Education, Health and Housing News


Poverty Data Not Surprising, No Matter How You Spin It


| | Bookmark and Share

The top 20 percent of households captured more of the nation’s collective income (51 percent) than the rest of population, according to the Census report Income and Poverty in the United States: 2013 released today.

This is consistent with what we know about worsening income inequality in this nation.

Median household income remained relatively stagnant in 2013 at $51,939, a mere $180 more than the previous year, giving average families no more buying power than they had the year before and 8 percent less than they did in 2007, just before the throes of the economic recession.

This is consistent with what working people all over the nation are saying: They work harder and harder, but they can’t get ahead.

The poverty rate dipped by half a percentage point to 14.5 percent, but that number is nothing to cheer about as it still represents generational highs.  

Child poverty declined by 2 percent, one of the bright spots in the report. But overall, what’s most notable about the data is that the numbers aren’t shocking. Troubling? Yes. Surprising? No.

In recent years, myriad studies have affirmed the nation’s growing income divide and economic mobility problem. Just yesterday, Standard & Poor’s released a study that revealed states are struggling to raise enough revenue because of income inequality. Institute on Taxation and Economic Policy experts noted that state tax systems are largely regressive. So, of course, as wealth concentrates at the top states, which tax poor and moderate-income families more than the rich, aren’t able to raise enough money to fully fund basic priorities.

A study released in June by the Russell Sage Foundation revealed that from 2003 to 2013, the net worth of the median American household fell, adjusted for inflation, by more than a third, but the best-off families experienced double-digit growth in their real net worth.  In 2013, a UC Berkeley economist released a study revealing income inequality in the United States is at its highest level since 1928, just before the Great Depression.

Today’s data on poverty and income simply confirms what other data sets have repeatedly revealed. Clearly, we don’t have a problem aggregating and analyzing data in these parts. Our problem is getting lawmakers to agree on policy solutions.

Just as the Census data are predictable, so, too, are the rallying cries. There will be calls for investments in proven poverty-alleviating programs such as job training and early education. At the same time, there will be calls from the extreme right that blame the poor for being poor and call for pull-yourself-up-from-your-bootstraps (even if you have neither boot, nor strap) "solutions."

As I started writing this piece for taxjusticeblog.org, I envisioned it as a way to highlight how progressive tax policies can play a big role in reducing income inequality. The Institute on Taxation and Economic Policy and Citizens for Tax Justice have plenty of research that supports this, which you can read here, here, here, and here. You’ll want to read these pieces if you have any doubt that tax policy makes a significant difference.    

But we need lawmakers to recognize every day--not just the day some new study reveals a new data set—that worsening income inequality and high poverty is not good for the nation and its families in the short or long term. Child poverty declined, but it’s still high. How many children were born into poverty in the year since the Census’s last report on poverty? And what will the economy look like 20 or more years from now if millions of children and their families continue  lacking the resources it takes to thrive?

Census data will confirm what we already know again next year and the next if policymakers don’t take action. Our elected officials must be willing to explore policy solutions that address widening income inequality and poverty with the same level of urgency that they expend raising money for their next campaign.


Tobacco Industry Games Rules to Dodge Billions in Taxes


| | Bookmark and Share

What's the biggest difference between small and large cigars or pipe and roll-your-own tobacco? Their level of taxation, according to the Government Accountability Office (GAO), which estimates that tobacco companies have managed to dodge an estimated $3.7 billion in federal excise taxes since 2009 by superficially repackaging their products to fit within the legal definitions of the least taxed forms of tobacco.

A Senate Finance Committee hearing last week examined the egregious methods tobacco companies use to accomplish this. One panelist related in his testimony (PDF) that Desperado Tobacco had literally pasted a label saying "pipe tobacco" onto its existing roll-your-own tobacco packages so it could avoid the higher rate on roll-your-own tobacco. Perhaps even more stunning, another panelist noted during the hearing that some companies had added cat litter to small cigars to add enough weight to their product so that it fit the definition of the lower taxed "large cigars."

What's driving these outrageous tactics is the substantial difference in the way each product is taxed. For example, roll-your-own tobacco is taxed by the federal government at a rate of $24.78 per pound compared to the $2.83 per pound rate on pipe tobacco. Similarly, small cigars are taxed at a rate of $50.33 per thousand, whereas large cigars are taxed as a percentage of the manufacturer's price, which in many cases results in a tax of about half that for small cigars. These differences in tax levels are so significant that according to the GAO, over the past few years there has been a dramatic rise (PDF) in both the purchase of large cigars and pipe tobacco along with a simultaneous collapse in the market for small cigars and roll-your-own tobacco, as consumers flock to the lower-priced alternatives.

