The Impact of the Federal Income Tax on Poverty: Before and After the 2017 Tax Revision (“TCJA”; P.L. 115-97)

Summary: The federal individual income tax is structured so that the poor owe little or no income tax. In addition, the federal individual income tax (hereinafter referred to simply as the income tax) increases the disposable income of many poor families via refundable tax creditsâprimarily the earned income tax credit (EITC) and the refundable portion of the child tax credit, referred to as the additional child tax credit, or ACTC. These credits are explicitly designed to benefit low-income families with workers and children and can significantly boost families' disposable income, lifting many of these families above the poverty line.

Summary: Using the federal government's Supplemental Poverty Measure (SPM), CRS estimates that under current law, the income tax reduced total poverty by 15% (from 14.5% in poverty to 12.3% in poverty). The impact of the income tax on the overall poverty rate was larger than the impact of many needs-tested benefits programs targeted toward the poor. In contrast, the income tax's ability to lift the poorest Americans out of povertyâto reduce the "poverty gap"âwas limited in comparison to many needs-tested programs. (The poverty gap is the difference between the poverty threshold and a family's disposable income, aggregated over all poor families, and is a measure of the degree of poverty.) CRS estimates that under current law, the income tax reduced the poverty gap by about $13.9 billion annually (from $150.8 billion to $136.9 billion), approximately half the effect of other needs-tested programs.

Summary: Virtually all of the poverty reduction from the income taxâboth in terms of reducing poverty rates and the poverty gapâwas concentrated among families with children and workers. For example, CRS estimates that poverty among children who lived in families with workers fell by almost 40% (from 14.7% in poverty to 8.9% in poverty) as a result of the income tax. For nonaged (i.e., nonelderly) adults in families with children and workers, poverty fell by almost a third (from 12.3% in poverty to 8.3% in poverty). (In contrast, CRS estimates that the poverty rates among individuals who lived in families with no workers were unchanged by the income tax.) Similarly, all of the estimated $13.9 billion in poverty gap reduction from the current income tax occurred among families with children and workers.

Summary: The current income tax includes the effects of legislative changes made by P.L. 115-97 , commonly referred to as the Tax Cuts and Jobs Act (TCJA). The TCJA made numerous changes to the federal income tax system, including many that affect individuals and families. A comparison of the effect of the current income tax (i.e., the post-TCJA income tax) and the pre-TCJA income tax on poverty rates and the poverty gap (assuming all else unchanged) provides one measure of the law's impact on poverty. CRS estimates suggest that the TCJA marginally reduced poverty rates and the poverty gap, with the impact of the post-TCJA income tax similar to the impact of the pre-TCJA income tax. This suggests the law provided relatively small benefits to poor families.

Summary: Insofar as policymakers are interested in expanding the antipoverty impact of the income tax, they could expand or modify the EITC or ACTC, or create new refundable tax credits targeted toward the poor. However, refundable tax credits are subject to several limitations as a poverty reduction policy: the current credits primarily benefit those who work (and have children), limiting their ability to reduce poverty among those who do not or cannot work; they are received only once a year when income tax returns are filed, limiting their ability to help the poor meet ongoing basic needs; and they are difficult for the IRS to administer, subjecting the credits and their recipients to additional scrutiny.

The federal individual income tax is structured so that the poor owe little or no income tax (although they may pay other federal taxes, like payroll taxes as well as state and local taxes). In addition, the federal income tax increases the disposable income of many poor families via refundable tax credits. These tax creditsâprimarily the earned income tax credit (EITC) and the refundable portion of the child tax credit, called the additional child tax credit (ACTC)âincrease the disposable income of many low-income taxpayers who work and have children, and have been shown to reduce poverty.

P.L. 115-97 , commonly referred to as the Tax Cuts and Jobs Act (TCJA), made numerous temporary changes to the federal income tax system, including many that affect individuals and families. Preliminary analyses of the TCJA found that the law provides larger benefits to higher-income individuals and families. This report's analyses find that overall the law had a relatively small impact on poverty compared to the pre-TCJA federal individual income tax.

Recent tax legislation considered in the 116 th Congressâincluding the Economic Mobility Act of 2019 ( H.R. 3300 ) ordered reported by the House Ways and Means Committee on June 20, 2019âwould target additional tax benefits to lower-income families. H.R. 3300 would temporarily increase the amount of the EITC for "childless" workers, allow all eligible taxpayers to receive the full amount of the ACTC, irrespective of a taxpayer's earned income, and make the child and dependent care tax credit refundable. To provide context for the consideration of new tax legislation, this report examines the relationship between the federal individual income tax and poverty. Given some policymakers' continued interest in using the tax system to reduce poverty and boost the incomes of low-income working families with children, understanding the impact of the income tax in reducing povertyâpre- and post-TCJAâmay help inform future policy debates and legislative proposals.

This report is structured to first provide a brief overview of the major federal income tax provisions that affect lower-income individuals and families, including a comparison of how these provisions changed under the TCJA. The report then provides an analysis of how the pre-TCJA federal income tax affected poverty, followed by a comparison of how the post-TCJA federal income tax affected poverty. The report concludes with some observations on the benefits and limitations of the federal income tax system and refundable tax credits in reducing poverty.

Key Concepts, Conventions, and Terms Used in this Report

Several major concepts, conventions, and terms used throughout this report are briefly described below. The information in this report provides some insights into how the federal income tax affects families' poverty status, specifically the immediate, short-term impact of the TCJA on poverty. The report does not estimate how the impacts of the TCJA will change over time or how people may change their behavior (e.g., choices between working and not working) in response to the TCJA.

The family is the unit of analysis. While federal income tax provisions affect taxpayers, the impact of these provisions is analyzed in terms of families. A taxpayer is generally composed of all individuals listed on a federal income tax return (IRS Form 1040) and includes an individual, his or her spouse (if married), and any dependents. Descriptions of the tax system pre- and post- TCJA will generally refer to how these changes applied to taxpayers (i.e., the below section titled, " How Major Federal Income Tax Provisions Apply to the Poor "). In contrast, poverty analysis is done at the family level since families can share many resources and expenses. Hence, in this report analyses of the impact of the income tax , pre- and post-TCJA, are generally done at the family level . In this report, a family is composed of people living together related by blood or marriage (the family), cohabiting partners, and foster children. In some cases, like multigenerational families, a family is composed of multiple taxpayers. In these cases, tax liabilities and/or benefits for all taxpayers are aggregated to determine the impact of the income tax on the family's resources. If a family is determined to be poor, all members of that family are counted as poor.

The Supplemental Poverty Measure (SPM) is used to measure the poverty impact of the federal income tax. This report examines the impact of the pre- and post-TCJA federal income tax on poverty, using the federal government's Supplemental Poverty Measure (SPM). Unlike the official poverty measure, the SPM was developed in part to help assess the effects of tax and government benefit policies on the economic well-being of low-income individuals. For more information on the SPM, see Appendix A and CRS Report R45031, The Supplemental Poverty Measure: Its Core Concepts, Development, and Use .

The impact s of the federal income tax (pre- and post-TCJA) are estimated using the TRIM3 model and are modeled as if they were in effect in 2016. To estimate the impact of the federal income tax on povertyâin both the pre- and post-TCJA casesâincome taxes owed (or the net benefit from refundable credits received) are subtracted from (or added to) the family's other resources, which are then assessed against an SPM poverty threshold. Other taxes that a family may payâincluding payroll and excise taxesâare unchanged in these analyses. All poverty estimates in this report are calculated using a computer simulation model called the Transfer Income Model, version 3 (TRIM3). TRIM3 uses data from the 2017 Annual Social and Economic Supplement (ASEC) to the Current Population Survey (CPS), representing income received and tax liabilities or benefits accrued during calendar year 2016. As such, the poverty estimates under the old and new income tax systems are estimated as if they were in effect in 2016 . Hence, for ease of reading, the estimates in this report are described in the past tense. Details on this methodology, including how the TCJA was modeled in TRIM3, can be found in Appendix A .

