This week's release of Census data showing that a growing number of families are officially poor prompted CTJ to examine claims that too many Americans are paying "no" taxes and calls to raise taxes on low-income families.

Aside from recipients of Social Security benefits (which are largely untaxed), all but the poorest Americans do pay federal income taxes or federal payroll taxes or both. We estimate that in 2010, only 15 percent of non-Social Security taxpayers paid zero dollars or less in combined federal income and payroll taxes.  These families and individuals pay other types of taxes, as this report explains.

Fifty-seven percent of those who paid zero or less in combined federal income and payroll taxes had incomes below $15,000, and 76 percent had incomes below $20,000. This tells us that the vast majority of these taxpayers were quite poor because the average poverty threshold for 2010 was $14,218 for a household of two individuals and $22,314 for a household of four individuals.

Our 3-page report is here.

Estimates provided by the White House show that the payroll tax cuts proposed last night by President Obama would cost $240 billion next year, just shy of the $245 billion cost of the Bush income tax cuts during the same year as estimated by Citizens for Tax Justice.

Republican lawmakers were the original proponents of a payroll tax holiday. But lately many of them have spoken out against it or are reluctant to endorse it because the President supports it. Apparently cost is not the reason for their objection, given their support of the Bush tax cuts.

The payroll tax cuts, which would go into effect in 2012 and which are the largest parts of the jobs plan announced by the President last night, have several components. The payroll tax cuts for workers would cost $175 billion, while the payroll tax cuts for employers would cost $65 billion, for a total of $240 billion.

Economists generally find that the most effective measures to mitigate a recession include programs that directly create jobs (such as Obama’s proposals to hire or retain school teachers and fix schools). Also at the top of the list are direct spending programs by the government on things like unemployment benefits (also included in Obama’s plan), since they go to the very people who are most likely to immediately spend any money or benefits they receive.

But some lawmakers oppose any and all new government spending, creating an obvious political constraint that the President has tried to navigate by proposing payroll tax cuts and other tax breaks that make up over half of the $447 billion cost of his jobs plan.

Payroll Tax Cuts for Workers: $175 Billion

As part of the tax compromise enacted at the end of last year, a one-year payroll tax cut is in effect for 2011, reducing the 6.2 percent Social Security payroll tax paid directly by workers to 4.2 percent. President Obama proposes to extend this break into 2012 and expand it by further reducing the tax paid by workers to 3.1 percent.

As we have explained before, cutting payroll taxes for workers is neither the best nor the worst possible tax measure. A tax credit that is more targeted to low- and middle-income people, like the Making Work Pay Credit, would be more effective because it would target money more towards people who are likely to spend it immediately and thereby give an immediate boost to the economy.

On the other hand, a payroll tax cut for workers is dramatically more targeted to low- and middle-income people than the other types of tax cuts that are usually debated (like the Bush tax cuts).

Payroll Tax Cuts for Employers: $65 Billion

The President’s plan would also reduce the Social Security payroll tax paid by employers to 3.1 percent for the first $5 million in wages paid in 2012. This break would go to all employers. The plan would also eliminate the entire 6.2 percent payroll tax paid by employers for any increase in a firm’s payroll up to $50 million.

Giving all companies a break for the first $5 million in wages is not likely to be effective because it gives employers a tax break regardless of whether or not they increase hiring. Economists have pointed out that many companies are stockpiling cash that they already could use to hire more workers, and a recent survey of business owners reveals that labor costs are nowhere near their main concern. In other words, only increased demand for goods and services can really prompt businesses to hire more workers. 

Some economists do believe that the payroll tax cut for businesses that expand their payroll will be more effective. But there are several reasons to be skeptical about the number of jobs that will be created as a result of this measure. First, most of this tax break will go to companies that would have expanded their payrolls anyway. Second, the payroll expansion in many cases will not mean new hires but could simply take the form of pay raises for existing employees. (This problem would be limited to a degree because the Social Security payroll tax does not apply to wages in excess of $106,800).

What businesses really need are customers. A payroll tax cut or a more targeted tax credit could help somewhat to produce more customers by putting cash in the hands of people who will spend it. But the other parts of the President’s plan, like transportation projects, extending unemployment insurance, modernizing schools, and rehiring teachers will almost certainly provide far more bang for the buck.

