The GOP plan to cut the EITC via administrative burdens
This piece was originally published on Can We Still Govern? on May 19 and is republished below. The version of the reconciliation bill passed by the House on May 22 made no changes to the provisions discussed below.
The tax bill passed by the House Committee on Ways and Means last week would impose onerous burdens on millions of taxpayers claiming the Earned Income Tax Credit (EITC). In doing so, it would discourage many eligible taxpayers from claiming the credit and incorrectly deny the credit to many more who do claim it. Distributing more than $60 billion this year, the EITC is one of the country’s largest anti-poverty programs, and the bill’s cuts would likely turn out to be very large.
Until January 20th, 2025, I supervised the work of Treasury’s Office of Tax Analysis, which conducts economic analysis on all aspects of tax policy. In that capacity, I worked closely with colleagues at the IRS to measure credit uptake and help taxpayers claim the credits for which they are eligible. So let me explain how the Ways and Means bill uses administrative burdens to achieve backdoor EITC cuts without explicitly cutting the credit.
The EITC is a tax credit available exclusively to low- and moderate-income workers. It is fully refundable, meaning it is distributed as a refund when filers are eligible for a credit that exceeds their tax liability. The growth of the EITC reflects how more and more of our safety net spending occurs through the tax system. While there are pros and cons to this approach, one of the chief advantages is that it dramatically reduces administrative burdens on users: they have to report their taxes anyway, and so don’t need to interact with another bureaucracy and filing process to claim benefits. And the IRS, taking advantage of its trove of administrative data, relies primarily on ex post audits rather than extensive up front documentation. As a result, take-up of the EITC is higher than for most other anti-poverty programs.
The Ways and Means bill would add new burdens to EITC claimants. It purports to address duplicate and erroneous EITC claims by establishing a new precertification system solely for taxpayers claiming the refundable EITC. For years before the precertification system is implemented, the bill would delay and even presumptively deny refunds for certain EITC claimants. While there are still many steps to go before the bill becomes law, the legislation as it stands now is nonetheless the best guide we have to what might be enacted if it does. Anything in it therefore merits a critical look.
While the new precertification system would prevent some improper EITC claims, it would come at the cost of causing many eligible taxpayers not to claim the credit, incorrectly denying the credit to many more who do claim it, and imposing new time and paperwork burdens on all of those who receive it and some who don’t. It’s a classic case of using overly broad anti-fraud measures to impose more hassles on everyone, reducing program access.
The Ways and Means bill focuses exclusively on setting up hurdles to claiming the EITC. It does nothing to help eligible taxpayers make it past those hurdles or to address existing access gaps that result in about one in five eligible people not claiming the EITC, despite outreach and educational efforts.
Beginning in tax year 2028, filers would be required to apply for a certificate for each qualifying child for every year for which they claim the EITC, including yet-to-be-specified supporting documentation, or forgo any refundable portion of the credit. The bill imposes no deadlines on the IRS and offers no certainty for the taxpayer. Indeed, the bill suggests that the IRS could even sit on these applications until after the tax filing deadline to determine whether there will be multiple claims for each child. This would expose EITC recipients to an extraordinary degree of uncertainty.
In taxable years beginning before 2027, when a child is claimed by multiple taxpayers, the IRS would send a notice to each taxpayer claiming the child. Then, in any subsequent year before the precertification regime is implemented, the IRS would hold all claims for refundable credits attributable to that child until October 15 and, if there are multiple claims, deny the refundable portion of the credit to all claimants regardless of eligibility (and, seemingly, regardless of whether they were one of the taxpayers who claimed the child in the previous year).
The bill offers the possibility that taxpayers whose claims are denied under either regime could provide information to establish eligibility and receive the credit, but it provides no details about how they would do so or when.
Here is what is important to understand: this is not a new idea, but was previously considered, studied, and rejected for very good reasons. The IRS studied related regimes between 2003 and 2005, but the Bush Administration ultimately did not implement a precertification system—even as it did implement other changes in EITC compliance processes they considered at the time. The IRS found that the certification regimes generated a lower financial return than existing enforcement activities and caused eligible taxpayers to stop claiming the credit. That’s a sensible balancing of the costs and benefits of burdens absent from the current proposal.