How Major Federal Income Tax Provisions Apply to the Poor

The federal income tax can increase or decrease a taxpayer's disposable income, which may affect a family's poverty status. Broadly, when a taxpayer receives refundable tax credits greater than the income taxes they owe, they have a negative tax liability , and an increase in disposable income, all else being equal. Conversely, if a taxpayer owes federal income tax, they have a positive tax liability , and reduced disposable income, all else being equal. (If a taxpayer has zero tax liability , their disposable income is unchanged by the income tax.) Unless otherwise mentioned, the term tax liability will refer to federal income tax liability in this report.

In order to understand how the individual income tax can affect tax liabilities, it can be helpful to broadly understand how income taxes are calculated, and in particular, how major components of the income tax affect poor taxpayers. Importantly, the description below summarizes only the major aspects of the federal income tax calculation that are particularly relevant for poor families. For a more detailed overview of the federal income tax calculation, see CRS Report R45145, Overview of the Federal Tax System in 2018 ; and CRS Infographic IG10014, The U.S. Individual Income Tax System, 2019 . For a more detailed description of the tax provisions summarized below, how they affect income tax liability, and how they were modified by the TCJA, see CRS Report R45092, The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law .

The TCJA substantially modified the federal tax code, including changing many provisions that affect individuals. Most of these changes are temporary, and are scheduled to expire ("sunset") at the end of 2025. The major changes made by the TCJA that are likely to affect many low-income taxpayers are highlighted below.

The first step for taxpayers in calculating their income tax liability is to add up their income from various sources to calculate their gross income.

The income tax code excludes certain types of income received by lower-income individuals from gross income. For example, public assistance payments (cash assistance from the Supplemental Security Income program or the Temporary Assistance for Needy Families [TANF] Block Grant) and the value of certain noncash benefits (food benefits from the Supplemental Nutrition Assistance Program [SNAP] or the subsidy value of housing benefits) are excluded from gross income under the income tax system, and hence are not taxable. The TCJA did not make any changes to the exclusion of public assistance.

The taxpayer then subtracts from gross income various deductions and exemptions to calculate the amount of income that is taxableâtheir taxable income . Most low-income taxpayers will subtract from their gross income the standard deduction (and before 2018, personal exemptions) to calculate their taxable income.

The Standard Deduction and Personal Exemptions

The standard deduction is a fixed dollar amount all taxpayers may deduct from their income, with the amount varying by the taxpayer's tax filing status. In 2018, before enactment of the TCJA, the standard deduction would have ranged from $6,500 to $13,000, depending on the taxpayer's filing status. The TCJA almost doubled the standard deduction. The personal exemption is a per-person subtraction from gross income for the taxpayer and, if applicable, his or her spouse and dependents. Before enactment of the TCJA, the personal exemption would have equaled $4,150 per person in 2018. The TCJA effectively eliminated the personal exemption (reduced the amount to $0). When combined, the personal exemptions and the standard deduction represent an amount of income that is not subject to income taxation. As a result of these provisions, many low-income taxpayers have little or no taxable income and hence have little or no income tax liability. (Taxable income cannot be reduced below zero.)

After taxpayers have calculated their taxable income, they then apply marginal tax rates to calculate their tax liability before credits.

A marginal tax rate is the tax incurred on each additional dollar of taxable income. Marginal tax rates in the individual income tax code are graduated, meaning the rate increases over successive ranges of taxable income. Many low-income taxpayers who do have taxable income pay taxes at the lowest marginal rate of 10%. The ranges of taxable income and their associated rate are often referred to as tax brackets . Taxpayers determine their tax liability before credits by applying marginal tax rates to their taxable income. Then taxpayers can subtract tax credits to determine their final tax liability. The 10% tax bracket (the lowest tax bracket) was unchanged by the TCJA. In general, marginal tax rates above the 10% rate were reduced under the TCJA. See Table C-2 .

Tax credits reduce the amount a taxpayer owes dollar-for-dollar the value of the credit. Credits can be nonrefundable or refundable. Nonrefundable credits cannot exceed tax liability, and therefore can only reduce tax liability to zero. In other words, "the maximum value of a nonrefundable credit is capped at a taxpayer's tax liability." For example, if a taxpayer owes $1,000 in income taxes and is eligible to receive $4,000 in nonrefundable tax credits, the taxpayer will receive only $1,000 in nonrefundable tax credits, reducing their income tax liability to zero. By contrast, refundable credits are not limited by how much a taxpayer owes in income taxes, meaning those with little to no tax liability, including may poor taxpayers, can receive the full value of the credit. A refundable tax credit provides a net benefit to a taxpayer (i.e., after-tax income is greater than before-tax income) when the amount of the credit is greater than the taxpayer's income tax liability. For example, if a taxpayer owes $1,000 in income taxes but receives $4,000 in refundable tax credits, the taxpayer has a net benefit (and negative tax liability) of $3,000.

The two major refundable tax credits claimed by low-income working taxpayers are the EITC and the additional child tax credit (the ACTC, which is the refundable portion of the child tax credit). The amount of the EITC is based on a taxpayer's earned income, marital status, and number of qualifying children. In 2018, before the TCJA, the maximum amount of the credit would have ranged from $520 to $6,444, depending on the number of qualifying children. The TCJA did not alter the EITC itself, though it did change the rules for adjusting it for inflation, which resulted in a slightly smaller EITC under the TCJA than under prior law (a difference of $1 to $13 in 2018, depending on the number of qualifying children claimed by a taxpayer). Before the TCJA the child tax credit equaled a maximum $1,000 per child, and up to the full amount ($1,000 per child) could be received as the ACTC. The ACTC was calculated as 15% of earned income over $3,000, not to exceed $1,000 per child. The TCJA increased the maximum child tax credit from $1,000 to $2,000 per child and increased the maximum amount of credit that could be claimed as the ACTC from $1,000 to $1,400 per child. The formula for calculating the ACTC was also modestly changed. Post-TCJA, the ACTC formula now equals 15% of earned income above $2,500, not to exceed $1,400 per child. While many low-income taxpayers did receive a larger benefit as a result of these changes, the poorest taxpayers received a more modest increase of up to $75 (see Figure C-1 and Figure C-2 ).

Impact of the TCJA on a Taxpayer's Tax Liability

The ultimate impact of the TCJA on a particular taxpayer's tax liability depends on how the taxpayer's individual circumstances interact with all of these provisions, not just one of them. For example, as a result of all the changes made by the TCJA, a taxpayer may have greater taxable income, but that income may be subject to lower marginal tax rates, and the taxpayer may also be eligible for a larger child credit. Hence, even though on average the TCJA lowered tax liabilities, individual taxpayers' tax liabilities may have been unchanged, increased, or decreased as a result of the law.

Under the pre-TCJA income tax, many poor families did not owe federal income taxes, and a significant proportion received a net benefit from refundable credits. As previously discussed, the combination of personal exemptions and the standard deductionâsubtracted from gross income to determine income subject to the taxâgenerally reduced most poor families' taxable income to zero. Additionally, some poor families with little or no income tax liabilityâparticularly those with children and earned incomeâreceived refundable tax credits that resulted in their after-tax income being greater than their before-tax income. (CRS estimates that before the income tax was subtracted from [or added to, in the case of negative tax liabilities] a family's resources, there were approximately 21.4 million familiesâequaling an estimated 46.5 million individualsâin poverty. For more information, see Appendix B .)

Poor Families with Positive, Negative, and Zero Tax Liabilities Under the Pre-TCJA Income Tax

Figure 1 illustrates the estimated share of families who owed income taxes (positive tax liability), owed no income taxes (zero tax liability), or owed no income taxes and received a net benefit from refundable tax credits (negative tax liability) by family poverty status. Under the pre-TCJA income tax, the majority of nonpoor families (75.7%) owed income taxes. In contrast, the majority of poor families (62.7%) owed no income taxes, and approximately a quarter (24.3%) owed no income taxes and received a net benefit from refundable tax credits.

