…

                                                                                               October 2005

A POST-HURRICANE POLICY RESPONSE TO POVERTY IN AMERICA
                    Ray Boshara, Reid Cramer, Leslie Parrish, and Anne Stuhldreher


The recent hurricanes wrought havoc on families and communities across the Gulf Coast and poignantly
revealed how the debilitating effects of poverty persist across the country. The President has wisely
proposed asset-based ideas as the core of his policy response--a urban homesteading act to encourage the
ownership of land and homes, a Gulf opportunity zone to foster business ownership, and worker recovery
savings accounts for job training and education. While insufficient in their scope, these proposals identify
a promising path for federal policy efforts.

After the federal government responds to the immediate needs of those affected, a primary goal of
rebuilding should be to assist evacuees build up long-term savings and assets as a means of reconstructing
their financial lives. But the President should not lose this moment to provide a coherent and far-reaching
strategy to address poverty. Poverty, such as that which was on display in New Orleans in the aftermath
of Katrina, remains a national affliction, and it has been on the rise since 2000. Even by the Census
Bureau's outdated measures, 37 million Americans--including one in four blacks and one in three black
children--are now living in poverty. And since initial surveys indicate that more than half of the evacuees
do not plan to return to the Gulf region, how can we discriminate between the evacuees and the poor in
their midst? In responding to Katrina, the federal government should assume the responsibility of
severing the disquieting ties between race, poverty, and ownership.

As recent events have shown, families without a stock of assets to draw upon in times of need are
vulnerable to unexpected events. Their lack of a personal safety net makes them completely dependent on
others. Policies that enable families to save and build up resources offer a means to move up and out of
poverty. These policies will be most effective if they are delivered through a platform that is flexible and
portable, one that works for evacuees regardless of where they re-settle as well as for others from the
general population.

This brief offers a blueprint for a post-Katrina policy response to poverty in America. The proposals
highlighted here are designed to address poverty by promoting the development of long-term savings and
assets. Several proposals can be targeted to those directly affected by the Gulf Coast Hurricanes, while
others can be implemented more broadly as a down payment on a renewed national commitment to
strengthen anti-poverty efforts.
                             SUMMARY OF RECOMMENDATIONS



Proposals to Help Katrina Evacuees Acquire Long-Term Savings and Assets

· Deploy a "Financial Service Corp" of financial and tax advisors to assist evacuees.

· Designate Series I Savings Bonds as "Katrina Bonds."

· Promote homeownership through a tax credit for evacuees who lost or never owned a home.

· Provide a $5,000 "Katrina Tax Credit" available to those that save in a Roth IRA, education
   account, low-cost bank account, or purchase a savings bond.

· Encourage financial institutions to offer simple, low-cost bank accounts to evacuees.


Proposals to Address Poverty with Long-Term Savings and Assets Development

· Expand Housing Voucher Program along with the Family Self-Sufficiency Program.

· Expand homeownership opportunities for lower-income families by increasing down payment
   assistance, and enacting a refundable First-Time Homebuyers' Tax Credit.

· Revise or eliminate asset tests in public assistance programs.

· Create a system of children's savings accounts at birth.

· Expand the Earned Income Tax Credit (EITC).

· Use tax returns to connect tax refunds to savings products by encouraging IRS to allow refunds
   to be split among multiple accounts and offering a matching deposit for low-income savers.

· Create a targeted Lifetime Savings Account.

· Expand access to college and post-secondary education by expanding and revising Pell grants
   and improving the effectiveness of Section 529 College Savings Plans.

· Support microenterprise by creating a new Entrepreneur Tax Credit, supported by a self-
   employment literacy campaign.




                                              2
    PROPOSALS TO HELP KATRINA EVACUEES ACQUIRE LONG-TERM SAVINGS AND
                                 ASSETS

·   Deploy a "Financial Service Corp" of financial and tax advisors to evacuees.