The best way to solve this tax avoidance by tobacco companies would be for Congress to equalize the level of taxation of the varying tobacco products, which would once and for all end the incentive for companies to repackage their product to fit the different product definitions. In the event of congressional inaction, the Alcohol and Tobacco Tax and Trade Bureau (TTB) also has authority to issue clearer definitions between the varying tobacco products. For example, TTB could require that large cigars be defined as being six rather than three pounds per thousand. But it's unlikely that any definitions the bureau could issue would adequately solve the problem of companies gaming their products.

While tobacco taxes are not the best source of revenue given that they are regressive and decline over time, they still provide billions in much needed revenue at the state and federal level to offset some of the social costs of smoking. For these reasons, lawmakers should put an end to the ridiculous games tobacco companies are playing to avoid paying taxes.


Despite Court Ruling, Obamacare Tax Subsidies Are Almost Certainly Here to Stay


| | Bookmark and Share

Odds are that a Tuesday D.C. circuit court ruling declaring health care subsidies to be illegal is not a real threat to the Affordable Care Act, but it is an important reminder about the crucial role that tax subsidies play in making health insurance more affordable for millions of Americans and the lengths that some politicians are willing to go to block them.

On July 22, the U.S. Court of Appeals for the District of Columbia Circuit ruled in Halbig v. Burwell that Affordable Care Act (ACA) tax subsidies are illegal in the 36 states that do not have state-run health exchanges. If the D.C. Circuit Court ruling holds, it would mean that 5 million Americans who received subsidies could see their premium costs go up as much as 76 percent.

The case was decided by a three-judge panel, and the decision will likely be reversed when the Obama administration takes the case to the full D.C. Circuit. If the full court upholds the decision, the case could make its way to the U.S. Supreme Court given that just hours after the ruling, the U.S. Court of Appeals for the 4th Circuit ruled in a similar case that the IRS acted appropriately in interpreting slightly ambiguous legislative language to mean Congress's clear intent was to provide subsidies to both the federal and state exchanges. 

While much of the media attention surrounding the ACA up until now has focused on the individual mandate and its related tax penalty, one of the most beneficial aspects of the health care law is the $940 billion in tax subsidies that will be targeted over the next decade to individuals purchasing health insurance. A study from earlier this year found that the average person eligible qualified for an annual subsidy of about $2,890 to purchase health insurance on an exchange.

The D.C. Circuit ruling would upend these important subsidies. While the court declared that congressional intent on the issue of the tax subsidies was not clear, anyone even distantly following the congressional debate surrounding the ACA knows that its writers fully intended the federally-run exchanges to provide the tax subsidies in exactly the same way as the state-run exchanges.

The good news is that the decision does not affect any subsidies being dispensed now.

Even if this or a similar case were to somehow make it to the Supreme Court (the only court that would actually be able to halt the subsidies), it would take years and, as Ezra Klein notes, the Supreme Court would not want to take any part in ripping "insurance from tens of millions of people due to an uncharitable interpretation of congressional grammar." On top of this, if the Supreme Court took the radical step of striking down the tax subsidies following the D.C. court's logic, it is possible that the federal government could simply take administrative actions to work around the ruling by handing the federal government infrastructure behind the federal run state exchanges over to state authorities.

Since the president proposed and Congress passed the Patient Protection and Affordable Care Act of 2010, it has faced criticism and challenges, mostly from the extreme right wing. The U.S. Supreme Court upheld the act as the law of the land in June 2012. In spite of technical glitches when the health exchanges rolled out last fall, millions have enrolled. Consumers can no longer be denied health insurance due to pre-existing conditions, and millions of people under age 26 now have health coverage because they can be on their parents’ plans.

Continual challenges to the law may show just how polarized our nation is, but it doesn’t change the fact that consumers who now have access to health insurance are much better off today than they were four years ago. It would behoove those who continue to raise legal challenges to think about that. 