The Obama administration has proposed to change the way unemployment insurance is financed to avoid tax increases on businesses that will otherwise occur automatically — but Republicans in Congress are resisting the plan because it allows for the possibility that states will collect more taxes overall from employers in the future.

Unemployment insurance benefits are generally financed by state taxes on employers while the administration of the program is financed by federal taxes on employers. The state tax revenue is saved in trust funds from which benefits are paid, but these had run dry in most states at the end of 2010, so states were allowed to borrow from the federal trust fund. States must eventually pay that money back with interest, but the economic recovery act enacted in 2009 gave states a break on the interest payments for almost two years.

The federal UI taxes on employers will increase automatically, under current law, in many states this year or next year to pay for the principal on those loans from the federal trust fund. On top of that, states must start paying the interest, and for this they often levy additional state taxes on employers. All of this is scheduled to occur at a time when economists agree that the recession is far from over.

The Obama administration's plan would respond by delaying the automatic increase in federal UI taxes on employers and the due date for the interest payments from the states for two years. In 2014, the plan would more than double the tax base, from $7,000 of wages for each employee (which has not been adjusted since 1983) to $15,000. The rate of the federal tax would be reduced so that the federal tax would not be increased overall. The state taxes have the same base (at a minimum) as the federal tax, so the states could collect more revenue to shore up their programs if they did not change their tax rates.

The Center on Budget and Policy Priorities and the National Employment Law Project released a report Wednesday that spells out a very similar plan and explains its benefits.

Not for the first time, Republican leaders are putting themselves on record as preferring to allow a tax increase to take place rather than support a tax bill that is not exactly what they want.

The last place you would ever expect a discussion of tax policy is in the sea of Super Bowl commercials about beer, cars, and Doritos, yet the organization Americans Against Food Taxes spent over $3 million to change that last Sunday.

The ad, called “Give Me a Break”, features a nice woman shopping in a grocery store,  explaining how she does not want the government interfering with her personal life by attempting to place taxes on soda, juice, or even flavored water. The goal of the ad is to portray objections to soda taxes as if they are grounded in the concerns of ordinary Americans.

But Americans Against Food Taxes is anything but a grassroots organization. Its funding comes from a coalition of corporate interests including Coca-Cola, McDonalds and the U.S. Chamber of Commerce.

It is easy to understand why these groups are concerned about soda taxes, which were once considered a way to help pay for health care reform. The entire purpose of these taxes is to discourage the consumption of their products. As the Center on Budget and Policy Priorities explains in making the case for a soda tax, such a tax could be used to dramatically reduce obesity and health care costs and produce better health outcomes across the nation. Adding to this, the revenue raised could be dedicated to funding health care programs, which could further improve the general welfare.

These taxes may spread, at least at the state level.  In its analysis of the ad, Politifact verifies the ad’s claim that politicians are planning to impose additional taxes on soda and other groceries, writing that “legislators have introduced bills to impose or raise the tax on sodas and/or snack foods in Arizona, Connecticut, Hawaii, Mississippi, New Mexico, New York, Oklahoma, Oregon, South Dakota, Vermont and West Virginia.”

It's true that taxes on food generally are regressive, and taxes on sugary drinks are no exception according to a recent study. It's a bad idea to rely on this sort of tax purely to raise revenue, but if the goal of the tax is to change behavior for health reasons, then such a tax might be a reasonable tool for social policy. We have often said the same about cigarette taxes, which are a bad way to raise revenue but a reasonable way to discourage an unhealthy behavior.

With so many states considering soda taxes and the corporate interests revving up their own campaign, the “Give Me a Break” ad may just be the opening shot in the big food tax battles to come.

A new online resource, Tax Credits for Working Families, was recently launched to highlight the importance of providing affordable and targeted assistance through refundable tax credits to the growing number of people and families living in poverty across the country.  Check out the website for links to research and state-level information on state refundable Earned Income Tax Credits, property tax circuit breakers, and child related credits.

A minority of Senators made clear on Saturday that if the Bush tax cuts cannot be extended for the very richest taxpayers in America, then they will allow the tax cuts to expire for everyone.