To help evacuees rebuild their financial lives and navigate through the range of relief programs, serious
and ongoing financial counseling and tax-preparation assistance will be greatly needed. We thus propose
a "Financial Service Corp" of financial and tax advisors, similar in structure to the Army Corps of
Engineers or AmeriCorps. We propose a tax credit to tax preparation firms (such as H&R Block) and
financial institutions to help off-set some of their costs of training personnel and advising evacuees.
Recognizing that many financial educators may work for non-taxpaying entities (non-profits, credit
unions, etc.), a direct grant program could be administered by the existing Treasury-led Financial Literacy
and Education Commission.

·   Designate Series I Savings Bonds as "Katrina Bonds."

Just as Series EE Savings Bonds were renamed "Patriot Bonds" following September 11th, Series I
Savings Bonds could be designated "Katrina Bonds." Katrina Bonds would provide an opportunity for all
Americans to contribute to the Katrina recovery effort while providing an easy, safe way for them to save
for their future. I Bonds offer investors a fixed rate combined with semiannual inflation adjustments that
will help protect purchasing power. Naturally, I Bonds would continue to honor eight prominent
Americans, whose portraits appear on the different denominations offered. Finally, Savings Bonds are, in
general, an excellent place for low-income Americans and Katrina victims to save money--Savings
Bonds are safe, investment risks are low, and no bank account is required for purchase.

·   Promote homeownership through a tax credit for evacuees who lost or never owned their own
    homes.

Homeownership must be central to any rebuilding of lives or affected regions. A "Homebuyers Tax
Credit" would be available to qualifying households for the three years after purchasing a home. The
credit could be pegged to a percentage of purchase price with a cap of 6% and restricted by an appropriate
income level as well. This kind of temporary tax relief targets families that are ready and capable of
buying a home but deterred by the increased financial commitment in succeeding years. This policy
would help augment demand for homeownership and be implemented as one part of a vigorous strategy
aimed at increasing homeownership in the Gulf region and for evacuees any where they may decide to
live.

·   Provide a $5,000 "Katrina Tax Credit."

To "jump start" long-term savings and asset-building, we propose a new Katrina Tax Credit that could be
delivered directly on tax returns as a new refundable credit or simply by increasing the EITC or Child Tax
Credit by the amount of the Katrina Credit. Only persons who lived in zip codes affected by Katrina
(regardless of where the evacuees may reside at the time they file their tax return) could claim the credit.
This $5,000 credit could be used only for:

        * Saving in a Roth IRA, which allows penalty-free withdrawals for first-home purchase and post-
             secondary education, in addition to retirement. We recommend increasing the cap on
             homeownership non-penalized withdrawals from $10,000 to $30,000;
        * Saving in a tax preferred education savings account;
        * Opening a low-cost bank account or purchasing a US Savings Bond directly on a tax return.

·   Encourage financial institutions to offer simple, low-cost bank accounts.

In one recent survey of New Orleans evacuees, 70% lacked a checking or savings account as well as a
usable credit card. Without a basic bank account, financial stability will be nearly impossible to achieve.
                                                     3
We thus propose increasing both the supply of and access to low-cost bank accounts in the private sector.
An easy way to achieve this would be to offer financial institutions a one-time payment to open
"Electronic Transfer Accounts," or ETAs, which are low-cost accounts currently provided by the
Treasury Department for people who receive recurring federal payments such as Social Security.
Through participating financial institutions, the ETA could be made available to Katrina evacuees--
provided banks would be given greater flexibility to tailor the product to meet their and the evacuee's
needs. Tax credits could be offered to banks that offer ETAs, while direct payments from Treasury could
be offered to credit unions and other non-taxpaying financial institutions.


    PROPOSALS TO ADDRESS POVERTY BY SUPPORTING LONG-TERM SAVINGS AND ASSETS
                                 DEVELOPMENT

The images of the hurricane's aftermath were especially powerful because they exposed the despair that is often
intrinsic to poverty. The pervasiveness of this despair extends far beyond the Gulf Coast. The following proposals
are intended to address anti-poverty efforts on a national scale. Some of these ideas could be tailored to
populations in specific regions, but they would have the greatest impact if implemented across the country.