For Education Tax Breaks, Progressivity = Effectiveness


| | Bookmark and Share

On Tuesday, when the Senate Finance Committee contemplates the patchwork of tax breaks that are supposed to subsidize postsecondary education, they will likely consider ways to streamline these breaks and make them less confusing. That’s a good idea, but it’s not enough. The bigger problem is that too much of these tax subsidies are going to families who are well-off and would send their kids to college no matter what, and too few are going to lower-income families who are likely to send their kids to college only if they can find sufficient assistance.

The current collection of tax breaks can be confusing. A 2012 report from the Government Accountability Office found that more than a fourth of taxpayers eligible for postsecondary education tax breaks don't take advantage of them, and those who do use them often don't use the most advantageous tax break for their situation.

But Congress also needs to make these tax benefits more targeted to those households that actually need them to access postsecondary education. That could mean scaling back or eliminating some poorly targeted breaks and beefing up the American Opportunity Tax Credit, which is the best targeted of the bunch.  

It’s not clear that lawmakers will take up this cause, especially given that they are likely to move in the opposite direction by extending the most regressive of these tax breaks, the deduction for tuition and related fees. The deduction for tuition and related fees is among the temporary tax provisions that would be extended for two years under the “tax extenders” legislation approved by the Finance Committee on April 3, with the support of committee chairman Ron Wyden and ranking Republican Orrin Hatch.

Tax Breaks for Postsecondary Education Are Poorly Targeted, and Deduction for Tuition and Fees Is the Worst

A report from the Center for Law and Social Policy explains that unlike the direct federal spending provided through Pell Grants, the tax breaks for postsecondary education overall favor relatively well-off households, as illustrated in the graph below.

The graph below shows that the most regressive of the tax breaks is the deduction for tuition and related fees, followed by the Lifetime Learning Credit (LLC) and the deduction for interest payments on student loans.

One option would be to simply end the practice of providing these subsidies through the tax code and instead increase spending on Pell Grants or other similar assistance. While this would be logical, Congress may be too politically committed to the concept of tax breaks for education to seriously consider this.

There are certainly ways to make these tax breaks work better. The more regressive tax breaks could be scaled back, and the savings could be put toward expanding the American Opportunity Tax Credit (AOTC). The figures illustrate that the AOTC, first signed into law by President Obama in 2009, is the most progressive of the postsecondary education tax breaks (or perhaps it’s better described as the least regressive of the education tax breaks).

The biggest reason why the AOTC is better targeted to low-income families than the other breaks is the fact that the AOTC is a partially refundable credit. The working families who pay payroll taxes and other types of taxes but earn too little to owe federal income taxes will benefit from an income tax credit only if it is refundable, such as the Earned Income Tax Credit.

Unfortunately, the AOTC is currently scheduled to expire at the end of 2017, when it will revert to a less generous credit that existed before 2009. If lawmakers were serious about making tax breaks for postsecondary education more effective, they would at very least make the AOTC permanent and allow the deduction for tuition and fees to expire as scheduled.


Five Key Tax Facts About Healthcare Reform


| | Bookmark and Share

With Obamacare exceeding the Administration's goal of 7 million sign-ups for private health coverage this week, there's no longer any doubt about the dramatic impact that the Affordable Care Act (ACA) is having on healthcare coverage throughout the country. Unfortunately, there is a lot of misunderstanding about the various tax provisions included as part of the ACA.

Here are the five key facts to remember about tax policy in the ACA:

1. The Affordable Care Act includes tax subsidies of $940 billion for low- and middle-income families.

While endless coverage has been given to the tax increases (mostly on the rich) used to pay for the ACA, the reality is that the act also includes over $940 billion in tax subsidies over the next decade to help individuals and families pay for health insurance. In fact, a recent report by the Kaiser Family Foundation found that as of February 28, 2014, 3.5 million people have already qualified for a total of about $10 billion in annual premium subsidies, which breaks down to an average subsidy of $2,890 per person. By 2018, the CBO expects the number of people receiving tax subsidies to help pay for healthcare to reach as high as 20 million.

2. Only two percent of Americans will pay the tax penalty for not having insurance.

The tax penalty on individuals who do not purchase health insurance will be paid by hardly anyone. According to the CBO, only an estimated two percent of the US population will owe the rather modest penalty.

More importantly, the provision in the ACA banning discrimination against pre-existing conditions cannot work without the penalty for not purchasing health insurance. Without the tax penalty, the ban would cause a significant increase in the cost of health insurance premiums because it would allow individuals to simply delay obtaining insurance until they need care.

3. About three-fourths of the tax increases included to pay for health reform apply to businesses or married couples making over $250,000 and single people making over $200,000.

