David Newville is director of federal policy for Prosperity Now. Joanna Ain is senior policy manager for Prosperity Now.
Despite a seemingly strong economy, many families in the District are struggling to make ends meet. One-third of the city’s residents are liquid-asset poor, meaning they cannot subsist at the poverty level for three months if they lose their income. Such a high level of liquid-asset poverty puts families just one job loss, car breakdown or medical emergency from financial disaster. The national rate of liquid-asset poverty is even worse at 36.8 percent.
In response, the D.C. Council and Congress introduced innovative new policy proposals to bolster the savings of these working families during next year’s tax-filing season. In June, D.C. Council Member Brianne K. Nadeau (D-Ward 1) introduced the Rainy Day Refund Act to support low-income working families’ long-term savings by leveraging their tax refund. On July 17, a bipartisan group of four senators — Sens. Tom Cotton (R-Ark.), Heidi Heitkamp (D-N.D.), Todd C. Young (R-Ind.) and Cory Booker (D-N.J.) — introduced similar legislation in Congress, the Refund to Rainy Day Savings Act.
The bills piggyback on the success of the earned-income tax credit, the most effective antipoverty program in the country, implemented at the local and federal levels. The EITC boosts the tax refund amount many working families receive. The EITC can make up 30 percent of a household’s total income and helps keep about 5.8 million people out of poverty. EITC recipients use it to save, pay down debt and invest in long-term assets.
For most people, though, the EITC comes once a year — at tax time. When that refund is depleted later in the year, many families find themselves struggling to get by again. The D.C. and federal proposals would help these families save a portion of their tax refunds for later in the year and provide them a savings match. For example, Nadeau’s proposal would build on the benefits of the D.C. EITC by offering the 1 in 5 D.C. residents who get the tax credit an even larger refund if they set aside a portion of it for six months. With the additional support, households would be primed to weather financial emergencies that occur beyond tax time and enjoy greater financial stability.
Low-income families and households of color are in desperate need of this additional boost. Prosperity Now’s Scorecard shows that nationally 57 percent of African American households and 61 percent of Hispanic households are liquid-asset poor compared with 28 percent of white households.
When families without savings get hit with an unexpected expense or a drop in income, they aren’t left with many good options. Some are lucky enough to have friends and family who can help, but many others incur debt or have to sell property to cover the expense, leaving them in a deeper financial hole. Some turn to costly alternative financial services, such as payday loans. The Pew Charitable Trusts found that black households are twice as likely and Hispanic households 1.5 times as likely as white households to turn to payday loans.
Overall, Congress has taken many more and much bigger steps to hurt working families with regressive federal tax cuts, attempts to undermine the Affordable Care Act and the repeal of important rules to protect consumers from predatory financial behavior. Hopefully, these small but important steps by both Congress and the D.C. Council will soon become law and spark more positive changes for working families in the District and beyond.
District residents, and all Americans, certainly need it.