Building Wealth

Community development corporations have attracted billions of dollars of public and private funds to revitalize urban neighborhoods and rural communities. But global and national economic policies have undermined these efforts, and poverty has increased in many low-income communities throughout the United States. The challenge for CDC practitioners is to link community economic development and wealth creation strategies that can increase both the income and assets of low-income individuals.

Two effective strategies for building wealth are the promotion of tax credit refunds and the encouragement of savings in regular and specialized accounts, such as individual development accounts. Together, these strategies can result in millions of new dollars in assets that can be invested in homeownership, business formation and retention, and numerous education and training opportunities.

Low-Income Tax Tools

The Earned Income Tax Credit (EITC) lifts more than 5 million Americans above the poverty line each year and is arguably the most effective federal anti-poverty policy. The EITC is a refundable tax credit for low-income working Americans administered through the IRS. Eligible individuals and families receive payments, even if they do not owe federal income tax. Nationally, EITC provided over $30 billion in refundable tax credits to low-income working families in 2000.

But up to 25 percent of eligible families are not applying for the EITC, according to studies by the General Accounting Office, the Urban Institute and others. Because the average refund is $1700, the failure to apply represents, cumulatively, a huge loss of income and potential assets.

As of 2001, 16 states, the city of Denver and the District of Columbia have adopted EITCs based on the federal credit. These states primarily use the eligibility rules from the federal EITC and define the credit as a specified percentage (ranging from 5 to 50 percent) of the federal credit. Eleven states have a refundable tax credit, with a majority of the states between 10 to 25 percent. The average state credits range from $150 to $450. The Center on Urban and Metropolitan Policy at the Brookings Institution recently conducted a survey of 27 cities and rural areas and found that two million families received more than $3.4 billion in EITC refunds in 2000; state income tax credits that build on the EITC boosted family incomes in 12 of the sites by a combined $312 million.

The Child Tax Credit, a partially refundable tax credit available to qualifying families with dependent children under the age of 17, is worth a maximum of $600 per child with no limits on the number of qualifying children.

The Child and Dependent Care Credit (CDCC) is nonrefundable and available to low-income workers who pay someone to care for their dependent children under age 13 or a spouse or other dependent adult. Qualifying families are eligible for a maximum CDCC of $720 per child to a maximum of $1440 per family. Ten states have passed a similar credit.

Paying for Your Money

Many eligible recipients need help filing their taxes and are unaware of these tax tools. Individuals who file electronically and use direct deposit generally receive refunds within seven to 10 days. Those who file manually must wait an average of four to six weeks and are vulnerable to refund anticipation loans (RALs), which provide advances on the borrower’s anticipated refund. Tax preparation services provide loans that often carry annualized interest rates of well over 100 percent, with some reported as high as 700 percent.

In its survey, Brookings found that low-income filers spent an estimated $212 million in EITC refunds on tax preparation and high-cost loans in 2000. The Center for Budget and Policy Priorities estimates that taxpayers filing for EITC paid at least $633 million in 2001 for tax preparation alone. When combined with refund anticipation loans, these taxpayers spent more than $1 billion in 2001 for tax services.

Marketing the EITC and other credits and providing tax preparation assistance to low-income families are critical. Two notable projects, in Tulsa and Chicago, address both needs.

Marketing, Outreach and Community Partnerships

The Community Action Program of Tulsa County (CAPTC) launched an outreach campaign in 1994 to make thousands of low-income Tulsans aware of the EITC. Community development block grant funds were used to start a free tax preparation and electronic filing site. A partnership with a local television station resulted in free advertisements. Twelve thousand postcards were mailed to former customers, and ads placed on billboards, buses and radio. With the help of 14 AmeriCorps volunteers, tax forms were filed for more than 12,500 individuals, resulting in more than $13 million in EITC refunds.

In Chicago, the Center for Economic Progress (CEP) partnered with Mayor Richard Daley to launch a citywide campaign to increase public awareness of EITC benefits in 1999. Mayor Daley’s interest was spurred by research that found 60,000 Chicago workers were not claiming the benefits of EITC, depriving the city of $90 million in potential revenues each year. In addition to sending out more than four million notices with utility bills, the campaign distributed flyers, aired radio ads and placed ads on transit cards and grocery bags. Each January, for three years, the Illinois Department of Human Services also mailed information to almost one million families. In 2002, more than 14,564 individuals were served by free low-income tax preparation sites in 25 communities, generating over $19 million in refunds.