Figure 2 shows the estimated share of poor families with positive, zero, and negative tax liabilities by the presence of children or aged family members. Nearly 6 in 10 poor families with children (57.5%) had a negative tax liability under the pre-TCJA income tax. In comparison, nearly 2 in 10 poor families without children or aged adults (19.5%) had a negative tax liability.

The Impact of Pre-TCJA Income Tax on Poverty Rates

Comparing poverty rates before and after a policy change is one way to assess a policy's impact on poverty. To calculate poverty rates under the pre-TCJA income tax, a family's poverty status must be determined before and after tax. A family's before-tax poverty status is based on the family's available financial resources before federal income tax liabilities are subtracted from (or added to, in the case of negative tax liabilities) their disposable income. In contrast, a family's after-tax poverty status is based on the family's financial resources after the federal income tax is subtracted from (or added to, in the case of negative tax liabilities) disposable income. If the income tax boosts income sufficiently to push a poor family above the poverty threshold, they are then counted as nonpoor as a result of the pre-TCJA income tax. As previously discussed, if a family is determined to be poor, all members of that family are counted as poor. Poverty rates are then calculated based on the number of individuals who are poor before and after the pre-TCJA income tax is applied.

Figure 3 shows the effect of the pre-TCJA income tax system on the poverty rates of individuals based on the types of families in which individuals lived. Overall, the pre-TCJA income tax reduced poverty: the before-tax poverty rate was 14.5%, while the after-tax poverty rate was 12.5%, a net reduction of two percentage points. Figure 3 also indicates that the poverty reduction impact of the income tax was concentrated among individuals who lived in families with children. Specifically, the pre-TCJA income tax reduced child poverty by nearly 30% (from 17.5% in poverty to 12.3% in poverty) and reduced poverty among nonaged (i.e., nonelderly) adults in families with children by a quarter (from 14.5% in poverty to 10.8% in poverty). In contrast, the post-tax poverty rate for nonaged adults in families with no children was higher than the pre-tax poverty rate for this group (the poverty rate for individuals in this group rose from 12.8% to 13.1%).

Further examination of the impact of the pre-TCJA income tax on poverty rates indicates that all of the antipoverty effect of the federal income tax went to those individuals who lived in families with workers. As illustrated in Table 1 , CRS estimates that among the subset of families who had no workers, poverty rates, including the poverty rates of children and nonaged adults who lived with children, were unchanged by the pre-TCJA income tax. In contrast, among those who lived with a worker, poverty fell by over 20% (from 10.8% in poverty to 8.3% in poverty), with larger reductions for children and nonaged adults who lived in families with children. In other words, the poverty reduction of the pre-TCJA income tax was concentrated among individuals who lived with workers and children.

The Impact of Pre-TCJA Income Tax on the Poverty Gap

The poverty gap is another metric that can be used to understand poverty and to examine the impact of a policy on poverty. The poverty gap is the difference between the poverty threshold (an amount of money below which a family is counted as poor) and a family's disposable income. (The poverty gap for a nonpoor family is $0.) Unlike the poverty rate, which is based on whether a family is below the poverty threshold, the poverty gap provides a way of examining the degree to which a family is below that threshold.

For example, assume there are two poor families who have the same poverty threshold of $25,000. The first family has $20,000 of disposable income, hence their poverty gap is $5,000. The second family has $10,000 of disposable incomeâthey are poorer than the first familyâand their poverty gap is $15,000. Hence the larger the poverty gap, the poorer the family.

For this analysis, poverty gaps are summed together across all poor families to determine the aggregate poverty gap. The aggregate poverty gap is calculated both before and after taxes (or refundable credits) are subtracted (or added) to disposable income as calculated under the pre-TCJA income tax. Changes to the aggregate poverty gap from the pre-TCJA income tax measure the degree to which the federal income tax reduced financial hardship among poor families.

Table 2 provides estimates of the aggregate poverty gap before and after the pre-TCJA income tax. The aggregate poverty gap before the pre-TCJA income tax was $150.8 billion. The poverty gap after the pre-TCJA income tax was $138.1 billion. Thus, the pre-TCJA income tax reduced the aggregate poverty gap by $12.7 billion, all of which went to families with children and at least one worker. For families without children (i.e., families with aged adults and families without children or aged adults), the aggregate poverty gap increased slightly as a result of the pre-TCJA income tax.

Under the post-TCJA income taxâsimilar to the pre-TCJA income taxâmany poor families did not owe federal income taxes (i.e., had zero tax liability), and a significant proportion owed no income tax and received a net benefit from refundable credits (i.e., had a negative tax liability). The impact of the post-TCJA income tax system on poverty rates and the poverty gap suggests the TCJA provided relatively small benefits to poor families. (CRS estimates that before the income tax was subtracted from [or added to, in the case of negative tax liabilities] a family's resources, there were approximately 21.4 million familiesâequaling 46.5 million individualsâin poverty. For more information, see Appendix B .)

Poor Families with Positive, Negative, and Zero Tax Liabilities Under the Post-TCJA Income Tax

As illustrated in Figure 4 , CRS analysis indicates that the shares of poor and nonpoor families with positive, negative, and zero income tax liabilities were similar pre- and post-TCJA. For both poor and nonpoor families, there is a relatively small decrease (less than 2 percentage points) in the number of families with a positive tax liability. For both poor and nonpoor families, there is a relatively small increase in the share of families with zero tax liability. The share of poor families with a negative tax liability is effectively unchanged, while the share of nonpoor families with a negative tax liability increased by a relatively small amount.

Figure 5 compares the estimated share of poor families with positive, zero, and negative income tax liabilities under the pre-TCJA and post-TCJA income tax by family type. This analysis indicates that across all poor family types, the share of poor families that owed taxes (i.e., had positive tax liability) modestly fell as a result of the TCJA. Among poor families with children, CRS analysis indicates that share of these families who did not owe income taxes (i.e., had zero tax liability) increased as a result of the TCJA. In contrast, the share of poor families with children who received an increase in their disposable income from refundable tax credits (i.e., had a negative income tax liability) fell as a result of the TCJA.

The Impact of the Post-TCJA Income Tax on Poverty Rates

Figure 6 compares estimated after-tax poverty rates between the pre- and post-TCJA income tax. The difference in these poverty rates reflects the impact of the TCJA on poverty. These estimates indicate that the TCJA had a relatively small effect on poverty rates. CRS estimates that the TCJA reduced overall poverty by 1.6% (from 12.5% in poverty under the pre-TCJA income tax to 12.3% in poverty under the post-TCJA income tax). The impact of these changes was concentrated among individuals who lived in families with children. Specifically, the TCJA reduced poverty among children and nonaged adults living in families with children by about 2.4% and 1.9%, respectively (from 12.3% to 12.0% in poverty among children and from 10.8% to 10.6% in poverty among nonaged adults living in families with children).

As with the pre-TCJA income tax, the impact of the post-TCJA income tax on poverty rates was concentrated among those who lived in a family with workers. As illustrated in Table 3 , CRS estimates that among the subset of families who had no workers, the poverty rates of children and nonaged adults who lived with children were unchanged by the post-TCJA income tax. In contrast, among those who lived with a worker, poverty fell by nearly 25% (from 10.8% in poverty to 8.1% in poverty), with larger reductions for children and nonaged adults who lived in families with children. As with the pre-TCJA income tax, these estimates suggest that virtually all of the benefits of post-TCJA income tax go to individuals who live with workers and children.