Our calculations show that about three-fourths of tax increases apply to businesses or married couples making over $250,000 and single people making over $200,000. For example, the biggest revenue-raiser in the ACA is the expansion of the Hospital Insurance tax so that it applies at a higher rate for very high-earners and no longer exempts wealthy people’s investment income. These reforms were originally proposed (PDF) by Citizens for Tax Justice.

4. Healthcare reform includes billions in tax subsidies to help small businesses.

Every politician loves to talk about helping small businesses, but opponents of the ACA have been surprisingly quiet when it comes to discussing the estimated $14 billion in tax subsidies that the ACA will provide small businesses over the next decade to help pay for health insurance for their employees. The tax credit can actually be worth up to 50 percent of a small business’s contribution toward its employees’ premium costs.

5. The medical device excise tax is worth keeping.

Since the passage of the ACA, the effects of the medical device excise tax have been wildly distorted by industry opponents of the tax. They will enjoy increased business as a result of the ACA’s increase in coverage, but don’t want to shoulder any of the costs. Despite their claims to the contrary, the tax is not large enough to have a significant impact on the industry.

Repealing the tax would cost about $30 billion over 10 years, which would either require raising taxes on other groups or increasing the deficit. It’s also worth nothing that medical device companies like Baxter International already pay extremely low effective income tax rates tax rates and enjoy substantial profits. 


New CTJ Reports Explain Obama's Budget Tax Provisions


| | Bookmark and Share

New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal

Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.

The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.

Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.

For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.

To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”

And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”

Read the CTJ reports:

The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue

The President’s FY 2015 Budget: Tax Provisions Affecting Businesses


Reasons Why Congress Should Allow the Deduction for Tuition to Remain Expired


| | Bookmark and Share

You might be surprised to learn that Congress is likely to extend a tax break that is claimed mostly by high-income individuals paying for graduate education and by families of undergrads who are mistakenly taking this break instead of one that would benefit them more.

The deduction for tuition and related fees is part of the “tax extenders,” which is the nickname often given to a package of provisions that Congress approves every couple of years to extend various arcane tax breaks that mostly go to businesses. This deduction is one relatively small piece of the larger “tax extenders” package, and it’s one that does go to families. But unfortunately, it’s also the most regressive of all the tax breaks for postsecondary education, meaning it’s targeted more to the wealthy than any other education tax break.

Congress last extended the deduction for tuition and related fees in the tax extenders package that was included in the “fiscal cliff” legislation approved on January 1 of 2013. That legislation extended it retroactively to 2012 and prospectively through the end of 2013. The two-year extension cost $1.7 billion.

Here’s a list of reasons why Congress should allow it to remain expired.

The deduction for tuition and related fees mainly supports graduate education.

Americans paying for undergraduate education for themselves or their kids in 2009 or later generally have no reason to use the deduction because starting that year another break for postsecondary education was expanded and became more advantageous. The more advantageous tax break is the American Opportunity Tax Credit (AOTC), which has a maximum value of $2,500. The deduction for tuition and related fees, in contrast, can be taken for a maximum of $4,000, and since it’s a deduction that means the actual tax savings even for someone in the highest income tax bracket (39.6 percent) cannot be more than $1,584.

The AOTC is more generous across the board. Under current law, the AOTC is phased out for married couples with incomes between $160,000 and $180,000, whereas the deduction for tuition and related fees is phased out for couples with incomes between $130,000 and $160,000. For moderate-income families, the AOTC is more beneficial because it is a credit rather than a deduction.   The working families who pay payroll and other taxes but earn too little to owe federal income taxes – meaning they cannot use many tax credits – benefit from the AOTC’s partial refundability (up to $1,000).

Given that a taxpayer cannot take both the AOTC and the deduction, why would anyone ever take the deduction? The AOTC is available only for four years, which means it would normally be used for undergraduate education, while the deduction could be used for graduate education or in situations in which undergraduate education takes longer than four years.  The deduction can also be used for students who enroll for only a class or two, while the AOTC is also only available to students enrolled at least half-time for an academic period during the year.

For graduate students and others in extended education, under current law the Lifetime Learning Credit (LLC) is generally a better deal than the tuition and fees deduction. Because the upper income limit for the LLC is lower — $124,000 if married, $62,000 if single, the tuition and fees deduction primarily benefits taxpayers whose income is above these thresholds.

