Congressional Research Service IN11247 (COVID-19 and Direct Payments to Individuals: Considerations on Using Advanced Refundable Credits as Economic Stimulus)

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A Congressional Research Service Insight, IN11247, by Margot L. Crandall-Hollick, dated March 17, 2020, on using advanced refundable tax credits to make direct payments to individuals as economic stimulus during the COVID-19 pandemic. It notes that some have suggested a payroll tax cut while others have proposed direct cash payments, or "recovery rebates", to virtually all households. It explains that one way to provide payments quickly is to create a new refundable tax credit and advance it to households before they would claim it on their returns, a policy enacted most recently in 2008. It answers common questions about refundable tax credits, including how they differ from nonrefundable credits.

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INSIGHTi

COVID-19 and Direct Payments to
Individuals: Considerations on Using
Advanced Refundable Credits as Economic
Stimulus

Margot L. Crandall-Hollick
Acting Section Research Manager

March 17, 2020
In response to concerns about an economic slowdown stemming from the COVID-19 pandemic,
policymakers have been considering a broad array of policy options. Some are targeted directly toward
the individuals and industries that may be most affected. Others would more broadly seek to stimulate the
economy. Among this latter category of policies, some have suggested a payroll tax cut, while others have
proposed direct cash payments—“recovery rebates”—to virtually all households. One mechanism to
provide cash payments relatively quickly is to create a new refundable tax credit and then advance it to
households before they would otherwise claim it on their income tax returns. A similar policy was enacted
most recently in 2008. This Insight addresses some common questions about advanced refundable tax
credits.

What is a refundable tax credit?
Tax credits reduce income taxes owed dollar for dollar; each dollar in tax credit is a one-dollar subtraction
from income tax liability. Nonrefundable credits are limited by the taxpayer’s income tax liability, while
refundable credits are not. Hence, taxpayers with little to no income tax liability—including many low-
income taxpayers—can benefit from refundable tax credits. Refundable tax credits targeted toward low-
income individuals and families are estimated to have relatively large stimulative effects compared to
other policies—a large “bang for the buck”—because low-income populations tend to spend these
amounts quickly. Some economists were concerned that the 2008 credit would not be effective because a

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lump-sum payment might be saved rather than spent. Empirical evidence based on studying a prior rebate
found, however, that the rebate was largely spent.
Current refundable tax credits—the earned income tax credit (EITC) and the refundable portion of the
child credit—benefit low-income families that include workers and children. These tax credits are
received once a year when federal income tax returns are filed. Tax credit amounts are primarily based on
the taxpayer’s earned income and number of qualifying children in the prior year (e.g., an EITC received
in 2020 when 2019 tax returns are filed is based on 2019 income and family composition).

What does “advancing” a tax credit mean?
Advancing a tax credit effectively means issuing a tax credit for a given year before the tax return for that
year has been filed (and before income taxes for that year have been calculated). The 2008 recovery
rebates for individuals included in P.L. 110-185 were refundable tax credits against 2008 income taxes.
However, taxpayers did not need to wait to file their 2008 income tax returns in early 2009 to receive
these credits. Instead, the law allowed the IRS to advance these credits in 2008, basing the advanced
amount on income and family structure information from tax returns filed for the 2007 tax year. The
credit equaled up to $600 per person ($1,200 for joint filers), with an additional $300 per dependent child.
Lower-income taxpayers tended to receive a smaller credit, while the credit phased out for taxpayers with
incomes over $75,000 ($150,000 for married joint filers).
Advancing tax credits based on prior data can pose challenges if any of the parameters used to calculate
the credit—like income and number of children—change from these prior values. For example, if a
taxpayer’s 2019 income is significantly greater than their income at the end of 2020, an advanced credit
estimated based on 2019 income may be larger than what a taxpayer is ultimately eligible for in 2020.
(Even if an advanced payment is a fixed amount per person [does not vary by income], the final amount
can still vary if family structure changes during the year.) This could result in taxpayers having to pay
back the excess credit when they file their 2020 income tax returns (in early 2021). Insofar as this is a
concern, policymakers can limit how much taxpayers have to pay back (for example, as is done with the
advanced premium assistance tax credit), or they can bar repayments of excess advanced payments
entirely, as was done with the 2008 recovery rebates.

How long would it take for the IRS to begin issuing
advanced credits?
Past experiences with the IRS issuing advanced refundable tax credits may provide some guide on how
long these policies take to implement. On January 28, 2008, H.R. 5140, which included the 2008 recovery
rebates for individuals, was introduced in the House. Two weeks later, on February 13, 2008, it was
enacted as P.L. 110-185. Sixty-two days later, the IRS began issuing the first one-time rebate checks.
More than 120 million taxpayers received their payments by mid-July 2008. Taxpayers who had filed
their 2007 tax returns and received a refund via direct deposit also received the 2008 recovery rebates via
direct deposit. Otherwise, paper checks were mailed out to taxpayers using address information from
2007 income tax returns. A 2007 tax return had to be filed to receive a recovery rebate check. Those who
did not receive a recovery rebate check could claim the benefit when filing a 2008 income tax return.

How many individuals could receive an advanced
refundable tax credit?
One concern that some have about using the federal tax system to administer direct cash payments to
households is that not all individuals in the United States file income tax returns—either because their
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income is below the filing threshold or because they are not complying with federal tax laws. A 2017
CBO analysis estimated that of 292.6 million individuals who could be included on a federal income tax
return (as the taxpayer, spouse, or dependent), 251.9 million were actually included—or 86%. The study
estimated that the greatest share of nonfilers were lower-income individuals, especially those 65 years or
older. As was noted above, the 2008 recovery rebate could be claimed by taxpayers who did not file a
2007 tax return. These nonfilers—which included many low-income individuals and seniors—could
claim the credit on their 2008 returns when they filed them in 2009. The federal income tax system is
limited in its ability to provide cash assistance to individuals quickly, particularly when those individuals
are nonfilers.

IN11247 · VERSION 2 · NEW
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