The Impact of the Post-TCJA Income Tax on the Poverty Gap

The post-TCJA income tax reduced the aggregate poverty gap from $150.8 billion to $136.9 billion. The pre-TCJA income tax reduced the aggregate poverty gap to $138.1 billion. Hence, CRS estimates that the changes made by the TCJA reduced the aggregate poverty gap by an additional $1.2 billion compared to the pre-TCJA income tax. Table 4 breaks down this $1.2 billion reduction by family type and indicates that the majority of the additional reduction in the poverty gapâapproximately $800 million of the $1.2 billionâoccurred among families with children. Almost all of that $800 million went to families with children and workers.

A Comparison of the Impact of the Post-TCJA Income Tax and Selected Low-Income Assistance Programs on Poverty Rates and the Poverty Gap

A comparison of estimated antipoverty effects of the post-TCJA income tax and other low-income assistance programs indicates that while the income tax substantially reduced the poverty rate , it had more limited effects on the aggregate poverty gap . Figure 7 shows the estimated percentage-point reduction in the poverty rate attributable to the post-TCJA income tax and several low-income assistance programs: the Supplemental Nutrition Assistance Program (SNAP); Supplemental Security Income (SSI); assisted housing programs (Section 8 vouchers and public housing); and Temporary Assistance for Needy Families (TANF) block grant cash assistance. Only SNAP resulted in a comparable reduction in the overall poverty rate compared to the post-TCJA income tax.

Estimates of the reduction in the aggregate poverty gap from the post-TCJA income tax compared to selected low-income assistance programs highlight some of the limitations of the income tax in helping the poorest families. As illustrated in Figure 8 , three of the four low-income assistance programs reduced the poverty gap by greater amounts than the income tax. This may occur for several reasons. First, these nontax programs tend to aid the very poor, and even though their benefits are not large enough to lift a family above the poverty threshold, they do provide significant financial assistance. Second, the majority of the income tax's antipoverty provisionsâincluding the EITC and the ACTCâare available only to families with earned income. Poor families who receive the EITC and the ACTC tend to be "less poor" than other families who receive SNAP, SSI, and housing assistance.

The income tax provides significant monetary benefits to many low-income families. These benefits reduce the overall poverty rate. The analysis in this report suggests, however, that the income tax is less effective, in comparison to many needs-tested programs, in helping the poorest families move out of poverty, as measured by its impact in reducing the aggregate poverty gap. Overall, the impact of the income tax on poverty was marginally changed by the TCJA. Specifically CRS estimates that before taxes, the poverty rate was 14.5%. After the pre-TCJA income tax, the poverty rate fell to 12.5%, while after the post-TCJA income tax it fell to 12.3%. CRS estimates that before taxes, the aggregate poverty gap was $150.8 billion. After the pre-TCJA income tax it fell to $138.1 billion, while after the post-TCJA income tax it fell to $136.9 billion. These benefits went almost exclusively to individuals who lived in families with workers and children.

This analysis highlights both the importance of the tax system in reducing poverty, and also some of its limitations. As discussed in this report, the main mechanism by which the income tax reduces poverty is through refundable tax credits, primarily the EITC and the refundable portion of the child tax credit, the ACTC. These credits are available only to families who include a worker (and who generally have children) since their value is based in part on a taxpayer's earned income. Hence these credits provide little if any benefit to those who do not or cannot work, and who are more likely to be poor.

There are other limitations to using refundable tax credits to reduce poverty that are not discussed in this report. Notably, the EITC and child tax credit are received once a year as part of a taxpayer's refund after they file their federal income tax return, and are not paid out on a more periodic basis (i.e., monthly) to help families meet their basic needs. Addressing this limitation, the National Academy of Sciences, in its most recent report on reducing child poverty, proposed converting the child tax credit into a monthly child allowance. However, the Internal Revenue Service (IRS) may be ill-equipped to accurately and efficiently pay out tax benefits like the EITC and the child tax credit on a more periodic basis. Even on an annual basis, as they are currently paid out, these credits can be difficult for the IRS to administer and for taxpayers to comply with. The complexity of these tax credits is often cited as the main factor driving their high rate of erroneous claims.

Despite these limitations, and the limitations highlighted in this report, the income tax remains a popular (and near-universal) mechanism to provide aid to the working poor, especially those with children. Recent legislative proposals, including the Economic Mobility Act of 2019 ( H.R. 3300 ), would expand refundable tax credits, increasing the size of the EITC for workers without custodial children (the "childless EITC"), and increasing the ACTC to $2,000 ($3,000 for young children) for all low-income taxpayers irrespective of earned income. The stated purpose of this legislation is to help working families with children. And yet, by eliminating the phase-in for the ACTC, H.R. 3300 (and the American Family Act of 2019; S. 690 / H.R. 1560 ) also represents a shift in the target population of refundable tax credits, expanding eligibility to poor families with children that do not include a worker. Similarly, the proposed increase in the EITC for taxpayers without custodial children also reflects a shift from providing benefits only to workers with children (although childless EITC recipients may live in families with other children and/or have noncustodial children who do not live with them). Insofar as eligibility and the amount of refundable tax credits are expanded, the antipoverty effects of the income tax may increase.

Appendix A. Methodology and Data Sources

To examine how the federal individual income tax affects poverty, this report uses estimates from the Transfer Income Model, version 3 (TRIM3) and data from the Census Bureau's Annual Social and Economic Supplement (ASEC) to the Current Population Survey. TRIM3 is a static microsimulation model that estimates federal and state taxes and certain benefit transfer programs. TRIM3 is primarily funded by the U.S. Department of Health and Human Services and maintained by the Urban Institute. The measure of poverty used is the Census Bureau's Supplemental Poverty Measure (SPM).

The Annual Social and Economic (ASEC) Supplement to the Current Population Survey

The ASEC is a household survey of the noninstitutionalized population conducted by the Census Bureau in March of each year. There are approximately 94,000 households in the ASEC.

The ASEC includes questions related to household members' demographic characteristics and family living arrangement at the time of the survey, and work experience and income in the prior year. This report's estimates are based on the 2017 ASEC, which captures information on work experience and income in the prior yearâ2016. The ASEC is used by the U.S. Census Bureau to estimate both the official poverty measure and SPM poverty in its reports. The sample of the ASEC is large enough to make reliable estimates for the nation as a whole and, sometimes, for some of the larger states. However, the sample is not large enough to make state-level estimates for all states.

Estimates discussed in this report were weighted from the sample information to make the ASEC representative of the population of U.S. households. Since the estimates in this report come from a sample, they are subject to sampling error. Additionally, the information on the ASEC is based on respondents' answers to the survey questions, and nonresponse or incorrect responses can result in nonsampling error.

The ASEC itself does not ask survey respondents about taxes paid or refundable credits received in the prior year. That informationâimportant for determining a family's or an individual's SPM poverty statusâmust be estimated. This report uses estimates from the TRIM microsimulation model for these estimates. The Census Bureau uses a different microsimulation model in its reports on SPM poverty.

Microsimulation models of tax and transfer programs are composed of computer code that mimics the rules of the tax code and benefit programs. The models determine whether an individual, family, or other unit is eligible to be subject to a tax or eligible for a benefit and then estimates the amount of the tax (or benefit). TRIM assumes that all taxpayers fully comply with the requirements and rules of the tax code.

TRIM3 applies policy rules in effect during the year to the population for that year. The estimates in this report use information from the TRIM3 federal income tax module for 2016. The 2016 federal income tax module makes "baseline estimates" of the tax code as it existed for 2016. The model uses data from the ASEC's information on family structure at the time of the survey to place individuals into federal tax filing units (e.g., taxpayer and, for those married filing jointly, the spouse). It also identifies "extended" tax filing units, which include dependents, and identifies "qualifying children" for the purpose of the EITC and the child tax credit. TRIM3 creates tax units not only for tax filers, but also for all potential filers. The model then uses information on the earnings and other income sources reported on the ASEC for 2016 to determine a tax filing unit's federal income tax liability.