·   Expand Housing Voucher Program along with the Family Self-Sufficiency Program

For many low-income families, the lack of affordable housing options leads to housing costs that eat away at a
family's budget. Securing affordable rental housing is also often the first step towards homeownership.
Expanding the voucher program would increase the demand for rental housing at the same time as it would
control a family's housing costs. It is essential that this expansion occurs in accordance with the principles of the
Moving to Opportunity Demonstration project, which has reinforced the advantages of promoting economic
integration and avoiding the concentration of poverty in specific communities. This expansion should accompany
increased use of the Family Self-Sufficiency Program, which allows public housing authorities to create escrow
accounts where earnings increases are stored rather than being used to pay for rent.

Individuals gain access to these accounts once they are employed, free of welfare assistance for at least 12
months, and substantially achieve the goals in their self-sufficiency plan. While public housing authorities have
the ability to open escrow accounts, they are required to identify designated case managers. HUD should either
increase its dedicated funding to hire case managers or more effectively seek partnerships with agencies already in
the case management business.

·   Expand Homeownership Opportunities for Lower-Income Families

Homeownership is at the core of the American Dream. Supported by a steady stream of public policy
interventions that have facilitated the purchase and continued ownership of homes, the rise in the national
homeownership rate has been impressive. Yet lower-income families face significant hurdles in becoming
homeowners and do not benefit from most of the current policy incentives designed to promote homeownership.
This can be addressed through a series of new policies, program, and reforms.

        Increase Down Payment Assistance. This can either be achieved through small grants or mortgages
        subsidies that bring down the costs of getting into a new home.

        Make the homeowner's mortgage deduction refundable for lower-income households. This tax break
        provides $70 billion a year in tax relief. Since the mortgage deduction is not refundable, the bulk of the
        benefits go to higher income families. 54 percent of the homeowner's deduction goes to households
        earning more than $100,000 a year, and nearly 90 percent of this benefit goes to households with adjusted
        gross incomes over $50,000. Making the deduction refundable for households earning under $50,000 will
        open up this subsidy to families on the cusp of achieving the American Dream.

        Enact a refundable First-Time Homebuyers' Tax Credit. The largest obstacle for most first-time
        homebuyers to overcome is saving for the down payment. This problem has only increased as home
                                                     4
        prices have risen. First-time homebuyers earning under $50,000 a year should be eligible for a dollar-for-
        dollar tax credit for money used as a down payment, up to a $10,000 amount. This tax credit should be
        made refundable to benefit families without high tax liabilities.

·   Revise or Eliminate Asset Tests in Public Assistance Programs

The application of low asset limits to determine eligibility for federal public assistance benefits is a huge
disincentive for saving. One of the great policy achievements of the 1990s was that nearly all states raised their
assets limits as part of their TANF plans. Several have dropped them altogether. While states continue to innovate
where they have the flexibility to do so, an opportunity also exists to reform these limits at the federal level.
Restricted savings should be excluded from eligibility resource tests. Currently, only retirement savings in
pension plans are universally excluded from consideration in assistance eligibility, while 401(k)s are excluded in
only some programs, and IRAs are generally counted. Resources in these types of accounts should be exclude
across the board so that these savers are not rewarded in some programs and penalized elsewhere. Further, if the
asset limits are not eliminated entirely, they at least should be raised to make them more in line with
contemporary standards. The asset limit for the Supplemental Security Income program has remained frozen at
$2,000 ($3,000 for couples) since 1989. Indexing these limits for inflation would help to gradually raise the
amount that families can save without need for additional legislative or other action. Or, these limits should be
raised enough so that everyone can keep three months emergency savings on hand--an amount most financial
planners agree provides an appropriate contingency.

