The Power of Cash

 

After a yearlong exploration of the public workforce space, Code for America found that helping workforce clients access cash support is one of the best ways the system can help people find and keep living wage jobs. Before they can take full advantage of the opportunities that the workforce system offers, job seekers need a basic level of financial stability. Cash support is available to many workforce clients through the Earned Income Tax Credit (EITC), the country’s largest benefit for workers. Unfortunately, one in five eligible households are not currently claiming the benefit. As a result, $10.5 billion is left on the table every year by low-income households—that’s about $1,336 per household. It’s the same story that we hear all too often at Code for America: those who need a government benefit the most are missing out. American Job Centers have an opportunity to help low-wage and unemployed workers connect to free tax preparation services, receive the EITC and other tax credits, and move toward economic stability.

 

Raise the floor and build ladders

As we spoke with workforce leaders across the country, we learned that in order to help more people achieve economic mobility, we must raise the floor (build the foundation that supports people in work and improve conditions for all workers) and build ladders (move people into better jobs and support them on their career journey). Wraparound services such as food assistance and cash supports raise the floor, creating a steady foundation from which a job seeker or low wage worker can move into living-wage work. Lack of wraparound services was the single most prominent user pain point that we heard in our research of jobseekers and low-wage workers. This core finding is not new, but it bears repeating: low-wage and unemployed workers struggling and living in poverty need a basic level of financial stability before they can take advantage of opportunities that offer a chance at economic mobility.

Our user research showed that users significantly benefited from comprehensive wraparound services, especially cash supports, and that the need for cash is deeply felt by users. Our research also revealed that cash supports are an efficient and effective means to meet the varied needs of a jobseeker or low-wage worker, and that even small amounts of money made a huge difference. A 2018 study by the Federal Reserve Board supports the widespread need for cash, finding that four in ten Americans would have difficulty coming up with $400 to pay for an unexpected expense.

 

Across the country, American Job Centers provide referrals to wraparound services. Clients can get access to GED books, work uniforms, transportation vouchers, and more. Though helpful for meeting some specific needs, we found that those referrals were sometimes not flexible enough or, in many cases, available to respond to immediate client needs in real time. Cash supports are powerful because they give clients the flexibility to solve their own most painful problems.

One of those cash supports is the Earned Income Tax Credit (EITC). The EITC is the largest government benefit for low to moderate-income workers and their families. In 2018, the EITC delivered $63 billion to 25 million workers and families. Along with the Supplemental Nutrition Assistance Program (SNAP), the EITC is one of the two most effective anti-poverty programs in the United States.

The EITC is known as an effective policy for increasing wages and employment for a few key reasons:

1. It helps create a stable foundation for work by increasing access to key supports such as transportation, child care, and training.
2. It encourages and rewards work by increasing the financial benefit of work.
3. It boosts overall economic activity by driving resources to low-income communities.

 

To receive the EITC, an individual must claim it on a tax return, making it relatively easy to access. It provides a significant amount of money—up to $8,529 per family in New Jersey. In Colorado, for a single mother with one child, making minimum wage, the credit amounts toa $1.59-an-hour raise over the course of the year. In addition to claiming the federal EITC, preparing tax returns also helps families access other benefits, such as supplemental state EITCs, the Child Tax Credit (CTC), the American Opportunity Tax Credit, and any withholdings. These combined benefits can become a significant source of cash support for low-income workers and the recently unemployed. Together, the EITC and CTC lifted an estimated 9.4 million people out of poverty in 2018.

The EITC puts control in the hands of the client, treating claimants with dignity and respect. It allows clients to prioritize resources according to their need, maximizing customer choice.

Our research found that low-income workers need better services to access the EITC

Through our early research and discovery, we have already seen the impact that the EITC has on low income families—a client named Lisa’s story is a great example. When we first met Lisa, she hadn’t filed taxes since her divorce two years prior. She had never heard of the EITC. After meeting with us, Lisa filed her taxes for 2018. She was shocked by how much money she got back.

“We got a refund. It was close to $9,000. We have been wanting to start our own business and we’ve slowly been doing it for the past year so that’s what we’re going to use it for. Our business, and growing our business.”

Lisa is not alone. One out of five eligible low-income workers are missing out on this opportunity. Fortunately, taxes can be filed at any time of year. In addition, the EITC and other credits can be retroactively claimed for the past three years, even if you already filed your taxes.