Additionally, expense and income items not available on the ASEC but required to compute federal income taxes were obtained through a statistical match with the IRS Statistics of Income Public Use File, which is based on a sample of tax returns. TRIM3 estimates of the elderly and disabled tax credit and the child and dependent care tax credit are aligned to target amounts based on IRS data.

In terms of estimating federal income taxes, there are a number of caveats and limitations of the TRIM3 estimates. These limitations are not idiosyncratic to TRIM3 estimates. They generally result from limitations on the underlying ASEC data and are also present in estimates from the Census Bureau. These limitations include the following:

Estimates are not reliable for very - high - income taxpayers . The estimates of federal income tax liability are not likely to be reliable for very-high-income taxpayers because the ASEC oversamples lower-income populations, rather than higher-income populations. Thus, TRIM3/ASEC estimates are most often used in reports (such as this report) that focus on lower-income populations. Amounts of refundable tax credits tend to be underestimated . The estimates from TRIM3 (as well as the Census Bureau's microsimulation model) underestimate refundable tax credits. For example, the TRIM3 estimate of the EITC for 2016 (pre-TCJA) was $39.2 billion. The total amount of the EITC claimed in 2016 according to the IRS was $66.7 billion. This discrepancy has long been known by researchers, but has yet to be fully explained. Potential reasons for the discrepancy include the information on the ASEC family structure perhaps not adequately representing that used for filing tax returns; the underreporting of certain forms of earnings (such as self-employment earnings); and the high rates of error made by taxpayers claiming the EITC.

A Revised Federal Income Tax Module for Estimating Rules under the TCJA

The Urban Institute, in partnership with the Congressional Research Service (CRS), modified TRIM3's federal income tax module to account for the major provisions of the TCJA affecting individual taxpayers. Thus, the information in the model was revised to reflect

the new tax brackets and marginal tax rates that apply to them, the suspension of the personal exemption and the increases in the standard deduction, limitations on itemized deductions, including the limitation on the deductibility of state and local taxes (SALT), revised rules for the child tax credit, and other changes to the federal individual income tax code.

A number of changes to the federal income tax were not modeled. These include changes to the treatment of alimony, the mortgage interest deduction, and elimination of the individual mandate for health insurance. The treatment of alimony was not modeled because the changes will apply only to new or revised orders and will not affect many cases in the near term. Limits on interest qualifying for the mortgage interest deduction were not modeled since there are no data to inform the impact of these changes. Additionally, certain smaller changes are not present in the simulation, such as the elimination of the deduction for bicycle commuting.

The post-TCJA tax code parameters were deflated to 2016 dollars to answer the question, "What if the 2018 TCJA parameters were in place in 2016 and 2016 was the first year of their enactment?" The adjustment was done using the chained Consumer Price Index for All Urban Consumers (C-CPI-U), since the TCJA requires the use of that price index rather than the CPI-U for future price adjustments. Specifically, the 2018 amounts were adjusted to 2016 dollars using the chained CPI; see. Hence the estimates in this report reflect the impact of the post-TCJA tax code as if the first year of its enactment were 2016 (it actually went into effect in 2018).

The SPM was created to address some of the limitations of the official poverty measure. Particularly relevant for this analysis, the official poverty measure does not take into account taxes (and tax benefits, like refundable credits) and their impact on disposable income. It also does not take into account certain noncash government benefits, such as food benefits from SNAP or the value of housing benefits.

The measure of total income in this analysis is computed similarly to the way the U.S. Census Bureau computes total financial resources, though there are a few differences. This analysis uses the TRIM3 estimates for TANF, SSI, and SNAP, rather than amounts reported on the ASEC, to address the underreporting of these income sources on the ASEC. Additionally, the measure of child careâdeducted as a work expense for the SPMâdiffers. This analysis uses TRIM3's estimate of child care expenses, which includes estimated copayments for families receiving child care subsidies from the Child Care and Development Block Grant (CCDBG). The Census Bureau also caps child care expenses at the earnings of the lower-earning parent when determining net financial resources. This analysis deducts all child care expenses as a work-related expense of the family.

Appendix B. Estimated Number of Individuals and Families in Poverty Before the Income Tax, 2016

Below are estimates of the number of individuals in poverty before the federal income taxes are subtracted from (or added to) financial resources using the TRIM3 microsimulation model. The individual types used in this table are also found in Table 1 and Table 3 of this report.

Below are estimates of the number of families in poverty before federal income taxes are subtracted from (or added to) financial resources, estimated using the TRIM3 microsimulation model. The family types used in this table are also found in Table 2 and Table 4 of this report.

Appendix C. How the Major Federal Income Tax Provisions That Affect Low-Income Taxpayers Were Modified by the TCJA

Below are descriptions of how the major federal income tax provisions that affect low-income taxpayersâdeductions, exemptions, tax rates, and refundable creditsâwere changed by the TCJA. Stylized examples included at the end of each section help illustrate the impact of these changes for a hypothetical family.

Standard Deduction and Personal Exemptions

The standard deduction and personal exemption, when combined, represent the minimum amount of income of a tax unit that is not taxed under the federal income tax. The standard deduction is a fixed dollar amount that taxpayers can subtract from their income when determining the amount of their income subject to taxation (e.g., "taxable income"). The TCJA nearly doubled the standard deduction. Specifically, in 2018 the standard deduction for unmarried single filers, head of household filers, and married joint filers increased from $6,500, $9,550, and $13,000 to $12,000, $18,000, and $24,000, respectively. The TCJA suspended the personal exemption, effectively reducing it from $4,150 per person in 2018 to $0. These changes are in effect from 2018 through the end of 2025.

The combination of the standard deduction and personal exemption is sometimes referred to as the 0% bracket since that income is not taxed. It is also referred to as the tax entry point since every dollar above this amount is generally taxable (and hence considered taxable income). The increase of the standard deduction combined with the effective elimination of the personal exemption result in a similar or higher tax entry point for some families (unmarried individuals with no children, unmarried individuals with one child, and married couples with no children, as illustrated in Table C-1 ), while larger families, including many with children, will have a lower tax entry point under the new tax law. For these families, more of their income will potentially be subject to the federal income tax.

For example, as illustrated in Table C-1 , a married couple with two children would have had a tax entry point in 2018 pre-TCJA of $29,600. If this family had $36,000 of income, only the amount above $29,600â$6,400âwould have been taxable. Post-TCJA this tax entry point is now $24,000 for this same family. Hence, of their $36,000 of income, $12,000 would now be taxable income.

A marginal tax rate is the percentage that a taxpayer pays on an additional dollar of taxable income. The federal individual income tax code has seven marginal tax rates ranging from 10% to 37%. The income ranges over which these marginal rates apply, often referred to as tax brackets , differ based on the taxpayer's filing status. The federal income tax is considered a progressive tax by economists because as taxable income increases, income above a given bracket threshold is taxed at a higher marginal rate.

Once a tax unit has determined how muchâif anyâof their income is taxable (i.e., after subtracting the standard deduction from their income post-TCJA), they then apply marginal tax rates to this amount. If poor families have any taxable income, most if not all of it is subject to the lowest marginal tax rate, although some of their income may be subject to the second-lowest bracket (the second-lowest bracket was the 15% bracket pre-TCJA, and is now 12% under the TCJA). The lowest marginal tax rateâ10%âwas unchanged by the TCJA. Changes to marginal tax rates are presented in Table C-2 . These changes are in effect from 2018 through the end of 2025.

For example, for a married couple with two children and $36,000 in income, their taxable income pre-TCJA would have been $6,400 in 2018. That income would have been subject to a 10% marginal rate, for a tax liabilityâbefore accounting for tax creditsâof $640. Post-TCJA, this same family would have had $12,000 of taxable income, all subject to the 10% marginal rate, which would result in $1,200 of income tax liability before subtracting any tax credits.