Taxpayers confused by all the education tax breaks may mistakenly take the deduction rather than a tax break that benefits them more.

One reason a family paying for undergraduate education would claim the deduction instead of the AOTC is confusion. Because the panoply of education tax breaks is so confusing, many taxpayers mistakenly claim a break that is not the best deal for them. A 2012 report from the Government Accountability Office found that over a fourth of taxpayers eligible for postsecondary education tax breaks don't take advantage of them, and those who do use them often don't use the most advantageous tax break for their situation.

The deduction for tuition and related fees is the most regressive tax break for postsecondary education.

The distribution of these tax breaks among income groups is important because if their purpose is to encourage people to obtain education, they will be more effective if they are targeted to lower-income households that could not otherwise afford college rather than well-off families that will send their kids to college no matter what.

The graph below was produced by the Center for Law and Social Policy (CLASP) using data from the Tax Policy Center, and compares the distribution of various tax breaks for postsecondary education as well as Pell Grants.

The graph illustrates that not all tax breaks for postsecondary education are the same, and the deduction for tuition and fees is the most regressive of the bunch. Some of these tax breaks are more targeted to those who really need them, although none are nearly as well-targeted to low-income households as Pell Grants. Tax cuts for higher education taken together are not well-targeted, as illustrated in the bar graph below.

One proposal offered by CLASP would expand the refundability of the American Opportunity Tax Credit (AOTC), represented by the blue bar above, increasing the assistance available to low-income families not helped by the other tax breaks. The proposal offsets these costs — and simplifies higher education tax aid – by eliminating the other tax breaks and reducing AOTC benefits for higher income households


Rental Housing and the Tax Code


| | Bookmark and Share

More than sixty years after President Franklin Delano Roosevelt made “freedom from want” one of the “four freedoms” he sought to guarantee to families worldwide, one important component of Roosevelt’s vision—affordable housing—is further and further away for many low-income families. It’s well-known that the gradually unfolding foreclosure crisis of the past half-decade put homeownership out of reach for millions of American families. But as a new study from Harvard’s Joint Center for Housing Studies (JCHS) shows, many of these families have found that shifting from homeownership to renting has hardly eased the burden of housing costs. The study, America’s Rental Housing: Evolving Markets and Needs, finds that half of all renters nationwide are now paying more than 30 percent of their incomes on rent.

This is significant because housing experts have traditionally viewed the 30-percent-of-income threshold as the upper limit on affordable housing costs—and because the share of American renters paying burdensomely high rents, by this measure, grew faster over the past decade than at any time in the past half century. In 1960, JCHS finds, the share of renter households paying more than 30 percent of their income was 22 percent. In 2000, that share had risen to 38 percent, and in the decade that followed it jumped to 50 percent.

The JCHS measure breaks out families whose rental costs are “moderate burdens” (30 to 50 percent of income) and “severe burdens” (more than 50 percent of income). Disturbingly, the last decade’s jump in unaffordable rents was driven primarily by those with “severe” rental costs. An astonishing 27 percent of American rental households now spend more than half their income on rent alone, up sharply from 19 percent at the turn of the century. 

But as a September 2013 ITEP report notes, an increasing number of state tax systems have a straightforward mechanism in place, the property tax “circuit breaker” credit, that can be tailored to reduce the burden of rental housing cost for families. Circuit breakers are designed to prevent housing costs from exceeding some “excessive” share of income, and nearly half of the states now offer renters at least a small tax credit to keep their rental costs below these excessive levels. Recent expansions in renter tax breaks in Minnesota and the District of Columbia, described in our September report, show that even in a fiscally challenging environment these relatively inexpensive tax credits can be achievable for states.

In fact, circuit breakers administered by state governments may be the most attainable policy solution going forward for mitigating the excessive rental housing costs that millions of low-income families currently face. This is because, as the JCHS report shows, direct rental subsidies have actually been provided to fewer and fewer rent-challenged families even as rental costs have soared. The share of eligible households receiving rental subsidies fell from 27 to 23.8 percent during the past five years alone. In other words, state circuit breakers may be the last backstop for near-poverty families facing severe housing costs.


Payroll Tax Loophole Used by John Edwards and Newt Gingrich Remains Unaddressed by Congress


| | Bookmark and Share

For several years, Citizens for Tax Justice has raised the alarm about a payroll tax loophole that allows many self-employed people, including two former lawmakers, John Edwards and Newt Gingrich, to use “S corporations” to avoid payroll taxes. Unfortunately, Congress passed up an opportunity to address this loophole as part of health care reform. Despite a few recent court decisions in favor of the IRS’s attempts to slightly restrict this loophole, it will continue to be a problem until Congress takes our advice and closes it.