Senate Republicans successfully filibustered a bill based on President Obama's tax plan to permanently extend the Bush tax cuts for the first $250,000 of income for married couples and the first $200,000 of income for unmarried individuals. The two percent of taxpayers with incomes above $250,000/$200,000 would therefore continue to enjoy part of the Bush tax cuts while the other 98 percent would continue to enjoy all of them.

Throughout months of debate over President Obama's tax plan, lawmakers and reporters often seemed to think that a person making one dollar over the $250,000/$200,000 threshold would lose all of the Bush tax cuts. CTJ's recent report shows this is entirely untrue. For example, it explains that married couples with incomes between $250,000 and $300,000 would only lose 1 percent of the Bush tax cuts, on average, under the Democratic tax plan.

The bill, introduced by Finance Committee Chairman Max Baucus, would also have allowed the estate tax to come back into effect but only at the levels that existed in 2009, with an adjustment for inflation. The bill would also have made permanent expansions in refundable tax credits for low-income families that were included in the economic recovery act enacted last year. Emergency unemployment insurance (UI) benefits, which recently expired, would have been extended for one year under the bill.

Unlike nearly every democratic institution on Earth, the Senate cannot approve anything without a super-majority of three-fifths of the chamber's votes. Democratic leaders were able to muster 53 votes for the tax bill, seven short of the 60-vote threshold to overcome a filibuster.

Voting with the Republicans were Joe Lieberman (D-CT), Ben Nelson (D-NE), Joe Manchin (D-WV), Jim Webb (D-VA), and Russ Feingold (D-Wisconsin). Unlike the others, Feingold made it clear that he voted against because he believed that this bill to extend tax cuts entirely for the first $250,000/$200,000 of income is simply too expensive.

The Senate held a second vote on a proposal introduced by Senator Chuck Schumer (D-NY) that was the same plan except that the tax cuts would be made permanent for the first $1 million of income. Republicans and Senator Lieberman voted against this bill also, but were joined by some progressive Democrats who believed that the $1 million threshold was too high.

"A minority of Senators are saying that the chamber must extend tax cuts for the extremely rich, or else low-income and middle-income families will lose their tax cuts, and people who are jobless through no fault of their own will receive no more help," said Bob McIntyre, director of Citizens for Tax Justice. "Even a proposal to extend the tax cuts for the first $1 million of income is not enough to satisfy this minority of Senators. Their disregard for working class Americans and their blind loyalty to multi-millionaires would be hard to believe if they were not on full display this weekend."

The tax bill passed by the House yesterday (H.R. 4853) would make permanent two provisions that were included in the economic recovery act and which would otherwise expire at the end of this year. One makes the child tax credit more accessible to low-income working parents. The other reduces the marriage penalty in the EITC.

The bill introduced by Senate Finance Chairman Max Baucus, which Democratic leaders plan to vote on Saturday, would make these changes permanent as well as a third change in the recovery act that expands the EITC for families with three or more children.

For more information, see CTJ's recent state-by-state figures showing how each of these provisions impacts families with children.

A recent survey shows that fewer than one in ten Americans knows that that President Obama cut their taxes in 2009 and 2010, and many believe he actually raised them. CTJ released this report and state-by-state fact sheets before Tax Day showing that the recovery act signed into law by President Obama cut taxes for 98 percent of working Americans.

Read the report and state fact sheets.

On Thursday, the Senate approved, by a vote of 61-39, H.R 1586, providing $26 billion to states to continue funding Medicaid programs and to avoid teacher layoffs. House Speaker Nancy Pelosi announced that she would bring her chamber back into session next week to approve the bill. 

The bill includes revenue-raising provisions to offset the $26 billion cost, including the set of provisions that would clamp down on abuses of the foreign tax credit and which were originally part of the ill-fated "tax extenders" bill (H.R. 4213). (Some other revenue-raising provisions included in the bill are not ideal.)

The foreign tax credit ensures that a U.S. individual or corporation with income generated in a foreign country is not double-taxed on that foreign income. These taxpayers are allowed a credit against their U.S. taxes for any foreign taxes they pay on the foreign income. The problem is that many corporations have found ways to receive foreign tax credits in excess of what would be necessary to avoid double-taxation.