After taxpayers calculate their income tax liability before credits, they can subtract the value of any tax credits for which they may be eligible. Taxpayers with little or no tax liabilityâwhich includes most of the poorâcan still receive the refundable credits, including the refundable portion of the child tax credit (the ACTC). The ACTC is calculated as a percentage of earnings (the refundability rate) above the refundability threshold up to the maximum amount of the refundable portion of the credit. The ACTC plus the amount of the credit that offsets any income tax liability cannot be greater than the maximum credit per child. (Low-income families who do have a positive tax liability will first reduce their income tax liability by the nonrefundable portion of the child tax credit, and then claim the ACTC.) TCJA made several changes to the child tax credit and ACTC, as outlined in Table C-3 .

In addition to modifying the credit formula, TCJA also enacted a new ID requirement for the credit. Prior to TCJA, taxpayers could provide the taxpayer identification number for the child in order to claim the credit. The most common taxpayer ID is a Social Security number (SSN), but other taxpayer identification IDs included individual taxpayer identification numbers (ITINs). Post-TCJA, taxpayers will now need to provide the SSN for the child in order to claim the credit. These changes are in effect from 2018 through the end of 2025.

How much a taxpayer's child tax credit changed following the TCJA depends on their income level. As a result of the changes made in the TCJA, the child tax credit doubled for many middle-income families. With the higher income phaseout thresholds, middle- and higher-income families became child tax credit eligible, as illustrated in Figure C-1 . However, many low-income families received a smaller increase, as illustrated in Figure C-2 .

For example, for a married couple with two children and $25,000 of income, their child credit as a result of the TCJA would increase from $2,000 to $2,900 ($800 of the increase from the refundable portion and $100 from the nonrefundable portion). For this family, once income was $36,000, their child tax credit would increase from $2,000 to $4,000 (with $800 of that increase from the refundable portion and $1,200 from the nonrefundable portion).

The law did not directly change the largest antipoverty program in the tax code, the EITC. However, the law did change the measure of inflation used to adjust numerous provisions in the tax code, including the EITC, beginning in 2018. This new inflation index, the C-CPI-U price index, is projected to grow more slowly than the previous inflation index, the CPI-U. Hence, over time the EITC will grow more slowly. In 2018, the differences in the EITC from the adoption of this new measure will be relatively small, reducing the maximum amount of the credit by $1 for recipients with no children, $7 for recipients with one child, $12 for those with two children, and $13 for those with three or more children. However, as the effects of the slower inflation adjustment compound over time, these changes will grow larger.

In addition, the income cutoff points of marginal tax rates will grow more slowly. Over time, if wages grow faster than C-CPI-U, some of the income of low-income taxpayers currently subject to the 10% marginal tax rate may become subject to higher marginal rates.


Development and Regulation of Domestic Diagnostic Testing for Novel Coronavirus (COVID-19): Frequently Asked Questions

Summary: On December 31, 2019, the World Health Organization (WHO) was informed of a cluster of pneumonia cases in Wuhan City, Hubei Province of China. Illnesses have since been linked to a disease caused by a previously unidentified strain of coronavirus, designated Coronavirus Disease 2019, or COVID-19. Despite containment efforts in China, the United States, and elsewhere, by late February there were indications that the COVID-19 outbreak may have entered a new phase, with community spread occurring or suspected in several countries other than China, including in the United States.

Summary: Diagnostic testing is a critical part of the public health response to and clinical management of COVID-19, caused by the SARS-CoV-2 virus. Efforts in the United States to develop and disseminate a test for COVID-19 have faced challenges. Manufacturing and quality issues with the nation's testâdeveloped by the Centers for Disease Control and Prevention (CDC)âresulted in significant delay in access to testing throughout the country. In this context, on February 29, 2020, in an effort to facilitate the expansion of testing capacity as the first cases of community spread were confirmed in the United States, the Food and Drug Administration (FDA) announced a new policy, issued via agency guidance and effective immediately, that would allow certain laboratoriesâprincipally clinical and large commercial and reference laboratoriesâthat have developed and validated their own COVID-19 diagnostic to begin to use the test prior to it receiving an Emergency Use Authorization (EUA) from the agency.

Summary: FDA's February 29 guidance aims to facilitate the expansion of diagnostic testing from the public health setting into the clinical health care and commercial settings. Doing so may help the country meet the increasing and substantial demand for testing generated by community spread of the disease and expanded clinical testing guidelines issued by the CDC. This report does not address financing or coverage of diagnostic testing for COVID-19.

O n December 31, 2019, the World Health Organization (WHO) was informed of a cluster of pneumonia cases in Wuhan City, Hubei Province of China. Illnesses have since been linked to a disease caused by a previously unidentified strain of coronavirus, designated Coronavirus Disease 2019, or COVID-19. Despite containment efforts in China, the United States, and elsewhere, by late February there were indications that the COVID-19 outbreak may have entered a new phase, with community spread occurring or suspected in several countries other than China, including in the United States.

Diagnostic testing is a critical part of the public health response to and clinical management of the COVID-19 caused by the SARS-CoV-2 virus. Efforts in the United States to develop and disseminate a test for COVID-19 have faced challenges. Manufacturing and quality issues with the nation's testâdeveloped by the Centers for Disease Control and Prevention (CDC)âresulted in essentially all testing going through CDC's laboratory facility in Atlanta through early March, despite distribution of test kits to state and local public health labs beginning in early February. CDC's initial test kits had to be remanufactured and redistributed, which, along with other factors, has significantly delayed access to testing throughout the country. It has been reported that the CDC's Atlanta laboratory is currently under investigation by the Department of Health and Human Services (HHS) for possible quality issues related to its manufacture of the test kits, which may have led to the contamination of one reagent and thus to the quality issues with the test.

In this context, on February 29, 2020, in an effort to facilitate the expansion of testing capacity as the first cases of community spread were confirmed in the United States, the Food and Drug Administration (FDA) announced a significant new policy. This policy, issued via agency guidance and effective immediately, allows certain laboratoriesâprincipally clinical and commercial laboratoriesâthat have developed and validated their own COVID-19 diagnostics to begin to use the tests prior to the test receiving an Emergency Use Authorization (EUA) from the agency.

Diagnostic testing for COVID-19, in part because it is caused by a novel pathogen, has been led and carried out to date through the country's public health infrastructure. This includes primarily the CDC and the country's network of state and local public health laboratories. In contrast, in most situations, diagnostic testing is carried out by a number of facilities, including private commercial laboratories (e.g., Quest, LabCorp), hospital and other clinical laboratories, and laboratories in academic medical centers, among others.

FDA's February 29 guidance aims to facilitate the expansion of diagnostic testing from the public health setting into the clinical health care and commercial settings, leveraging significant standing resources throughout the country, including facilities, trained personnel, expertise, materials, and equipment. It is FDA's intention that this expansion will help the country meet the increasing and substantial demand for testing generated by community spread of the disease and expanded clinical testing guidelines issued by the CDC. In addition, because many cases of COVID-19 are reportedly mild or asymptomatic, widespread access to testingâwhich informs development of important metrics such as the case fatality rateâis critical to understanding the scope and extent of the disease in the United States, and to efficiently directing resources to mitigate its impact in the broader community.

Diagnostic testsâformally called in vitro diagnostic (IVD) devicesâmay be commercially developed and distributed as "kits" or developed, validated, and carried out by a single laboratory. This second type of testâknown as a laboratory-developed test, or an LDTâis the more commonly used type of test because of its flexibility and differing federal regulatory requirements, among other reasons. Although the CDC's test is being manufactured as a test kit and initially has been distributed to specific CDC-qualified labs, the FDA guidance targets LDTs that are generally carried out in clinical and academic settings or private commercial laboratories. All clinical laboratories in the United States, regardless of whether they are part of the country's public health infrastructure or part of the health care delivery system, are regulated by the Clinical Laboratory Improvement Amendments of 1988 (CLIA) program, administered by the Centers for Medicare & Medicaid Services (CMS).

