Child Poverty Rates Dropped Before Changes to Social Safety Net Could Take Effect

A recent article in the New York Times and a research paper from Child Trends—a research organization focused on child welfare—highlighted the stark decline in child poverty driven by growth in the social safety net.

From 1993 to 2019, child poverty has disappeared largely due to changes in government programs like housing subsidies, Social Security, Supplemental Nutrition Assistance Program (SNAP)—but most significant were the changes to the Earned Income Tax Credit (EITC) in 1993, according to the research.

Child poverty, which had been growing steadily in the 80s and early nineties would suddenly swing the other way following the passage of the Budget Reconciliation Act of 1993, which expanded support for families below the poverty line through the EITC.

In the following two years (1993-1995), the poverty rate would drop 5 percent in two years. Based on Internal Revenue Service (IRS) numbers, the agency would hand out an additional $4 million to 10.4 million filers a year.

But the bill, pushed by then-president Bill Clinton, was only signed in August of 1993. Any policy changes affected by it would not happen until the following year, 1994, and any financial income from the policy would take some time to resolve poverty situations (e.g. handing out tax refunds).

While the EITC would be important to those who receive it, it only amounted to about $1,100 per filer per year, or about $2,200 in current dollars based on IRS data. Substantial, but not enough to immediately bring most families out of poverty.

There is also an indication that changes in poverty were not related to the tax credits. Poverty rates without the effect of tax credits would also show a stark decline beginning in 1993 as well according to supplemental poverty data from Columbia University’s Center on Poverty and Social Policy.

And then there are unanswered questions as to why poverty rates were growing substantially in prior years—1988 to 1993—despite growing use of EITC and other social programs.

Abuse of EITC

While the 1993 act is significant for expanding EITC, it was also notable for addressing large issues with noncompliance and overpayments in the program.

In the decade before the changes were passed in 1993, Congress regularly highlighted abuse of the EITC program according to a 2000 paper from the National Tax Journal. Overpayment for recipients was estimated at 46 percent based on a 1985 study by the IRS’s Taxpayer Compliance Measurement Program (TCMP).

Other reviews put the overclaim rate in the high 30s, but it was still far above error rates found in other programs like food stamps and Aid to Families with Dependent Children (AFDC), which were below 10 percent. Compared to them, EITC was criticized as “a tax credit for crooks,” as well as a work disincentive.

Throughout the 90s, the extra scrutiny and attempts to eliminate the work disincentives in the program would push estimated overclaim rates down into the low 20s.

There was additional focus put on insurance providers who sold policies aimed at enabling filers to improperly access EITC credits. Credits for health insurance policies would be eliminated with the 1993 changes.

A 2018 Congressional Research Service (CRS) report put the estimated average annual EITC overpayment at $49.3 billion for years 2006-2008.