A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.

But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.

His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.

The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.

Read the full report.

 

The U.S. House of Representatives adjourned for the year on Wednesday while the Senate hustles to finish legislation on health care. As of this writing, an array of major tax issues are still to be resolved in the next several days or when Congress returns in 2010:

Health Care Reform

On November 7, the House passed its health care bill, (H.R. 3962), which includes a public option. The largest revenue-raising provision in the House health bill is a surcharge of 5.4 percent on adjusted gross incomes over $1 million (or over $500,000 for unmarried individuals).

(See CTJ's previous analysis and state-by-state estimates of the surcharge in the House health care bill.)

The Senate is still working to pass a health care bill, and some reports claim that the chamber could be working on Christmas Eve to accomplish it. While there is a clear majority of Senators willing to support a public option, the rules allowing 41 Senators to filibuster legislation have encouraged a few conservative Democrats to join Republicans in blocking a public option.

While some details remain to be worked out, a majority of Senators seems to have settled on certain revenue-raising provisions to help pay for health care reform. The largest revenue-raiser in the still-developing Senate bill is an excise tax on high-cost health insurance plans. This excise tax is controversial because many analysts conclude that these plans are not particularly generous in the benefits they provide and they are not necessarily enjoyed by high-income workers. Rather, the high costs are often the result of insurers charging more to cover a work force that is older than average or that has high health risks.

(See CTJ's previous analysis concluding that the Senate's proposed excise tax on high-cost health insurance is less progressive than the surcharge in the House health care bill.)

One revenue-raiser in the Senate proposal that is progressive is an increase in the Medicare payroll tax rate on earnings over $250,000 (or over $200,000 for an unmarried individual).

While this tax increase would only affect those who can afford to pay more, an even better proposal would reform the Medicare tax so that it no longer exempts investment income. This idea was included in an amendment that was filed by Senator Debbie Stabenow during the Finance Committee markup, but was not acted on. Such an amendment may be offered when health care reform is debated on the Senate floor.

Job Creation

On December 8, President Obama announced several proposals to create jobs. His best ideas involve direct spending by the federal government (including extending aid to unemployed and low-income people and aid to state and local governments, among other things). His worst ideas involve tax cuts (including eliminating capital gains taxes on small business investment and providing a tax credit for payroll expansion).

(See CTJ's previous discussion of President Obama's job creation proposals and ways to stimulate the economy.)

The House approved a $154 billion jobs bill, as part of a regular appropriations bill (H.R. 2847), before adjourning this week, and thankfully, it focuses on direct spending. One of the few tax cuts included is a provision to remove the earnings requirement (currently set at $3,000) for the refundable portion of the Child Tax Credit, ensuring that low-income families with children can benefit from it. The Senate is not expected to take up jobs legislation until sometime next year.

Estate Tax

The tax cut legislation enacted by President Bush and his allies in Congress in 2001 set the estate tax to gradually shrink until disappearing altogether in 2010. But, like all the Bush tax cuts, this estate tax cut expires at the end of 2010, meaning the estate tax will reappear in 2011 at the pre-Bush levels if Congress simply does nothing.

Families who have several million dollars to leave to the next generation have benefited the most from the infrastructure, educated workforce, stability and other public goods that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.

One might be tempted to think that allowing the estate tax to disappear would be fine if it reappears at the pre-Bush levels in 2010. Unfortunately, the one-year repeal of the estate tax could tempt some lawmakers to make that repeal permanent, or might tempt them to allow only a very scaled back version of the estate tax to reappear in 2011.

So the House of Representatives approved a compromise that would make permanent the estate tax rules in effect in 2009. This would partially preserve the Bush cut in the estate tax, but prevent the tax from disappearing in 2010.

(See CTJ's previous analysis of the estate tax legislation, along with state-by-state figures showing how few estates are actually subject to the tax.)

Key Democratic Senators indicated that they did not want to make permanent the 2009 rules because -- incredibly -- they were interested in reducing the estate tax even more. Democratic leaders in the Senate attempted but failed to get agreement in the chamber to pass a one-year extension of the 2009 rules, which would prevent the estate tax from disappearing in 2010 and allow Congress to debate a permanent solution as part of the broader tax debate that must happen before the Bush tax cuts expire at the end of next year.

