Reforms could help Oregon families missing out on millions in tax credits

The earned income tax credit is one of the best tools to attack poverty – but processes are in the way

April 20, 2022 5:30 am

Hearings are scheduled in May in Portland to consider city government reforms. (Amanda Loman/Oregon Capital Chronicle)

Tax Day has now passed. And many low-paid working families missed an opportunity to make their life a bit easier.

Year in, year out, Oregon ranks at or near the bottom nationally in the share of families qualifying for the earned income tax credit who actually claim it. That’s bad news not only for the working families missing out on the cash, but for the entire state, which loses out on federal dollars that would otherwise flow to our communities.

It’s time for the Oregon Legislature to deal with the problem once and for all by making serious investments in free tax assistance or, even better, relieve Oregonians of much of the hassle and cost of filing their taxes.

The tax credit for both federal and state taxes is designed to boost the income of workers paid low wages. To benefit, an eligible worker must file tax returns claiming the credit. For families with children, the federal tax credit on average puts an extra $3,000, in their pockets. That amount can be game-changing for a cash-strapped household.

In 2018, the most recent year with available data, more than one in four working families eligible – about 75,000 Oregon families in total – did not claim the credit. That year, only Alaska fared worse than Oregon in terms of earned income tax credit usage among qualifying families.

As a result, Oregon families left unclaimed about $84 million in federal tax credit dollars. This is federal money that didn’t enter Oregon’s economy. This money could have helped families catch up on rent, fix a car, or put aside money for their children’s education.

In addition to leaving federal dollars on the table, Oregonian workers also did not claim about $9 million in state earned income tax credit funds.

Why do families fail to claim this credit that would help them make ends meet? Lack of awareness is part of the problem. Some workers who aren’t required to file a tax return simply don’t know they can get the money if they file.

Other factors pose even bigger barriers. The tax system is complex. Filing a tax return can be intimidating – a deterrent for those who aren’t required to file. Then there are the perceived and actual costs of filing a tax return. And for some families, language can pose a barrier to filing and claiming the credit.

All of this amounts to an avoidable tragedy. We’re not capturing the full benefits of the EITC – reduced poverty, better health for families, improved academic achievement for children, and even a boost to local economies.

While Oregon has taken modest steps in the past to increase awareness of this tax credit, those actions have done little to move the needle.

It’s time to break down the barriers that get in the way of people claiming the tax credit.

– Janet Bauer

One approach would be for the state to invest in free, culturally-appropriate tax preparation services. Volunteer-run programs have served some Oregon communities in the past, but many have foundered for lack of on-going support. Sustained public investment is vital to having a stable network of tax preparation services accessible to those who need assistance throughout the state.

In addition, the state should provide Oregonians a pre-filled tax return. The reality is that in many instances – especially with families whose entire income comes from a paycheck – the Oregon Department of Revenue already has all the relevant information. Often, filing a tax return is simply telling the department what it already knows.

Under this new system, the department would send everyone a pre-filled tax form. People would have the option of submitting it “as is,” correcting it, or rejecting it and preparing a tax return from scratch.

A pre-filled tax return would not only relieve many Oregon families of the cost and hassle of preparing a tax return, it would increase the share of qualifying families who claim the earned income tax credit.

This credit is an excellent strategy for fighting poverty among those who work. Let’s get the most out of it by removing the obstacles families face to claiming the tax credit.

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Janet Bauer

Janet Bauer is the director of policy research at the Oregon Center for Public Policy, where she focuses on policies that improve the quality of jobs in Oregon and raise the incomes of residents. When she is not researching data, there is a good chance she is out in nature birdwatching.