The IRS and Tax Court Lets Some Self-Employed People Avoid Social Security and Payroll Taxes — Unless They Go Too Far

Payroll taxes are supposed to be paid on income from work. The Social Security payroll tax is paid on the first $113,700 in earnings (adjusted each year) and the Medicare payroll tax is paid on all earnings. These rules are supposed to apply both to wage-earners and self-employed people.

“S corporations” are essentially partnerships, except that they enjoy limited liability, like regular corporations. The owners of both types of businesses are subject to income tax on their share of the profits, and there is no corporate level tax. But the tax laws treat owners of S corporations quite differently from partners when it comes to Social Security and Medicare taxes. Partners are subject to these taxes on all of their “active” income, while active S corporation owners are supposed to determine what salary they would pay themselves if they treated themselves as employees.

Naturally, many S corporation owners make up a salary for themselves that is much less than their true work income.

The Tax Court recently found that a California man named Sean McAlary attempted to do this in 2006 with an S corporation. He was the sole owner of the company, and he had only a handful of other real estate agents working sporadically for him (as independent contractors).

In 2006, McAlary, through his S corporation, had net income (income left after paying the other agents and paying other expenses) of $231,453. McAlary, who worked 60 hours a week at his company, initially did not report any of this income as compensation for work. And thus he paid no payroll taxes on it. When the IRS challenged him, he later claimed that only $24,000 was compensation for work. The other 90 percent, he said, was profit, not subject to Social Security or Medicare tax.

Logically, one would think that all of the net income of the company was income from work, since it all stemmed from McAlary’s efforts in selling real estate (and to a slight degree, from managing his sales agents).

But the IRS and the Tax Court totally missed the point. First, the IRS decided that less than half of McAlary’s income, only $100,755, was earned income. It came to this figure by multiplying what it guessed should be McLary’s hourly wage times the number of hours he worked. The Tax Court adjusted that down to $83,200 by making up a slightly lower average hourly wage.

Imagine if such a rule applied to ordinary wage earners. “So you were paid $75,000,” the IRS might say, “but you claim you were only worth half that much. Well, you have a point, but we’d say you were worth $50,000.”

By engaging in such fictions, the IRS and the Tax Court go to absurd lengths to give Subchapter S owners a tax break — just not as absurd as the numbers that many of the owners make up.

Medicare Tax Reform Was Missed Opportunity to Close Loophole

Two famous politicians have gained notoriety for low-balling their work income from Subchapter S corporations. The first was former Senator John Edwards, who actually claimed that his name was an asset, and that this asset (rather than his labor) was generating most of the income from his one-man law firm. The second was former House Speaker Newt Gingrich, whose tax returns released during the 2012 Republican primary demonstrated that he, too, took advantage of this dicey tax dodge.

In 2009, as members of Congress considered revenue-raising proposals to pay for health care reform, they eventually looked at an idea from Citizens for Tax Justice to reform the Medicare tax. We proposed that the Medicare tax, which was a flat-rate tax on wages, should have a higher rate for higher-income workers and that Congress create a matching Medicare tax applying to investment income (excluding retirement income) for people above a certain income threshold.

We assumed that if our proposal was adopted, then what was called the “John Edward Loophole” (and later called the “Newt Gingrich Loophole”) would be closed. Essentially all income over a certain threshold (not counting retirement income) would be subject to the Medicare tax one way or the other. Most of the disputes between the IRS and S corporation owners over how much of their income constitutes compensation would become unnecessary.

But Congress had other ideas. Although the health care law as enacted did include most of our proposal, an exception was made for “active income” of S corporations that the owners do not characterize as compensation for work.

This has created a strange situation in which wages and salary are subject to the Medicare tax and even most investment income (capital gains, dividends, interest, royalties, rents, to the extent they make up a taxpayer’s income in excess of $250,000 for married couples and $200,000 for singles) is, effectively, subject to the same tax. But “active income” that can be characterized as not wages and salary still escapes the tax, and thus taxpayers like McAlary still have an incentive to mischaracterize this income.

The most obvious and simplest solution would be for Congress to simply apply the Medicare tax to all “active income” of S corporations.