Federal agencies involved in the regulation of IVDs include FDA and CMS. FDA derives its authority to regulate the sale and distribution of medical devices, such as IVDs, from the Federal Food, Drug, and Cosmetics Act (FFDCA) and the Public Health Service Act (PHSA). CMS's authority to regulate IVDs is through CLIA ( P.L. 100-578 ). FDA regulates the safety and effectiveness of diagnostic tests, as well as the quality of the design and manufacture of the diagnostic test. CMS regulates the quality of clinical laboratories and the clinical testing process.

In vitro diagnostic devices are defined in FDA regulation as a specific subset of medical devices that include "reagents, instruments, and systems intended for use in the diagnosis of disease or other conditions ... in order to cure, mitigate, treat, or prevent disease ... [s]uch products are intended for use in the collection, preparation, and examination of specimens taken from the human body." As indicated by this definition, an IVD may also include components of tests, which can include both non-diagnostic ingredients, called general purpose reagents (GPRs), and the active ingredient in a diagnostic test, referred to as the analyte specific reagent (ASR).

In general, an IVD device may be a "commercial test kit" (a product developed, produced, and sold by a manufacturer for distribution to multiple laboratories) or a "laboratory developed test" (a product developed by and used in a single laboratory). LDTs may use components (e.g., general purpose reagents like a buffer) that are either manufactured in-house by the laboratory or commercially developed and distributed.

A laboratory-developed test is a class of IVD that is designed, manufactured, and used within a single laboratory. LDTs are often used to test for conditions or diseases that are either rapidly changing (e.g., new strains of known infectious diseases) or the subject of quickly advancing scientific research (e.g., genomic testing for cancer). The majority of genetic testsâa type of IVD that analyzes various aspects of an individual's genetic material (e.g., DNA, RNA)âare LDTs.

In general, oversight of in vitro diagnostic devices focuses on ensuring their safety and effectiveness; their accuracy and reliability; the quality of clinical laboratories that carry out IVD testing; the utility of the information generated by IVDs in clinician and patient decision-making; and the truthfulness of claims made about IVDs that are marketed directly to consumers. As with other medical devices, the application of FDA regulatory requirements to IVDs depends on the IVD's risk classification according to its intended use. Classification is based, in turn, on the risk the device poses to the patient. For IVDs, which are informational tests, the risk to the patient is that of an incorrect test result, either a false positive or a false negative result, either of which may cause serious harm to the individual. In the case of infectious diseasesâfor example, COVID-19âthe risk of a false negative test extends beyond the individual patient into the community at large. The FDA has three classes of medical device: Class I (low risk), Class II (moderate risk), and Class III (high risk). Regulatory controls are dependent on the class of a given medical device. COVID-19 diagnostics would most likely fall in Class III, as they would be considered to be high-risk devices.

The regulation of laboratory-developed tests has been the subject of ongoing debate over the past 20 years, driven in large part by an increase in the number and complexity of genetic tests over this time. In general, the FDA has maintained that it has clear regulatory authority over LDTs, as it does with all IVDs that meet the definition of medical device in the FFDCA. However, the FDA traditionally exercised enforcement discretion over LDTsâchoosing not to enforce applicable statutory and regulatory requirements with respect to such testsâmeaning that most of these tests have neither undergone premarket review nor received FDA clearance or approval for marketing. To date, FDA has instead focused its enforcement efforts on commercial IVD kits, which are broadly commercially marketed. In recent years, despite the absence of specific agency guidance on the regulation of LDTs, FDA has nevertheless begun to assert authority over LDTs, and specifically over some direct-to-consumer (DTC) genetic tests, that it considers to be higher-risk tests.

What Is CLIA and How Is It Involved in LDT Regulation?

CLIA of 1988 provides CMS with authority to regulate clinical laboratories. CLIA establishes quality standards for clinical laboratory testing and a certification program for clinical laboratories that perform testing using IVD devices. All laboratories that perform diagnostic testing for health-related reasons (i.e., with results returned to the patient or a health care practitioner) are regulated by CMS under the authority of CLIA. For CLIA to apply, testing must be carried out on a human specimen. CLIA certification is based on the level of complexity of testing that the laboratory performs, specifically (1) low (therefore, waived) complexity, (2) moderate complexity, and (3) high complexity. FDA is responsible for categorizing tests according to their level of complexity. CLIA requirements are used to evaluate a test's analytical validity , defined as the ability of a test to detect or measure the analyte it is intended to detect or measure. Laboratories that perform moderate- and high-complexity testing must meet specific standards and requirements as a condition of certification, including proficiency testing (PT), patient test management, quality control, personnel qualifications, and quality assurance. All LDTs, including genetic tests offered as LDTs, are considered high-complexity tests under CLIA. All COVID-19 diagnostics would be considered to be high complexity tests under CLIA.

How Are IVDs Regulated by the FDA During an Emergency Such as the Outbreak of COVID-19?

In certain public health or other emergency situations, the HHS Secretary may declare that existing circumstances justify the use of unapproved medical products for certain uses, or approved medical products for unapproved uses. This declaration facilitates access to not-yet-approved medical products in an expedited manner during certain emergency situations. In the case of the COVID-19 disease, HHS Secretary Azar determined that "there is a public health emergency and [declared] that circumstances exist justifying the authorization of emergency use of in vitro diagnostics for detection and/or diagnosis of the novel coronavirus." On the basis of this declaration, FDA issued an Emergency Use Authorization authorizing the emergency use of the CDC-developed diagnostic test for COVID-19. The FDA also issued an EUA to the state of New York for an LDT developed by the state public health labs. To date, these are the only two EUAs for coronavirus diagnostics that the FDA has issued.

How Does the Emergency Use Authority Apply to LDTs if They Are Generally Exempted from Premarket Requirements?

During an emergency, all laboratory-developed tests testing for the relevant pathogen (in this case, SARS-CoV-2) must either be approved, cleared, or authorized under an EUA to be legally carried out. As noted above, FDA generally waives most regulatory requirements (e.g., premarket review) for LDTs in normal situations; nevertheless, LDTs may only be used with authorization (e.g., an EUA) during an emergency declaration pursuant to FFDCA Section 564. That is, statutory requirements under FFDCA Section 564 apply to LDTs as they do to other medical products, and they apply to both commercial test kitsâwhich are normally subject to FDA regulatory requirementsâand to LDTs.

The EUA process is usually used to expedite access to medical products that would otherwise need premarket approval or clearance in emergency situations. However, because premarket approval requirements for LDTs are generally waived through enforcement discretion by the agency, the EUA represents additional regulatory requirements for the use of an LDT in emergency situations. This is because, among other things, in the case of a communicable disease, the test result has implications beyond the individual being tested, and so a false negative result could have serious consequences for the community. Therefore, FDA states that these tests need an EUA in an emergency prior to clinical use as do other medical products. In contrast, for commercial test kits, the EUA represents an abbreviated mechanism that allows the unapproved product to be used without undergoing the FDA premarket review typically required (for a complex molecular test for a novel pathogen, that review would generally be a Premarket Approval, or PMA, for high-risk medical devices).

Despite a request from the Association of Public Health Laboratories (APHL) to FDA, the agency declined to exercise enforcement discretion with respect to LDTs that detect SARC-CoV-2 and diagnose COVID-19 and the requirement that they receive an EUA prior to use. APHL maintains that these labs are regulated by CLIA, and that this regulatory oversight is sufficient. However, on February 29, 2020, FDA announced a new policy allowing certain laboratories that have developed and validated COVID-19 LDTs to begin to use the test clinically prior to it receiving an EUA from the agency but after validation of the test and notification of the agency (see " What Steps Did FDA Take to Expand Testing Capacity in Response to the Problems with CDC's Test? ").

