New Bill Aims to Reduce the Need for Payday Loans

Inside Subprime: April 18, 2019

By Lindsey Frankel

Senate Democrats have proposed a new bill that would create a child allowance while increasing the amount of the Earned Income Tax Credit for low-income families and childless adults. In addition, the Child Tax Credit would be available as a monthly payment, and families could take out up to a $500 advance on the EITC, an option intended to prevent low-income individuals from taking on risky debt from payday loans.

According to estimates from the Center on Budget and Policy Priorities, the legislation would increase the incomes of 46 million households, lifting 7 million people, including 3 million children, out of poverty. The child poverty rate would decrease by 28 percent.

The Working Families Tax Relief Act was designed to reach a compromise, providing a smaller degree of expansion than previous proposals, and 44 out of the 47 Senate Democrats have signed the bill. Should Democrats take control of the Senate and the presidency again, the bill is set up to pass without difficulty, Vox reports.

One of the reasons the current Child Tax Credit has been unsuccessful at reducing child poverty is that, because of a complex restriction, families with little to no income are precluded from obtaining the receivable $1,400. The Working Families Tax Relief Act would make the full $2,000 credit available to anyone below the phaseout range. An additional $1,000 would also be receivable for each child under the age of 6. That means up to $3,000 per young child would be available to parents either as a monthly payment or through tax returns.

Low-income adults without children would also benefit from the Act. Currently, a maximum EITC of $529 is available for adults ages 25 to 65. The Act would expand the age range from 19 to 67 and quadruple the maximum benefit to $2,074. For families with the kids, the maximum value of the EITC would be even greater.

Because the EITC is currently only available as a tax refund, many families use it to pay off debt, often from high-interest payday loan profiders, leaving less of the much-needed cash in their pockets. The new legislation would give families the option of taking out a $500 advance on the EITC, The idea was initially proposed in a 2014 paper for the Center for American Progress. Its authors stated: “Since the value of the typical payday loan is about $375, this amount would be sufficient to prevent many instances of predatory lending — and thus preclude the high costs and cycles of debt associated with such lending practices.”

The debt tap from payday loans occurs when borrowers can’t pay back these costly loans on time and are forced to reborrow. The Consumer Financial Protection Bureau found that about 80 percent of payday loans get renewed or rolled over.

Not only would the bill reduce the rate of child poverty, but there’s even evidence that providing cash to families raising young children leads to higher earnings for those children as adults, which in turn strengthens the economy. A randomized trial conducted in New York City also found that a higher EITC for singles would decrease deep poverty and even increase employment rates.

As Neera Tanden, president and CEO of the Center for American Progress, said in a statement, “This is what tax reform that actually benefits the American people looks like.” She added that “expanding the EITC and the CTC would dramatically reduce poverty while helping millions of families weather the squeeze between flat wages and the rising costs associated with reaching and staying in the middle class.”

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