Community Tax Coalitions

Both the CAPTC and CEP models require strong leadership and commitment, sophisticated organizational capacity and ability to access large-scale resources. A community-based coalition, on the other hand, emphasizes coordination of existing services, leveraging of community resources and collaboration, and represents one of the most important and least expensive ways that a community can assist its own working families. Nearly 100 community tax coalitions have emerged in a number of cities, with the support of the IRS, the Annie E. Casey Foundation and the National League of Cities.

IRS officials were prompted to support the coalitions when they realized that the agency’s traditional volunteer tax program, Volunteer Income Tax Assistance, was largely inaccessible to inner-city and rural residents. In 1999, the IRS created the Wage and Investment division, which contains the Stakeholders, Partnerships, Education and Communication (SPEC) unit. SPEC assists taxpayers who are low-income, disabled, elderly or have limited English proficiency, especially immigrants.

Through SPEC, the IRS has been able to forge community partnerships with organizations that have access to low-income constituents; good outreach and marketing capacity; the ability to recruit, train and retain volunteers; and linkages to asset-building strategies. The organizations that tend to be most involved in these coalitions are Community Action Agencies (CAAs), United Ways, local government, volunteer centers, CDCs and chambers of commerce.

The dynamics in each city are different but the process and strategies are consistent. Key community organizations and leaders invite local organizations to a meeting, after which a working group is formed of six to 10 organizations. One organization usually takes the lead in coordinating the effort.

In Milwaukee, the Milwaukee Asset Building Coalition is led by a local CAA with the support of the Annie E. Casey Foundation. The coalition has more than 40 community organizations, a core working group, community and corporate advisory committees and five additional committees for infrastructure identification, education and awareness, tax preparation, EITC outreach and asset building. In 2002 the coalition operated 12 free tax preparation sites in two neighborhoods.

The Boston Earned Income Tax Credit Initiative was spearheaded last year by Mayor Thomas Menino and included contributions from more than 70 member organizations. In addition to a publicity campaign about the EITC, the coalition sponsored 12 free tax preparation sites and this year plans four additional sites.

Last year, the Center for Economic Progress convened a meeting in Chicago to establish the National Community Tax Coalition. The coalition operates as a program of the center and provides technical assistance, publishes Tax Buzz and hosts a Tax Roundtable listserv of more than 125 affiliates.

The Savings Difference

Low-income families without savings accounts not only rely on refund anticipation loans when filing taxes, but overall have a tougher time building assets. The Federal Reserve estimates that 22 percent of families with less than $25,000 in income have no bank account of any kind, leaving them vulnerable to check cashing services and payday lenders.

A study by Robert Haveman and Edward N. Wolff estimates that although 12.7 percent of the population lives below the federal poverty level, 25.5 percent of all U.S. households are asset poor – “defined as net worth enabling a household to live at the poverty level for three months during times of income disruption.” Michael Sherraden, in his seminal work Assets and the Poor, identifies some of the benefits of asset development, including greater household stability, long-term planning and improved opportunities for children.

The Center for Economic Progress, in addition to launching the EITC awareness campaign discussed earlier, also formed a partnership with ShoreBank to launch the Extra Credit Savings Project, which has helped 202 families use their EITC refunds to open up low-cost checking and savings accounts at ShoreBank. Sixty percent of these individuals were previously unbanked.

One of the best ways to promote savings is through the use of direct deposit – whether into checking and savings accounts, or specialized accounts such as college savings plans, retirement accounts or individual development accounts (IDAs). Wolff cites a 2001 study by the U.S. Office of the Comptroller of Currency stating that 61 percent of individuals with bank accounts who use direct deposit save regularly.

Beyond Savings Accounts

IDAs are matched, restricted savings accounts for low-income participants that can be used for homeownership or home repair, post-secondary education and training, business capitalization or retirement savings. Other uses include the purchase of automobiles connected to finding and retaining employment and computers (see Shelterforce #89 and #110).

The Corporation for Enterprise Development (CFED) estimates that there are now more than 400 IDA programs nationwide, with about 20,000 accounts being sponsored or managed by more than 225 financial institutions. The dramatic growth of IDAs has spawned a number of other asset-building tools.

One of the promising new legislative developments, which nearly passed Congress in FY 2002, is the Savings for Working Families Act (SWFA). SWFA proposes a one-to-one match, up to $500 per year per person, for IDA savings. A 100 percent tax credit is offered to financial institutions that provide the matching and program funds. SWFA is one of the major provisions of President Bush’s Charitable Choice legislative bill and would be authorized for 300,000 IDA tax credits, totaling $500 million, a 15-fold increase from the current number of 20,000.