In order to better understand why eligible people like Lisa were not claiming the EITC, we conducted user research through interviews focused on understanding both tax filers who claim the EITC, and low income workers who are in the EITC participation gap either because they do not regularly file their taxes (lapsed or non-filers) or because they were unaware of the EITC benefit and how to claim it. Through our interviews, we hoped to gain more insight into who is in the EITC participation gap, why they were in the participation gap, what it would take for them to successfully file their taxes, and what those in the participation gap look for in a tax filing service.

We learned that people in the EITC participation gap do not file their taxes because they can’t find trustworthy, affordable help. In response to this lack of support and clarity, low income filers often choose not to file their taxes at all rather than risk making a costly mistake. The risks that potential taxpayers see are emotional risks of frustration, confusion, and the forced revisiting of emotional hardship. They also see financial risk and are afraid of making small mistakes on their taxes that could result in an audit, increased debt, or unintended consequences to their existing financial obligations (like child support or student loans).

 

Another key factor in lapsed tax filing was experiencing a major hardship or life event. Emotional hardships and major life markers like job loss, divorce, or the death of a family member are all inevitably going to affect tax filing and create gap years particularly for low income populations.

The life events that cause tax filing gap years also affect people’s motivation for filing. Some people in the EITC participation gap are not primarily motivated by the amount of money they could receive from a refund, though the money is often significant. Instead, people are motivated by a sense of obligation and by a desire for resolution. When they reflect on their filing experience they speak of relief and peace of mind before they mention paying their bills. Taxpayers could use their tax refunds to pay off bills, move to new apartments, buy vehicles, and send their kids to camp, but ultimately they experience emotional relief and security. Closing the EITC participation gap is dependent on the development of tax services that work with real life, that are designed to respond and serve these intermittent gaps.

We asked what role Code for America might play in increasing access to high-quality tax prep services and closing the EITC participation gap. With so many excellent organizations working in this space, did we have unique value to add?

Launching an EITC pilot

Based on our findings so far, a significant portion of the people who are eligible for the EITC but not claiming it are aware the benefit exists, but are not able to either understand if they qualify or actually navigate the process to claim it. That’s a service design problem we think can be solved.

We heard from the taxpayers we interviewed that, in addition to making the process less burdensome for taxpayers, a key way to close the EITC participation gap is to provide tax preparation support and services that reduce the threat of financial risk by establishing professional trust, and reduce the threat of emotional risk by building personal relationships between tax preparers and clients. This led us to partner with the Volunteer Income Tax Assistance (VITA) program, a program of the IRS, for an upcoming pilot for the 2020 tax season.

 

VITA provides trustworthy, clarifying, and thorough tax preparation service, free of charge. VITA is more accurate than private tax preparation companies because volunteers have better training and are incentivized to file accurate returns. VITA services are accessed through visiting a VITA location, bringing the necessary tax documents, and waiting while an IRS certified volunteer prepares the tax return. However, VITA cannot help everyone who needs them because the service depends on a taxpayer discovering VITA, finding a location that is accessible to them, and visiting the site during their hours of operation. In our research, we heard that many sites are in high demand and need to turn away taxpayers due to lack of capacity or because the taxpayer is missing a key tax document. VITA’s paper-based, in-person process limits VITA’s scale and capacity to reach people in the EITC participation gap. In addition, VITA sites typically lack the capacity to do deep research into the barriers users face when seeking services.

Our preliminary user research has already identified a number of pain points that may be possible to alleviate, like the difficulty of providing the documents necessary to complete the process. This process is the same kind of service redesign that has helped over 1 million people access food assistance in California through GetCalFresh, or even the radical redesign of criminal records clearance that is projected to help millions nationally overcome the barriers to employment, housing, and education caused by convictions. By combining our experience in service design at scale with the deep expertise and national reach of VITA, we believe that Code for America can play an important role in closing the EITC participation gap.

In the 2020 tax season, Code for America is piloting technology and processes to help make VITA more accessible and scale the great work that VITA is already doing. Through partnering with four local VITA organizations (in California, Colorado, Arizona, and Georgia), we are building a digital service that provides a way to get connected with VITA services from anywhere in the country. Taxpayers will answer simple questions about their situation, securely upload their tax documents, and get connected to VITA to answer their questions. The VITA team will remotely prepare the tax return, speak with the taxpayer to review their return, and file the return with taxpayer consent. For those that would prefer to visit a VITA location if one exists near them, we are providing a mobile-friendly location search tool at www.GetYourRefund.org.

We believe this scalable virtual model to make VITA services accessible to more people will alleviate the pain points we heard in our research, and increase access to the EITC. We’re so excited to embark on this journey in our continued mission to help people better access government services, and we look forward to sharing more about our EITC work in the coming months.