, therefore, were easier to serve…. The JTPA was suffering from several common challenges, as identified in an analysis by Burt Barnow & Jeffrey Smith:

  • The program provided stranger incentives to serve less-vulnerable populations: JTPA incentives treated all program participants equally, which led to higher margins for service providers who chose to serve lower-need individuals. The program did not serve groups such as women and people of color in proportion to their share of the eligible population, while individuals who would likely have achieved high post-training earnings regardless of the quality of the training were disproportionately represented. A structure that assigns different levels of value based upon the need of the population might have addressed this challenge.
  • The timing of performance incentives skewed services provided: In some cases, the length of the training programs was influenced by program managers’ desire to count participants in their data for a particular program year. These arbitrary timing changes were found to reduce the overall mean impact of the training services the program provided. Updates to monitoring and reporting systems may limit the extent to which programs are able to manipulate data in this way.
  • There was limited support that incentives improved individual performance: It is unclear that the project improved the individual efficiency of employees in the absence of incentives at the individual employee level. Future performance-based contracts may explore how service providers can pass on incentive payments to their employees and how they can track individual performance without adding significant overhead costs.
  • Some providers gamed the compensation system: There is strong evidence that JTPA service providers developed strategies to earn higher payments by gaming the performance system. A common gaming strategy involved formally enrolling participants in the program only after they had found jobs, and then quickly terminating them, in order to increase the proportion of employed individuals. Adjusting reporting requirements and improving metrics and evaluation systems could help to reduce the extent to which gaming can yield higher payments.

As a result of its structural challenges and the limited improvement to participants’ employment outcomes, the JTPA was repealed in 1998.  The program’s failure to segment target populations, its focus on measurements that were not linked to individual performance, and its lack of safeguards to avoid gaming are valuable reminders of the potential risks of performance-based contracting in workforce development. However, these mistakes also offer lessons regarding critical areas of focus for other pay-for-performance programs to succeed in the future.

Ticket to Work (1999)

In 1999, another performance-based workforce development program emerged that aimed to increase the number of low-income Americans achieving economic self-sufficiency. At the time, only 0.5% of Social Security Disability beneficiaries were leaving the benefit rolls because they secured jobs. Legislators hoped to create a better market to meet the diverse return-to-work service needs of beneficiaries and increase the rate of exiting the program due to work to 1%.

The Ticket to Work (TTW) and Work Improvement Incentives Act of 1999 was designed to support this mission by promoting flexible, customizable services to help disability insurance beneficiaries secure self-supporting jobs. The program incentivized private organizations and state agencies to deliver quality services by providing large payments for each client who secured a job and retained it for long enough to stop receiving Social Security Disability benefits….

Despite the program’s intent to reach a broad group of beneficiaries, its early success was limited: By 2005, only 2% of the individuals who received Tickets in the mail had used them, and only 45% of the 1,300 enrolled employer networks had accepted a Ticket. Like the JTPA, TTW’s outcomes suffered from a range of shortfalls:

  • Providers perceived the system as too financially risky: TTW tied 100% of provider compensation to outcomes, which caused significant uncertainty as to whether payouts would be achieved. Research showed that after the first two years of program operations, employer networks relying on TTW payments as their sole source of revenue would have lost money: The cost of service delivery far exceeded TTW revenues for most providers. Offering upfront operating capital to providers in addition to outcomes-based payments, as many social impact bonds now do, might have helped to mitigate this challenge.
  • The program provided higher payouts to providers serving less-vulnerable populations: Like other unsuccessful performance-based contracts, TTW created selection bias against harder-to-serve individuals and services less likely to lead to quick employment. Providers could refuse to serve individuals who they thought were unlikely to maintain high enough earnings to stop receiving benefits, and, therefore, unlikely to trigger outcome payments. They could also choose to offer only services that aligned with the outcomes payments they were likely to receive. Differentiating payment amounts based on participants’ level of need could have helped to avoid rewarding providers for serving the lowest-need clients.
  • The benefits structure discouraged some beneficiaries from returning to work: The program did nothing to address that participants would lose 100% of their Social Security Disability benefits once their monthly earnings exceeded a certain threshold, which created a significant barrier for returning to work. Structuring the program to scale the reduction of benefits more gradually might have increased the value proposition of returning to the workforce for participants.
  • Reporting and administrative burdens fell on service providers and participants: Finally, there were significant administrative challenges that delayed outcomes measurement and provider repayment. Beneficiaries were expected to submit salary documentation to employer networks but given no incentive to do so, which made it difficult for employer networks to demonstrate that monthly earnings had reached the designated threshold. Establishing data-sharing provisions upfront might have minimized administrative burdens and streamlined the system for triggering repayment….