Pathetically, the Senate failed last week to prevent the one-year repeal, which they had known was coming ever since the Bush cut in the estate tax was enacted back in 2001. Democratic leaders in the Senate say they will enact the one-year extension of the 2009 estate tax rules retroactively in 2010. While retroactive tax increases may not be the ideal way to do things, this approach should not cause any problems since tax planners have known for years that Congress was likely to act to prevent this one-year disappearance of the estate tax.

Corporate Tax Breaks (aka "Tax Extenders")

On December 9, the House approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.

The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again.

CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.

The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.

But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress.

(See our previous article on H.R. 4213 explaining the points made in the letter.)

Democratic leaders in the Senate want to pass the tax extenders retroactively early in 2010. One problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. As we've explained before, this is an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes.

On November 6, President Obama signed H.R. 3548, the Worker, Homeownership, and Business Assistance Act of 2009, which provides a much-needed extension of unemployment benefits. Around 400,000 workers exhausted their unemployment benefits at the end of September and far more would have exhausted them by the end of this year without this extension. As a report from CTJ explains, it is still unfortunate that the price of providing this necessary help is tax breaks to corporations and to the housing industry.

Sadly, Congress did not think that helping the unemployed during the worst recession in decades was worthy enough to do without larding the bill up a bit with tax cuts. One is a tax cut that will benefit people who buy a residence and who would have done so whether or not a tax cut was offered to them. The second will essentially give unprofitable companies cash with no strings attached.

Read the report.

Environmentalists have their eyes on the Senate, where Majority Leader Harry Reid has given several committees a September 28 deadline to mark up climate change legislation. The legislation is expected to include a "cap-and-trade" program, in which companies would need to have allowances to emit greenhouse gases, and the amount of allowances would be capped at a level that would decline for several years.

The House of Representatives passed its version (H.R. 2454, the American Clean Energy and Security Act of 2009) in June. It's clear that America needs to act to reduce the greenhouse gases that contribute to climate change. But it's equally clear that the Senate could do better than the House did in addressing this problem.

President Obama proposed in his first budget that Congress create a cap-and-trade system in which all of the emissions allowances are auctioned off to companies rather than given away for free. The overall amount of allowances would be capped and reduced each year. The revenue raised could be largely used, the President reasoned, for a refundable tax credit that would offset the impact of the resulting higher energy costs for low- and middle-income families.

The House cap-and-trade bill only auctions off 15 percent of the allowances, and the revenue raised would help offset the costs for the poorest fifth of families. So 85 percent of the allowances would not be auctioned off, but neither would they be doled out for free to corporations (not all of them anyway). There would be strings attached for some. For example, local utility companies would initially get almost half of the allowances, but in return they would be required to pass savings onto consumers. Unfortunately, there are many reasons why this is an inefficient way to protect consumers.

The Senate might repeat the House's mistakes. One of the Senate committees with partial jurisdiction over the legislation will be the Finance Committee, whose chairman (Max Baucus of Montana) recently told Congressional Quarterly that the Senate would probably not allocate the emissions allowances all that differently than the House bill does.

The increased costs that middle-income families would see if the House bill becomes law are not gigantic ($235 a year according to the Congressional Budget Office). But Congress needs to decide whether the increased prices paid for energy should go largely towards corporate profits (which seems to be the likely result of the House-passed bill) or be redirected back to consumers.

The Senate could accomplish the latter by auctioning off more than 15 percent of the allowances and using the revenue to offset the increased energy costs more effectively for both low- and middle-income families. The Center on Budget and Policy Priorities points out that refundable tax credits, combined with more use of EBT cards, would be an effective way to deliver the necessary energy refund to the vast majority of low- and middle-income families.

The Senate might not just repeat the House's mistakes. They might even add a few of their own. Baucus told the Daily Tax Report that “Congress could use the money from auctioning allowances to cut taxes: by cutting marginal rates, by cutting capital gains rates, by cutting payroll taxes. Or we could do all of the above.”