·   Create a System of Children's Savings Accounts at Birth

One of the most novel and promising ways to achieve a universal, progressive asset building system over time
would be to provide each generation of children a restricted, start-in-life asset account at birth. These accounts
would establish a universal platform and infrastructure to facilitate future savings and lifelong asset accumulation.
While every child would have an account, it would especially benefit the 26 percent of white children, 52 percent
of black children, and 54 percent of Hispanic children who start life in households without any resources
whatsoever for investment. The America Saving for Personal Investment, Retirement, and Education Act
(ASPIRE Act) is sponsored by a strong bi-partisan coalition of legislators in both the House and the Senate. The
ASPIRE Act would provide every child with an account at birth--called a KIDS Account--that would be
endowed with $500 and supported with progressive, targeted savings incentives until age 18, at which point it
could be used for going to college, buying a home, or building up a nest-egg for retirement. (For more
information, see www.AspireAct.org.)

·   Expand the Earned Income Tax Credit (EITC).

An expansion of the EITC, in addition to enabling more low-income Americans to save, would provide tax relief
to lower-income working families. Previous expansions of the EITC have proven to be effective at providing
work incentives and lifting families out of poverty. A well-crafted expansion would increase the maximum credit
for working families with three or more children, expand the credit for married, two-earner couples, and expand
the credit for families with two or more children. An expanded EITC program will create larger tax refunds,
which in turn can be linked to savings products.

·   Use Tax Returns to Connect Tax Refunds to Savings Products

The tax system can be a gateway to the financial system and to building savings and assets. Last tax season the
IRS sent refund checks averaging $2,100 to 106 million tax filers. These cash infusions are often the best chance
people have to save some money in any given year. This is particularly true for lower-income families.

Over 20 million lower-income families--one in six taxpayers--received an average $1,700 boost to their refund
from the Earned Income Tax Credit (EITC), a refundable tax credit designed to reward work. The Child Credit is
another vital source of tax refunds. Also, for the millions of Americans who do not have bank accounts, tax time
is an opportunity to help them open accounts to receive their refunds electronically, to take their first step to enter
the financial mainstream, and begin to save. People may spend rather than save their refunds because they do not
                                                          5
have an easy way to convert a portion of their refunds into savings vehicles. Recent research finds that many
Americans--including lower income ones--can and will save their refunds if offered appropriate incentives and a
clear way to do so. The challenge for policymakers is to facilitate and incentivize the savings of tax refunds into
existing--and possibly new--savings products.

        Encourage the IRS to allow tax refunds to be split among multiple accounts. Under this proposal,
        people could deposit their refund into IRAs, 529 college savings plans or a variety of other savings
        accounts. Right now, taxpayers have only one choice; refunds are issued in a lump sum. If it is easier for
        people to save right on their tax forms, to split their refunds into "money to save" and "money to spend,"
        people will save more, perhaps much more. Research has indicated that even low-income tax filers would
        use this "splitting" option to save. The Administration has signaled their intention to implement this change
        to the tax filing process by the 2007 tax year; they should be encouraged to keep to this implementation
        schedule.

        Provide a matching deposit, up to $500 per year, if a low-income taxpayer saves part of their tax
        refund in a targeted savings account (such as a 529 college savings plan or a Roth IRA). If a low-
        income taxpayer is willing to set aside up to $500 of their tax refund in an after-tax savings product, they
        would be eligible for a 1 to 1 match, up to $500 per year, to be deposited directly by the government into
        that account. This matched IRA could be justified as providing EITC recipients with similar opportunities
        for tax-favored savings enjoyed by higher-income workers. While legislation would be necessary to
        provide the matching deposit, no new refundable tax credits, and no new financial products would be
        required. Ideally, at some point the IRS could consider listing these savings products directly on tax
        forms, so that with a check-of-the-box a portion of a tax refund could be saved.

·   Create a Targeted Lifetime Savings Account

The President's Lifetime Savings Account (LSA) proposal, which would create an incentive for savings, should
be modified to target low-income families. Since LSAs as proposed are available to everyone regardless of
income, they would likely provide tax-sheltering or "asset shifting" opportunities for better-off Americans while
doing little to encourage low-income Americans to save. LSAs should be revised to encourage more low-income
Americans to save. In addition to adding an income limit on persons eligible to save in LSAs to reduce the
likelihood of asset shifting, LSAs can be made more inclusive by offering a matching deposit, on a 1-1 basis, for
low-income persons who save in LSAs. The matching deposit could be delivered through a tax credit to financial
institutions that offer LSAs, through existing refundable tax credits, or through the creation of new refundable tax
credit.