In response to provider feedback, a set of revisions passed in 2008 that increased the number and total value of provider payments, shortened the period of participant employment for employer networks to receive full payment from 60 to 36 months, and revamped payment procedures to reduce administrative burden. The revised system was significantly more attractive to providers, and the number of employer networks that accepted at least one Ticket doubled from 2007 to 2010.

The increase in participation in TTW following the 2008 legislation reform affirms the importance of seeking service provider input to mitigate unforeseen barriers to entry….

Physician Pay for Performance (2005-2017)

Health care is another area in which performance-based contracting offers both the potential to improve service quality, and the risk of gaming and poorly structured incentives. The United States spends more on doctors, pharmaceuticals, and health administration as a percentage of GDP than any other high-income nation, yet does not enjoy better health outcomes. To combat rising costs and improve quality, states, healthcare systems, insurance companies, and federal agencies have piloted Pay-For-Performance (PFP) programs for physicians and hospitals across the country. The success of these programs, however, has been largely uneven.

In November 2017, researchers from the University of Pittsburgh and Harvard published a study reporting that Medicare PFP programs failed to improve healthcare quality or reduce costs. Rather than promote better outcomes, the program penalized physicians who cared for lower-income and sicker patients because the doctors’ “quality scores,” and, therefore payment, decreased. The program’s structure emphasized health outputs over baseline improvement, creating financial disincentives for doctors to treat patients who were less healthy.

Providing higher payouts to those who serve healthier patients is a key issue in physician PFP programs, in which financial incentives often fail to promote health improvements over specific health outputs. While physician skill is an important component of health quality, factors such as the patient’s baseline health, socio-economic status, access to insurance, and exercise habits all contribute to health outcomes and are largely outside of the doctor’s control. PFP programs that exclusively target physician pay without supporting other interventions draw a direct link from individual clinician skill to patient health that can create financial disincentives to treat the sickest patients….

The lack of success of physician and hospital PFP programs has led many critics to call for an end to PFP in healthcare. However, it’s possible that an outcomes-based funding system could be effective in the absence of this program’s poor project design, weak measurement, incorrect outcome criteria, and flawed linkages between the intervention and outcomes. Past PFP programs struggled because they were structured around the underlying concept that financial rewards to physicians could improve outcomes in a vacuum. A stronger design could rescue the core concept.

Social Impact Partnerships to Pay for Results (2018)

As we’ve seen, performance-based contracts can fall victim to predictable design errors. But, when structured well, these programs have the potential for impressive results. In support of improving the effectiveness of social services, the Social Impact Partnerships to Pay for Results Act (SIPPRA) was signed into law in 2018.

SIPPRA brings great promise for the next generation of performance-based contracts. The Act appropriates $100 million to the U.S. Department of the Treasury, $15 million of which is set aside for evaluation costs to support state and local governments in building a foundation for outcomes-based decision making. Funding can be used across a range of issue areas, including child and family welfare, health, education, and employment, creating extensive opportunities to address the country’s most pressing needs.

I’m personally incredibly proud of SIPPRA and the principles it follows. First and foremost, SIPPRA takes a clearly evidence-based approach to lifting Americans out of poverty: Funding flows to programs whose methods have been evaluated using data, supporting real-world efforts that achieve positive results.

In building programs based on evidence of what works, SIPPRA has the potential to finance the most effective solutions for fighting poverty, which originate not from Washington D.C., but from leaders on the ground in communities across the country. SIPPRA funding will support individuals and organizations that have been making a difference in their communities for decades, while bringing their ideas to policymakers to expand their reach. This intersection of community-based approaches and government support is what will ultimately most improve the lives of Americans in need.