To take just one of these ridiculous ideas, the preferential rates that already exist for capital gains and dividends already cost us around $100 billion a year and the vast majority of the benefits go to the richest one percent of taxpayers. Let's hope Senator Baucus sees that relief for consumers is more important than showering more special breaks on wealthy investors.

The House Energy and Commerce Committee plans to mark up legislation next week that would create a "cap and trade" program to reduce the emission of gases that cause global warming ("greenhouse" gases). While President Obama favors auctioning off permits to pollute and then using the proceeds largely to offset the resulting costs for consumers, the Energy and Commerce Committee seems ready to give a large portion of those permits away to utility companies for free.

Why "Cap and Trade"?

The idea behind a cap and trade program is that the federal government could cap the overall amount of greenhouse gases that can be emitted into the atmosphere (and reduce that cap each year) and allow market forces to determine how the reduction in emissions can be made most efficiently.

For example, if a manufacturer finds that it can eliminate greenhouse gas emissions at its facilities very cheaply, it can then sell permits it doesn't need to another company that finds emissions reductions to be prohibitively expensive. The overall reduction in emissions would probably come with less costs to the overall economy than would be the case if the federal government simply mandated every company to reduce emissions by a set amount.

Impact on Consumers

Greenhouse gases are produced by the burning of fossil fuels like coal to provide electricity, and also by burning fossil fuels like petroleum to transport nearly every product we buy. This means that limiting the overall amount of greenhouse gases that can be emitted into the atmosphere could increase the costs of just about all consumer goods. If implemented properly, this would, in turn, provide new incentives for manufacturers, consumers, and energy companies to become much more energy efficient.

The overall added costs to consumers could be offset through refundable tax credits (an approach favored by President Obama and the House Ways and Means Committee). The result would be that energy and energy-intensive services and products would be more expensive relative to other things, but the overall buying power of consumers would not be diminished. As the Congressional Budget Office has pointed out, this is particularly important for low-income people, because they are forced to spend a larger portion of their income (or all of their income) on consumption and will therefore feel a larger impact.

The CBO has also explained that the cost increases for consumers are likely to occur whether the emissions permits are auctioned off to companies or simply given to the companies for free. Greenhouse gas emitting companies would be able to charge higher prices either way as a result of the cap. President Obama proposed in his budget outline that all of the emissions permits be auctioned to companies so that the resulting revenue can be used largely for a tax rebate (an extension of his Making Work Pay Credit) that would offset the increased costs for consumers.

The Center on Budget and Policy Priorities has analyzed the sorts of steps that can be taken to offset these regressive impacts, which would involve tax rebates for most people but would also require boosting other existing programs for people who would not be reached by tax rebates.

Energy and Commerce Committee Moving in the Wrong Direction

Henry Waxman (D-CA), chairman of the Energy and Commerce Committee, and Edward Markey (D-MA), chairman of the subcommittee handling the issue, have put forth legislative language that currently does not address whether all the permits would be auctioned or not. But media reports indicate that they are currently negotiating language that would give away as much as 40 percent of the permits to utility companies, which would be required to pass on savings to their customers.

There are many, many problems with this approach. To take just a couple: Less than half of the increased costs that consumers would face as a result of cap and trade would come from higher utility bills. Blunting the effects of cap and trade for electricity would force larger greenhouse gas reductions in other energy-intensive parts of the economy, which might raise the total costs of reducing emissions.

The President was right to propose that 100 percent of greenhouse gas emission permits should be auctioned off rather than given away for free. Hopefully, the cap and trade program that emerges will be much closer to what the President outlined.

New Data from Citizens for Tax Justice Shows that Many Survey Respondents Saying Income Taxes Are Too High Will Pay No Income Taxes for 2008

A recent Gallup poll found that 61 percent of respondents felt that the federal income tax they will have to pay this year is "fair." When asked about the specific amount of federal income taxes they pay, just over half felt they pay the right amount or too little.