The CDC 2019-Novel Coronavirus (2019-nCoV) Real-Time Reverse Transcriptase (RT)-PCR Diagnostic Panel

How Does the CDC's COVID-19 Diagnostic Test Work?

The diagnostic test developed by the CDC, called the 2019-Novel Coronavirus (2019-nCoV) Real-Time Reverse Transcriptase (RT)-PCR Diagnostic Panel, is a complex molecular diagnostic test that relies on generally standard molecular biology laboratory techniques. Specifically, the test uses a technique called Polymerase Chain Reaction (PCR), a standard in vitro technique for amplification of DNA. Because the SARS-CoV-2 virusâthe virus that causes COVID-19âis an RNA virus, the RNA must be first reverse transcribed to generate copy DNA, or cDNA, which is then amplified (multiple copies are generated) using PCR. PCR relies on primersâvery short single stranded pieces of DNA that are complementary to and bind with specific regions of the viral genome and thus define the specific genomic region to be amplified. The test then relies on a probe, or a single-stranded piece of DNA that is chemically or radioactively labelled, that can bind to and thus detect the amplified target portion of the viral genetic material.

CDC's original test used three sets of primers and probes: two to target specific regions of a designated gene within the SARS-CoV-2 viral genome, and a third that was specific to all SARS-like coronaviruses (see " What Quality Problems Did the CDC's Test Experience on Rollout to the State and Local Public Health Laboratories? "). The test also includes a number of authorized control samples, including a positive control for SARS-CoV-2 and a "no template control" to test for system contamination. Together, these controls help ensure that the test is functioning properly.

What Type of IVD Is the CDC's Test and Who May Carry It Out?

The CDC's test is being developed by the agency as a test kit and is generally authorized to be distributed to state and local public health laboratories to augment public health testing capacity. The test received an EUA from the FDA on February 4, 2020, under which "authorized laboratories" may receive and carry out the test despite the fact that it is not FDA-approved or FDA-cleared, and that it does not meet all related regulatory requirements for marketing. The EUA notes that "[t]esting is limited to qualified laboratories designated by CDC and, in the United States, certified under the Clinical Laboratory Improvement Amendments of 1988 (CLIA), (42 U.S.C. Â§263a), to perform high complexity tests." CDC-qualified laboratories with a CLIA certification for high-complexity testing able to receive the test kits include U.S. state and local public health laboratories, Department of Defense (DOD) laboratories, and select international laboratories. The public health laboratories must verify the test themselves prior to using it, and are currently required to send presumptive positive cases back to the CDC in Atlanta for confirmatory testing by the agency.

What Is the Role of the Commercial Manufacturer IDT in the Development and Distribution of the CDC's Test Kit?

The Trump Administration had estimated that approximately 1 million tests would be broadly available imminently, facilitated by leveraging manufacturing of the CDC test kit by a private company, Integrated DNA Technologies (IDT), a manufacturer that has been working with CDC. According to HHS Secretary Azar on March 5, 2020, IDT will send the CDC test kit to "hospitals, other labs around the country, commercial, public health â¦ labs" by the end of the week of March 2. The test kit being manufactured by IDT, identical to the CDC test kit and referred to as "IDT 2019-novel coronavirus kit," is being qualified by CDC in lots, and FDA reports that these CDC-qualified, IDT-manufactured test kits are covered by the CDC's EUA authorization of February 4, 2020.

FDA notes that if a lab purchases a test kit from IDT, the laboratory does not need its own EUA to carry it out, but that "[t]esting using CDC's EUA-authorized protocol and CDC qualified lots of reagents is considered to be testing done under the CDC's EUA. Labs performing such testing should follow any applicable conditions set forth in the EUA." LabCorp, a large commercial laboratory, is already reporting that it can perform the CDC test "if needed to meet testing demand" and that the test is only for use with "authorized specimens collected from individuals who meet CDC criteria for COVID-19 testing." IDT is manufacturing test kits in two sizes, with the largest having a capacity of 500 reactions (approximately 250 individual patients).

As noted above, the CDC's test kit used three sets of probes and primersâor reagentsâto detect and identify viral DNA beyond that specific to COVID-19. One of these reagents, the one meant to detect any SARS-like coronavirus including SARS-CoV-2, was returning inconclusive results. In response, the CDC validated a new protocol for their test that allows it to be run excluding the faulty reagent, running the test with only the other two diagnostic components. CDC has the authority to modify the test through enforcement discretion granted by FDA. The agency determined that the exclusion of this reagent does not affect the accuracy or the sensitivity and specificity of the test.

Certain laboratories have continued to experience problems running the test, even when using the modified protocol, with at least one laboratory reporting that the first reagent was also returning inconclusive results. This problem severely limited the state and local public health laboratories' ability to carry out the CDC's test.

In response to these issues, the New York State Department of Health requested and was granted the FDA's second EUA for its own laboratory-developed test, the New York SARS-CoV-2 Real-time RT-PCR Diagnostic Panel. Testing is limited under the EUA to two laboratories in New Yorkâthe Wadsworth Center, New York State Department of Public Health, and the New York City Department of Health and Mental Hygiene, Public Health Laboratories. New York was one of the states that had continued difficulty implementing CDC's original test kit, even with the modified protocol.

In response, CDC is also manufacturing new test kits after reportedly resolving the manufacturing issue that affected the original test kit. This time, however, CDC is manufacturing test kits with only the two reagents that were unaffected by the quality issueâthat are specific to SARS-CoV-2âand those kits are being made available to qualified CDC labs through the International Reagent Resource. , These test kits are expected to result in the public health laboratories having capacity to test up to 75,000 patients.

Some believe that the CDC's choice to develop and mitigate quality problems with its own COVID-19 diagnostic when an accepted diagnostic was available through the World Health Organization (WHO), which was efficiently distributing a German-developed test globally early in the outbreak, was a decision that cost the United States time in its response to the virus's introduction and spread in the country. Some speculated about the use of the third reagentâthat was to detect SARS-like coronavirusesâand whether it had been strictly necessary if the test was still accurate at diagnosing COVID-19 without that reagent included in the test at all, or if it had instead overcomplicated the test. In general, there have been questions raised about the CDC's handling of the development and distribution of its test, and its response to the quality problems that occurred, and the impact this may have had on the country's ability to detect community spread of the disease before it occurred more widely.

On February 29, 2020, as problems with the rollout of the CDC-developed diagnostic test continued, FDA announced a new policy to immediately leverage LDTs developed in high-complexity commercial, reference, and clinical laboratories nationwide to expand testing capacity. Specifically, the new agency guidance allows CLIA-certified high-complexity laboratories that have developed and validated their own COVID-19 diagnostics to use the tests while the laboratory is preparing, and FDA is reviewing, their EUA submission. ,

The FDA guidance states that laboratories have 15 days after validating their test to submit an EUA application to FDA, and the guidance recommends confirming the test's first five negative and positive results against an EUA-authorized diagnostic. According to FDA, it "does not intend to object to the use of these tests for clinical testing while the laboratories are pursuing an EUA with the FDA. Importantly, this policy only applies to laboratories that are certified to perform high-complexity testing consistent with requirements under Clinical Laboratory Improvement Amendments." The guidance includes detailed information about FDA's expected methods for test validation.

Pursuant to this FDA guidance, on March 5, 2020, LabCorp announced that it had begun offering its LDT, the LabCorp 2019 Novel Coronavirus (COVID-19), NAA test "for ordering by physicians or other authorized healthcare providers anywhere in the U.S.," and that it is currently pursuing an EUA with the agency for the test. This test is to take between three to four days to return results, and a health care provider must order and authorize it, and obtain the required specimen from the patient. Under the FDA's new guidance, Quest has also announced that it will begin testing for coronavirus with its own LDT, beginning March 9, 2020, and that it plans to pursue an EUA with the agency within 15 days, as required by the guidance.