In its research of employer-based IDAs, CFED found that employer participation depends on a firm’s capabilities and interest, other programs and benefits provided to employees and partnerships with nonprofits or financial institutions. In partnership with ShoreBank, Marriott Corporation offers an IDA program to its new welfare-to-work employees. Three small manufacturing firms in Los Angeles have started employer-based IDAs as a worker-retention strategy and are partnering with CD Tech, a regional nonprofit that provides basic IDA services. The county of El Paso, TX, and other municipalities are developing employer-based IDAs as a benefit for their low- and moderate-income employees. United Way of America received funding from the Office of Community Services at the U.S. Department of Health and Human Services to expand the number of employer-based IDAs through corporations that sponsor United Way campaigns.

CFED is also testing the development of children’s savings accounts, which would provide an account at birth that can be added to over a lifespan through annual deposits from family members, the government, friends and nonprofits.

The Doorways to Dreams Fund designed Online IDA as a scalable, low-cost, web-based record keeping, financial transaction and product delivery system. Online IDA, which leverages existing 401(k) technology to enable pooled investing for IDA participants, is being tested with several CDCs in Massachusetts and New Jersey. The One Economy Corporation has also established The Beehive, a comprehensive bilingual online self-help web site that connects consumers to information and services about money and jobs and other issues.

The Council for Adult Educational Learning in Chicago is piloting Lifelong Learning Accounts for adults to finance their education, matched to an established cap by employers and third-party sources. Demonstration projects are underway with the Illinois Restaurant Association and with the city of Fort Wayne and the Northeast Indiana Workforce Investment Board.

Opportunities for CDCs

NeighborWorks organizations, which include a number of CDCs, have developed Home Ownership Centers to offer pre-purchase education, home inspections, real estate agents, insurance services, post-purchase counseling and other services under one roof. These centers should first encourage their potential clients to take advantage of tax credits and set aside a portion of the refund for savings towards homeownership. CDCs that have similar centers should explore partnering with local financial service institutions that are members of the Federal Home Loan Bank. Many regional Federal Home Loan Bank offices provide a three-to-one match through their IDA initiatives for homeownership.

CDCs and other nonprofit micro-enterprise organizations can benefit from linking tax outreach and preparation to business development. Many small business entrepreneurs, especially recent immigrants, are not aware of the tax credits available to them. The Association for Enterprise Opportunities, the trade association for micro-enterprise organizations, provides training and technical support for member organizations to encourage their participation in tax preparation sites.

Asset-building tools can also open up new resources and opportunities for education and training. For example, the Fifth Avenue Committee in Brooklyn sponsors an IDA initiative to train low-income people to become cable installers and truck drivers. CDCs can work with local Workforce Investment Boards (WIB), which help coordinate the workforce preparation and employment mandated by the federal job training act of 1998. WIB one-stop operators (often community colleges) can help identify residents who have already started IDA accounts for education and training.

Overall, CDCs can help identify community residents who have not capitalized on tax credits, host free tax preparation sites and work with individuals to use the appropriate CDC initiatives. By creating opportunities beyond brick and mortar, CDCs will enable low-income families to lay the foundation for the well-being of future generations and their communities.

Robert O. Zdenek, DPA, is Senior Program Advisor to the Office of Community Services at the U.S. Department of Health and Human Services. He is also an independent consultant and is vice president of the National Housing Institute Board. robert.zdenek@verizon.net.


Adding it Up

Combining tax credits can lead to a significant infusion of income. Here’s an example of what a single parent earning $26,000 with two children could receive:

1. Federal EITC (average refund) $1700
2. State EITC (average refund) $ 300
3. Federal CTC $1200
4. Federal CDCC $1050

Subtotal $4250
Tax Liability – $1500

Total refund $2750


Getting the Word Out

The Earned Income Credit Campaign Kit is a resource for organizations that want to help working families obtain tax credits and connect them with free tax filing assistance so they can avoid hefty fees that diminish their returns. The kit, a project of the Center on Budget and Policy Priorities, provides fact sheets on the Earned Income Tax Credit and the Child Tax Credit; outreach strategy ideas; posters and flyers in English and Spanish; and the tax forms necessary to claim the credits. Flyers in a variety of languages, including Amharic/Ethiopian, Bosnian, Cambodian, Chinese, French, Haitian-Creole, Hmong, Italian, Korean, Laotian, Polish, Portuguese, Russian, Somali, Tagalog, Ukrainian and Vietnamese will be available soon.

The entire kit is available in pdf files and can be downloaded at www.cbpp.org/eic2003/index.html. A free hard copy is available by contacting eickit@cbpp.org. Additional kits and color posters can be ordered for a minimal charge.


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