Fewer than half of those polled said they thought their federal income taxes are "too high." It appears, however, that some of these respondents are basing their answers on the right-wing, anti-tax propaganda they've heard rather than their own income tax liability. A new report from Citizens for Tax Justice finds that many of the respondents who say they pay too much are likely to owe no federal income taxes at all, suggesting that education about the tax system could change their views.

Read the report.

New Data from Citizens for Tax Justice Shows that the U.S. Tax System Is Not as Progressive as You Think

Many politicians, pundits and media outlets have recently claimed that the richest one percent of American taxpayers are providing a hugely disproportionate share of the tax revenue we need to fund public services. New data from Citizens for Tax Justice show that this simply is not true. CTJ estimates that the share of total taxes (federal state and local taxes) paid by taxpayers in each income group is quite similar to the share of total income received by each income group in 2008.

- The total federal, state and local effective tax rate for the richest one percent of Americans (30.9 percent) is only slightly higher than the average effective tax rate for the remaining 99 percent of Americans (29.4 percent).

- From the middle-income ranges upward, total effective tax rates are virtually flat across income groups.

Read the fact sheet.

A new report from Citizens for Tax Justice answers many of the questions that are frequently asked about taxes during this time of year and clears up the old myths that are still accepted by many as fact. Here is just a sample of some of the questions that are answered:

Question: Does President Obama plan on raising our taxes?

Question: There might be cyclical downturns and upturns in the economy that no one can control, but don't tax cuts help us climb out of downturns a little faster?

Question: What are "tax havens" and why are some people in an uproar over them?

Question: What does it matter to me if someone else is hiding their income from the IRS?

Read the report.

Earlier this week, the National Women's Law Center released the April 2009 update to its report, "Making Care Less Taxing," which describes available state and federal child tax credits and dependent care tax credits, analyzes how these credits help families, and discusses how they can be best designed.

The Center has been instrumental in providing information to help federal and state lawmakers find ways to support families and devotes this annual report to the often forgotten role that tax policy plays.

The report includes information on changes made to state and federal child and dependent care credits in 2008, including:

- Previously legislated changes to existing child and dependent care tax provisions in Oklahoma, Georgia and Louisiana that took effect for tax year 2008;
- Changes to the definition of "qualifying child" that affect the federal child and dependent care credit; and
- Highlights of new IRS regulations on the definition of "custodial parent" as it relates to separated or divorced parents who claim the federal child and dependent tax credit.

The National Women's Law Center also has resources for parents, advocates and service providers about the tax credits available for families at the federal level and in every state.

The U.S. House of Representatives and the U.S. Senate both approved budget resolutions on Thursday that move Congress a step closer to enacting President Obama's agenda, without being quite as bold or explicit as the budget outline released by the President in late February. Both resolutions would spend about $3.5 trillion in 2010 and include non-binding, but important, provisions affecting spending and revenues in years after that. As lawmakers from both chambers leave Washington for their spring recess, behind-the-scenes negotiations will likely pave the way for a House-Senate conference to take place upon their return to iron out the differences between the two resolutions. On some key issues like estate tax and health care, the House has made wiser choices that will hopefully be maintained in the final budget resolution.

The basic thrust of many of the tax policies embodied in the budget resolutions mirror the President's proposals. Both assume the extension of the Bush income tax cuts for everyone except taxpayers with incomes above $200,000 (or $250,000 for married couples). Taxpayers above these thresholds are affected by the top two income tax rates, which would revert to 36 and 39.6 percent. Both resolutions would extend the "AMT patch," a measure that increases the exemptions from the Alternative Minimum Tax to ensure that most taxpayers are not affected by it. (The chambers differ on the extent to which the costs of the AMT patch will have to be offset with revenue-raising measures in the future.)

The resolutions do not follow the President's proposals on certain issues. For example, President Obama proposed that the income tax cuts aimed at working families and included in the recently-enacted stimulus bill be made permanent. The resolutions would make some of these permanent, like the expansion in the child tax credit and the American Opportunity Tax Credit for higher education.

But they would not make permanent the Making Work Pay Credit, one of Obama's signature tax policies. Neither do they include any specific language to create a "cap and trade" program to reduce greenhouse gas emissions, which, in the President's proposal, would produce the revenue needed to offset the costs of the Making Work Pay Credit and other energy initiatives.