Predictably, business associations representing multinational corporations oppose the provisions to prevent these abuses. A previous report from CTJ addressed their arguments, one of which focused on the provisions' supposed retroactivity (which is addressed by the version of the provisions in H.R. 1586). Another of the multinational corporate community's arguments was that the practices in question are necessary to keep U.S. corporations abroad competitive with foreign companies, which seems like an admission that the foreign tax credit is being used for more than just preventing double-taxation.

In June, the Peter G. Peterson Institute (funded by, and named after, the billionaire who is ostensibly concerned with the federal budget imbalance) released a remarkable report opposing the provisions to prevent abuses of the foreign tax credit. Another CTJ report responds to the Peterson Institute's arguments.

President Obama wants to sign a jobs bill into law. The majority of members of the House and Senate want the same thing. So do the two million out-of-work Americans who will have lost their unemployment benefits by July because of Congress's inaction. Not to mention the millions of Americans who will see public services like education and public safety slashed because their states have to make up shortfalls in Medicaid funding. And then there are the mainstream economists who conclude that some deficit-spending on measures that pump money immediately into the economy and create jobs are entirely justified when unemployment is hovering around ten percent. In the face of all this, a minority of 42 Senators has managed to block legislative action.

Congress has fought a months-long battle over the bill, H.R. 4213, which includes an extension of emergency unemployment benefits and Medicaid funding to states, two spending measures that economist Mark Zandi has argued are the most effective way to stimulate the economy. These measures result in immediate spending, which leads to a boost in consumer demand, and the retention or creation of jobs to produce the goods and services needed to meet that demand.

The bill also includes a collection of provisions that extend short-term tax breaks for business that Congress enacts every year or so. Members of Congress and Hill staffers often call these the "tax extenders." CTJ has criticized the tax extenders for years. But, we support them this year because they are coupled with provisions that would offset their costs by clamping down on unfair tax loopholes. This is a major step forward for Congress. See CTJ's many reports on these loophole-closing provisions.

To their credit, Democratic leaders have tried every conceivable tactic to win over the so-called "moderates" who are blocking the bill.

For example, the House passed legislation three times to completely eliminate the infamous "carried interest" loophole that allows certain wealthy investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate. This time, the House scaled back its provision to close this loophole, and Democratic leaders in the Senate scaled the provision back multiple times in their versions of the bill. Eliminating this loophole, which was proposed by the Obama administration, was estimated to raise about $24 billion over a decade. Democratic leaders in the Senate whittled that down to $13.6 billion. The provision is not so much a loophole-closer any more as a loophole-reducer.

Other compromises made to secure votes were even more alarming. The most recent proposal would have taken over $9 billion of unspent funds from the recovery act that are supposed to be used for food stamps to help offset the costs of this bill. This is preposterous. Food stamps are one of the most effective types of stimulus, along with unemployment insurance benefits and fiscal aid to states, according to Mark Zandi.

The country needs the Senate to pass, some way or another, a jobs bill. Sadly, Democrat Ben Nelson and the 41 Republican Senators have the ability, under the Senate's bizarre rules, to stop that from happening.

Federal benefits for the long-term unemployed have been expired for over a week and the Senate still has not approved a bill (H.R. 4213) that would extend these and other vital measures. The bill also includes badly needed Medicaid funding for states and other provisions that would stimulate the economy. (See CTJ's recent reports on this legislation).

Call your Senators and urge them to vote for H.R. 4213.

Use this toll-free number provided by AFSCME to make your call: 888-340-6521

Part of the consternation among some Senators is that the spending provisions in the bill would add (modestly) to the deficit. Economists have explained that short-term deficit-financed spending measures can be used to effectively boost consumer demand, and thus job creation, during a recession, without adding to the long-term budget crisis.

Many of the Senators who have supported tax cuts that created long-term deficits (the kind of deficits that actually do lead away from fiscal sustainability) now oppose this bill out of their concern about "fiscal responsibility." Other Senators are more genuine in their concern about deficits but have wildly misplaced fears about a bill that has little, if anything, to do with our long-term budget situation.

A number of Senators are still concerned about the tax provisions in the bill. It includes an assortment of small tax cuts (mostly for business), which are often called the "tax extenders" by members of Congress and their staffs. While these tax breaks probably accomplish very little, the good news is that their cost would be offset with provisions that close unfair tax loopholes.

It's the Senators' devotion to maintaining these loopholes that is another factor slowing down progress on this bill.