Some lawmakers have proposed a more limited solution that is overly complicated but which would at least solve part of the problem. Such legislation was first introduced as part of a tax “extenders” bill in 2010 (in order to offset some of the cost of those tax breaks) and a version has been introduced this year by Congressman Charlie Rangel. This legislation would address situations in which an S corporation provides a service and generates most of its profits based on the reputation or skills of three or fewer people. If this rule had been in place, Edwards and Gingrich probably would not have been able to avoid their Medicare taxes. But it might have left the courts to deal with cases like McAlary’s (because his business arguably relied on the skills and reputation of more than three people). 


New CTJ Report: Reforming Individual Income Tax Expenditures


| | Bookmark and Share

Congress Should End the Most Regressive Ones, Maintain the Progressive Ones, and Reform the Rest to Be More Progressive and Better Achieve Policy Goals

A new report from Citizens for Tax Justice explains how Senators responding to the “blank slate” approach to tax reform should prioritize which “tax expenditures” to preserve, repeal or reform.

Read the report.

Senators Max Baucus and Orrin Hatch, chairman and ranking member of the tax-writing committee in the Senate, have asked their colleagues to assume tax reform starts from a “blank slate,” meaning a tax code with no tax expenditures (special breaks and subsidies provided through the tax code). Senators are asked to provide letters to Baucus and Hatch by this Friday explaining which tax expenditures they would like to see retained in a new tax code.

CTJ’s report evaluates the ten costliest tax expenditures for individuals based on progressivity and effectiveness in achieving their stated non-tax policy goals — which include subsidizing home ownership and encouraging charitable giving, increasing investment, encouraging work, and many other stated goals.

CTJ’s report concludes that:

1. Tax expenditures that take the form of breaks for investment income (capital gains and stock dividends) are the most regressive and least effective in achieving their stated policy goals, and therefore should be repealed.

2. Tax expenditures that take the form of refundable credits based on earnings, like the Earned Income Tax Credit (EITC) and the Child Tax Credit, are progressive and achieve their other main policy goal (encouraging work) and therefore should be preserved.

3. Tax expenditures that take the form of itemized deductions are regressive and have mixed results in achieving their policy goals, and therefore should be reformed.

4. Tax expenditures that take the form of exclusions for some forms of compensation from taxable income (like the exclusion of employer-provided health insurance and pension contributions) are not particularly regressive and have some success in achieving their policy goals, and therefore should be generally preserved.

Read the report.

On Saturday, the Senate approved the budget resolution that was crafted by Budget Chairman Patty Murray of Washington State, by 50 votes. (The resolution would have received 51 votes if New Jersey Senator Frank Lautenberg not been absent due to an illness.)

The most important implication of this vote is that a majority of Senators agreed that Congress should raise $975 billion over a decade and cut spending by the same amount, rather than attempt to achieve deficit-reduction entirely through spending cuts. Indeed,  the Senate rejected several amendments that would have reduced or eliminated the revenue increase.

The description of the plan from Murray’s budget committee staff explains that revenue would be raised by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations.” But a great deal is left to be determined because, as we explained earlier, this budget resolution offers no details on which loopholes or wasteful tax expenditures might be limited.

Murray Plan in the Senate a Stark Contrast to the Ryan Plan in the House

In any event, the Senate budget resolution is so different from the resolution approved by the House (the plan crafted by House Budget Chairman Paul Ryan) that it’s difficult to imagine how a Senate-House conference committee could ever “reconcile” or “merge” the two documents.  As CTJ has already demonstrated, the Ryan plan would provide millionaires an average net tax cut of at least $200,000, and possibly much more.

Senate Would Give States the Right to Require Online Retailers to Collect Sales Taxes

The Senate approved, by a vote of 75 to 24, an amendment to allow states to require out-of-state remote retailers (like Internet retailers) to collect sales taxes from their customers. This amendment has no binding effect but it shows that there are enough votes in the Senate to pass important legislation (the Marketplace Fairness Act) that would give states this authority.

Currently, a state is allowed to require a retailer to collect sales taxes from its customers only if the retailer is “physically present” in the state. This creates an unfair advantage for a company like Amazon, which is selling its products remotely, over a company like Target, which is physically present (because of its stores) almost everywhere it does business. Even worse, states are losing more and more revenue as more commerce happens online — a trend that can only increase with time.

It’s worth repeating (as CTJ has explained before) that this proposal would not actually increase taxes, but would only facilitate the collection of taxes that are due (but rarely paid) under current law.