Similarly, the resolutions do not include language laying out how Congress will pay for health care reform. (The President's budget outline included a reduction in the benefits of itemized deductions for the rich to partially fund health care reform.)

None of this means that Congress will not act on these proposals of the President's. The resolution includes language allowing for deficit-neutral legislation in these areas without specifying how money will be spent or how it will be raised.

Congress's next important test involves settling the differences between the House and Senate resolutions. When it comes to revenues raised to pay for health care or revenues raised from the estate tax, hopefully the choices made by the House will be maintained in the final budget resolution. See the following Digest articles for more.

Estate Tax: Senate Approves a Break for Millionaires that Leader Reid Calls "So Stunning, So Outrageous"

 

Reconciliation for Health Care Reform: House Moves to Stop Senators' Obstruction of Measures with Majority Support

 

House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks

When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?

This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.

The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.

A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

• Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
• The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
• The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.

Yesterday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate right now. His proposal is apparently an update on the plan that House GOP leaders introduced last week and is different in some key respects.

A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

• Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
• The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
• The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.

Yesterday, the Republican leadership in the U.S. House of Representatives released the outlines of a tax and spending plan that they argue is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate.

A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the President's plan and finds that:

• Over a fourth of taxpayers, mostly low-income families, would pay more in taxes under the House GOP plan than they would under the President's plan.
• The richest one percent of taxpayers would pay $100,000 less, on average, under the House GOP plan than they would under the President's plan.
• The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the President's plan, would cost over $300 billion more than the Obama income tax cuts in 2011 alone.

Read the report.

This week, Citizens for Tax Justice updated its recent report on the tax proposals in the President's budget outline to include estimates of the proposals' impacts on different income groups in every state. The new state figures examine the proposed cuts compared to current law and also compared to the baseline that the Obama administration uses in presenting its budget figures. The figures show that, whichever baseline is used, the vast majority of families in every state will get a significant tax break.

Read the report. (State-by-state figures are in the final appendix.

On February 26, President Obama sent to Congress the blueprint for what could be one of the most progressive federal budgets in generations. The budget calls for national health care reform, expanded education funding, a program to reduce global warming, and several improvements in human needs programs. As a new report from Citizens for Tax Justice explains, it would make the tax code considerably more progressive, and close a number of egregious tax loopholes.

There is, however, a flaw in the budget proposal: It does not raise enough revenue to pay for public services. Instead, its net effect is to cut taxes dramatically.

Opponents of the President have attempted to argue that the budget proposal calls for tax increases that could sink the economy, but this complaint is plainly unfounded. President Bush and his allies in Congress were adamant that lower taxes would lead to an explosion of prosperity, and they enacted tax cuts in 2001, 2002, 2003, 2004 and 2006. Some allies of the former President argue that Congress is now insufficiently focused on tax cuts, but this view seems bizarre and incredible given the sad economic facts all around us.

Indeed, one might reasonably conclude that we could safely allow most of the Bush tax cuts to expire at the end of 2010, as they are scheduled to under current law, without any concern about how this will impact the economy. But President Obama actually proposes to keep most of the Bush tax cuts. Obama's largest proposed tax cut is to re-enact 80 percent of the Bush tax cuts that are scheduled to expire at the end of 2010. Most of this reflects re-enacting the Bush income tax cuts for married couples with incomes below $250,000 and others with incomes below $200,000 (or put another way, for about 98 percent of taxpayers), and permanently reducing the Alternative Minimum Tax (AMT). In addition, Obama proposes to re-enact close to half of the Bush estate tax cut.

On top of re-enacting most of the Bush tax cuts, the Obama budget includes a number of additional tax cuts for families and individuals. (These would be extensions of temporary tax cuts included in the recently passed stimulus law.) It also proposes some questionable business tax cuts.

Partially offsetting its tax-cut proposals, the Obama budget proposes some significant revenue-raising provisions. These include a cap-and-trade program to reduce carbon emissions, a limit on the benefits of itemized deductions for high-bracket taxpayers, and a number of corporate and high-income loophole-closing measures.

Read the Report