·   Expand Access to College and Post-Secondary Education

For many, higher education is a prerequisite for securing a well-paying job, but is also often the first step to
achieving security, acquiring assets, and building wealth. While educational attainment rates continue to rise
across all race and income groups, persistent gaps remain between races and people of difference socio-economic
backgrounds. Financial barriers prevent almost half of academically qualified low-income students from attending
a four-year college and financial aid increasingly is offered through loans, merit awards and tax credits rather than
need-based assistance.

        Revise and expand Pell Grants. An increase in the maximum Pell Grant award that a student can receive
        every year would be the most beneficial way to increase access to college.1 However, the current Pell
        Grant program should be restructured so that aid is concentrated in the first two years of college. This
        "front-loaded" grant would cover a larger percentage of expenses and greatly reduce the need for a loan in
        the first two years. While students would then have to finance their remaining years of school with a
        federal loan, they would be less averse to taking out a loan after having gained confidence in their
        abilities to complete their education.

1
 In the FY 2006 Budget, the Bush Administration calls for increasing the maximum Pell Grant award from $4050 to $4550
over the next five years.
                                                             6
       Expand pre-college programs. One of the most important parts of making college more accessible is
       ensuring that every child receives a quality K-12 education so that they are prepared to succeed in college.
       They must also begin their school career with the expectation that college is within their reach. To this
       end, it is important to increase awareness and financial support of pre-college programs which have
       shown that they are successful. The TRIO and GEAR UP programs should be dramatically expanded so
       that far more than the current 10 percent of eligible students are able to take advantage of these programs.

       Improve the effectiveness of Section 529 Savings Plans. 529 savings plans offer an account-based
       approach to saving for post-secondary education. While the structure of most state-run 529 plans offers a
       useful savings platform, the federal tax incentives associated with these accounts primarily restrict
       benefits to middle- and upper-income families. This platform should be strengthened by making the
       system more transparent, inclusive, and offering saving incentives for those who need them most. Options
       could include an initial public deposit delivered directly or through a refundable tax credit, matching
       grants, or setting up a system of children's savings accounts for each child through the 529 account
       infrastructure already in place. These reforms will enable families to evaluate and make informed choices
       as to how best to save for college.

·   Support Microenterprise

Microenterprises--businesses with five or fewer employees that can benefit from a loan of $35,000 or less--are
an important source of household income for many families. These businesses access training and financial
services from more than 600 microenterprise development organizations nationwide. Yet public support for these
programs, and the businesses they serve, has been fragmented and uneven.

       Create a New Entrepreneur Tax Credit and Self-Employment Literacy Campaign. Filing Schedule
       C is perhaps the single most important "formalizing" event in a new business's start-up process.
       Schedule C could be an appropriate vehicle for targeting different kinds of asset-building deductions and
       credits for micro businesses and other self-employed businesses. A New Entrepreneur Tax Credit could
       be offered to first-time Schedule C filers that have at least $10,000 in net business income. The credit
       could be taken over a multiple-year period for new entrepreneur start-ups. Further, a Business and Tax
       Literacy Campaign would inform sole proprietors about the benefits of Schedule C filing and the new tax
       credit.

       Restructure the SBA Microloan Program. Since 1992, the Small Business Administration has
       provided grants and loans to nonprofit intermediary lenders engaged in microenterprise
       development. This program could be more effective if the following changes were made: (a) create a
       credit enhancement pool of $500 million; (b) expand the target market; (c) establish standards for
       borrower, loan performance, and technical assistance.



FOR MORE INFORMATION:
Ray Boshara, Reid Cramer, Leslie Parrish, and Anne Stuhldreher
Asset Building Program, New America Foundation
1630 Connecticut Avenue NW 7th Floor
Washignton, DC 20009
202.986.2700 phone
202.986/3696 fax
www.newamerica.net
www.assetbuilding.org




                                                        7