Battle Continues Over "Carried Interest" Loophole for Investment Fund Managers

The most controversial tax provision would clamp down on the "carried interest" loophole, which allows investment fund managers to treat their earned income as capital gains and thus benefit from a much lower income tax rate. Over the past few weeks, some honest investment fund managers have spoken up to tell Congress that their loophole really is unjustified, and it was also reported that two Republican Senators favor closing the loophole.

The draft of the bill proposed by Senate Majority Leader Reid already watered down this reform a great deal (compared to the version that passed the House) by allowing the lower capital gains rate to continue to apply to a larger portion of carried interest. As a new report from the Center on Budget and Policy Priorities explains, the last thing Congress should do is weaken this provision any further.

Senators Defend the "John Edwards" Loophole

Another controversial reform would close the "John Edwards" loophole for "S corporations." Payroll taxes apply to wage income, but not other types of income. So, some people want to disguise their wage income as non-wage investment income to avoid payroll taxes. People who own S corporations have to determine (and tell the IRS) how much of their income is wage income and how much of it is other income, and of course there is a huge incentive to underestimate the amount that is wage income.

John Edwards famously played this trick by saying that his name was an asset and this asset, rather than his work, was generating most of the income of his S corporation.

Some Senators have expressed concern about the effect this reform would have on small businesses. But none have explained coherently why we should allow this type of scheme to continue.

A new report from Citizens for Tax Justice explains that the new jobs and "extenders" bill released by the chairmen of the House and Senate tax-writing committees on Thursday contains several long-overdue provisions to close tax loopholes. The bill (H.R. 4213) takes aims at corporations that shift profits offshore, investment fund managers who use the "carried interest" loophole to pay lower tax rates than their secretaries, and business people who use the "John Edwards" loophole to avoid their Social Security and Medicare taxes.

Many people are more familiar with the important spending provisions in the bill geared to speed up the economic recovery, including an extension of unemployment insurance and COBRA health care benefits for the unemployed, Medicaid funding for states, TANF jobs and emergency funding for states and other measures that will help boost the economy.

The tax loophole-closing provisions are used to offset the costs of extending several small tax breaks. The spending portion is mostly considered emergency spending that does not have to be paid for under Congress's budget procedures because it is temporary and necessary to prevent the economy from drifting back towards recession. (The Center on Budget and Policy Priorities explains why the spending portions of the bill are economically necessary and fiscally sound.)

Call your lawmakers now and urge them to vote in favor of H.R. 4213. Visit the website for Jobs for America Now, which makes it extremely easy for you to make a toll-free call to your lawmakers to support this bill.

The Coalition on Human Needs is circulating a sign-on letter for organizations in support President Obama's proposals to make permanent some of provisions in the recovery act that expand refundable tax credits to help working families.

If you are authorized to sign on behalf of an organization, please sign your group onto this letter to preserve and build upon tax credits for low-income children, working families, and students.  The deadline is Friday, April 30.

Read the letter. 

Sign the letter. 

CHN is seeking local, state, and national organizations to sign this letter, which will be sent to every Representative and Senator in Congress.  Congregations, service providers, labor, civil rights, social action, policy, and advocacy groups are all asked to join the letter. PLEASE SHARE THIS INFORMATION WITH OTHERS IN YOUR STATE.  

Poverty and hardship are rising across the nation.  Tax credits can help families buy what they need, protecting children and boosting the economy too.  The Child Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit (for low-income college students) can make a real difference in providing income to millions of families.  But if Congress does not act, these tax credits will expire.  

Why it matters:  A family with two children with a parent working full-time at the minimum wage now receives about $1,750 from the Child Tax Credit.  If the current tax credit law expires, this low-income family will lose $1,500 — and receive only $250.  If the law expires, families with 3 or more children will lose up to $629 in their Earned Income Tax Credit.  And, if the law expires, low-income students will lose up to $1,000 to help with their college expenses.

At a time when unemployment is high, and near depression levels among people with little education, in communities of color, and in some urban and rural areas, this is no time to drastically reduce the help low-income tax credits provide.

The voices of local, state, and national organizations are needed to show Congress very strong support for preserving and improving these tax credits.  Please add your voice by signing this letter — and forward this request to other organizations.