Notably, in all three years, the IRS studied the use of a precertification requirement when it was applied only to a group of claimants where the IRS had the greatest doubts about the validity of a child’s residency status. In the first year, the study population was drawn from about 25 percent of claimants judged to be the highest risk. In the final year, the study population was drawn from about 15 percent of claimants judged to be the highest risk.
Focusing on the highest-risk population should provide the most favorable results for a precertification requirement as it should include relatively fewer eligible claimants and relatively more ineligible claimants. Nonetheless the IRS found that the financial return on the precertification was less than $3 per dollar spent in 2003 and 2004 (the IRS did not report a corresponding number in 2005), which is substantially less than the $6 or more the IRS generally realizes on every dollar invested in enforcement activities.
Moreover, this analysis assumed that anybody who claimed the credit and did not make it through the certification process was ineligible. However, the IRS employees reviewing the documentation claimants submitted did not have an affirmative obligation to determine whether claimants were eligible for the credit, they only assessed the documentation provided. And evidence from EITC audits suggests that enforcement activities that default to a presumption of ineligibility deny the credit to some eligible claimants.
While the IRS found that a precertification requirement was not the best use of its resources even when focused on the highest-risk taxpayers, the Ways and Means bill would apply the requirement to every claimant—even those that are very low risk. We would necessarily expect that this approach will deny the credit to more eligible claimants, deter more eligible claimants from claiming, and impose much larger burdens than what the IRS studied in the early 2000s.
The administration could make the precertification regime appear to be more cost-effective by reducing staffing, such as relying on AI to review documents and providing no phone support, but doing so would just be an EITC cut, further increasing the number of eligible taxpayers who do not receive the credit.
This approach may well be what the bill’s authors are contemplating given recent IRS funding cuts and the administration’s efforts to scale back the IRS workforce. The bill provides no resources for the IRS to stand up and administer the program. The IRS will need to handle potentially tens of millions of qualifying child applications, which will likely trigger a deluge of phone calls and requests for assistance. Taxpayers who fail to navigate the system successfully will not receive their credit, even if eligible.
In contrast, the programs studied by the IRS in the early 2000s had characteristics of soft notice and education programs in addition to the review of documents. Taxpayers in the study population received information about the process in advance and many taxpayers called the IRS multiple times.
Taken as a whole, the available evidence suggests that the Ways and Means bill imposes administrative burdens to achieve backdoor cuts to the EITC. The bill’s approach is less sophisticated than approaches the IRS piloted 20 years ago, and even those pilots were ultimately determined to be inferior to other uses of the IRS’s resources. As a result, they were discarded in favor of alternative approaches.
The inclusion of the precertification requirement in the bill in the face of this evidence reflects a profound double standard in the treatment of different taxpayers. The Ways and Means bill would increase scrutiny and burden for low-income taxpayers even as its tax cuts for the wealthy have no similar requirements.
Moreover, EITC recipients have historically faced higher audit rates than the average taxpayer. The proposed change would further discriminate them from other taxpayers, undermining one of the benefits of the EITC design: participants do not experience the sense of stigma that is associated with other forms of welfare because they are not overtly treated as suspect welfare claimants. Thus, the proposed changes are not just about dollars in pockets, but how we want the government to treat the working poor.
The disparity in treatment becomes even clearer when we consider the impacts of DOGE-related cuts at the IRS more broadly. These cuts are undermining the IRS’s capacity to audit the complex returns of wealthy taxpayers, allowing them to more easily avoid paying the tax they owe. In contrast, when inadequate funding undermines the IRS’s ability to administer the EITC precertification system, more low-income taxpayers will lose access to the credit and end up paying too much in tax. Wealthy tax cheats benefit from IRS cuts, while the low and moderate-income families who play by the rules are hurt.