Congress will act on extending tax cuts for the middle class, and must also decide about tax cuts for the rich and for business interests.  Please make sure they remember the millions of low-income families who need help the most — and whose help provides the biggest economic boost.

The 2009 federal income taxes that come due on April 15 have been cut for nearly all working Americans, including Americans at all income levels, by the Recovery Act signed by President
Obama last year. But no one seems to be aware of this. Recent polls indicate that the vast majority of Americans think that the President either raised taxes or left them the same for 2009.

CTJ has new state-specific reports that aim to clear up this widespread misunderstanding. They show that the President cut taxes for working people at all income levels for 2009 and they show who was helped by each individual tax break.

Read the fact sheet and report for your state.

The U.S. Chamber of Commerce recently said that it will not try to repeal the new health care reform law. Has big business seen the light?

No. Actually, the Chamber is still planning on spending $50 million to defeat lawmakers who voted in favor of reform. And they will work to shape regulations and try to repeal parts of the law that are not in the interest of big business, which presumably includes the health insurance industry. Which means it's hard to see what part of the new law the Chamber does NOT want to repeal.

Business groups are already taking aim at particular provisions. For example, the American Benefits Council is complaining that several large corporations must take write-downs ranging from $50 million to $1 billion on their financial statements because the health care reform law repealed a tax break enacted as part of the Medicare prescription drug law in 2003.

The tax break in question should never have been enacted. The prescription drug law subsidizes companies that provide prescription drug coverage for their retirees, ostensibly to prevent those retirees from shifting over to the government program. On top of this subsidy, the companies were also allowed to continue deducting the entire costs of the drug coverage, including the 28 percent subsidy paid by the government.

The health care reform law leaves in place those 28 percent subsidies but repeals the deductions. Telecommunications giant AT&T announced that it would take a $1 billion charge against its profits to reflect the likely future impact of this tax change. Verizon announced a $970 million charge, and other companies, including Exelon, 3M, Caterpillar and John Deere, announced charges in the millions or tens of millions.

But this is only because they're losing a tax break that was never really justified in the first place. The point of deductions is that they account for expenses that companies pay and that reduce their bottom line, i.e., reduce their profits, because profit is what is ultimately taxed. It makes no sense for a company to deduct a subsidy from the government because it does not reflect an expense paid by the company itself.

It seems that Congress really wanted to give these companies a larger subsidy than just the 28 percent, but decided that it would be easier to do so through the tax code. Whether or not larger subsidies were justified, it's generally poor policy to provide them through the tax code because it creates more tax complexity (causing corporations to pour more resources into figuring out how to lower their tax liability) and is less transparent. At least direct spending on subsidies for corporations show up as "costs" each year in government budget documents and are debated extensively by lawmakers. Corporate subsidies provided through the tax code, however, rarely receive this much attention.

It's also worth pointing out that the charges that the companies are announcing may sound like big numbers, but they're actually costs to the companies over many, many years. They reflect the costs of paying full taxes on those subsidies for retiree drug coverage over the course of the retirees' lives, which will be decades. They do NOT represent costs that they must pay this year.

Also, to the extent that the health care reform law provides any benefits to these companies, those are not going to show up on their financial statements today, which is another reason that they are a poor measure of how reform will affect them. Health and Human Services Secretary Kathleen Sebelius recently said that company executives she has communicated with "admit at the outset that what they will give up in terms of closing that kind of a loophole on tax benefits is well overcome by the kind of savings they're looking at with not only incentives for businesses to keep health insurance for their employees, but the kind of wellness and prevention efforts to lower costs in the long run."

Finally, it's entertaining to see conservatives tie themselves in knots as they try to defend the massive subsidies provided in the Medicare prescription drug law (enacted under President Bush) despite their supposedly "free market" philosophy. The Wall Street Journal, presumably, does not support government subsidies, but their opposition seems to melt when some part of the subsidy takes the form of a tax break.

The paper essentially argues that the subsidy and the tax break are justified because they actually save the government money by keeping retirees off of the Medicare prescription drug program. It may or may not be true that the 28 percent subsidy ends up saving the government money, but there is no reason to think that the double deduction, on top of that subsidy, does so, too. On the contrary, the Joint Committee on Taxation estimates that scrapping this unjustified tax break will save the government $4.5 billion from fiscal 2013 through fiscal 2019.