Many Other Amendments Have Little Meaning

Votes taken on amendments during the Senate budget debate are generally not binding. Their greatest significance is that they show whether or not enough votes can be gathered to pass a given proposal in the Senate. For example, the vote on allowing states to require remote retailers to collect sales taxes demonstrates that there are more than the 60 votes needed in the Senate to approve that proposal when it comes to the floor as an actual bill.

But other amendments are not as helpful in determining support for actual legislation, and can be best described as posturing with little real meaning.

For example, the Senate rejected a Republican-sponsored amendment to repeal the estate tax, but then approved by 80-19 an amendment sponsored by Democratic Senator Mark Warner “to repeal or reduce the estate tax, but only if done in a fiscally responsible way.”

The Senate’s approval of this amendment does not indicate that an actual bill to reduce or repeal the estate tax would get 60 votes because an actual bill would either have to include specific provisions to offset the costs, or the bill would clearly increase the deficit. There have been votes on such bills in the Senate many times and they have never received the needed 60 votes, much less 80 votes.

To take another example, the Senate voted 79-20 to repeal a tax on medical device manufacturers that was enacted as part of health care reform. This was one of the taxes enacted with the idea that companies that would benefit from health care reform should share in its costs. The budget amendment says that legislation should be passed to repeal the tax “provided that such legislation would not increase the deficit.”

An actual bill to repeal this tax would require some sort of provisions to offset the cost, or it would increase the deficit, and Senators voting in favor would have to be ready to support those offsetting provisions or the increase in the deficit. It’s not obvious that any such bill would get 60 votes.

There are many other examples of amendments that were mostly about posturing, and many would be terrible policy if they were enacted as actual legislation. The estate tax, for example, has been gutted in recent years even though it’s the one tax that addresses concerns about income inequality and the richest one percent pulling away from everyone else. And the medical device tax was part of the intricate compromise that was necessary to enact virtually universal health coverage without increasing the budget deficit. It’s unfortunate that so many Senators feel a need to pander to the special interests who want to repeal these taxes.


Reforming Tax Breaks for Education


| | Bookmark and Share

A new report from the Center for Law and Social Policy (CLASP) explores the shortcomings and potential reforms of tax breaks that are intended to expand access to postsecondary education. “While delivering student aid through the tax system is a ‘second best’ strategy,” the report argues, “because Congress has chosen to deliver nearly half of non-loan student aid this way, it is essential to make it work better."

It’s hard to disagree. The report notes that the confusing collection of tax breaks for postsecondary education cost $34.2 billion in 2012, almost as much as the $35.6 billion spent on Pell Grants. But, whereas Pell Grants target lower-income households that could not otherwise afford college, the tax breaks target relatively well-off families who will usually send their children to college with or without any tax incentive to do so.

As the report explains, “…the percentage of high school completers of a given year who enroll in two- or four-year colleges in the fall immediately after completing high school… was 52 percent for low-income families (bottom 20 percent), 67 percent for middle-income families (middle 60 percent) and 82 percent for high-income families (top 20 percent…).” In other words, higher-income families might send their children to college no matter what, while student aid could make the difference between going to college or not going to college for lower-income people. 

Improve and Expand the Best Education Tax Break, Ditch the Others

But not all tax breaks for postsecondary education are the same. Some are more targeted to those who really need them than others, although none are nearly as well-targeted to low-income households as Pell Grants, as illustrated in the bar graph below.

The graph shows that the most regressive of the tax breaks is the deduction for tuition and related fees, followed by the Lifetime Learning Credit (LLC) and the deduction for interest payments on student loans.

One proposal offered in the CLASP report would expand the American Opportunity Tax Credit (AOTC), represented by the blue bar above, which at least reaches low-income families not helped by the other tax breaks. The costs of the expansion would be offset by eliminating the deduction for tuition and fees, the LLC and the deduction for student loan interest.

In addition to better targeting tax breaks for postsecondary education, this reform would also reduce confusion among families as they try to figure out what aid is available for college. A 2012 report from the Government Accountability Office found that over a fourth of taxpayers eligible don't take advantage of any tax benefits for education, and those who do use them often don't use the most advantageous tax break for their situation.

Things Will Get Worse if Congress Doesn’t Act

The AOTC, the most progressive of the education tax breaks (or perhaps it’s better described as the least regressive of the education tax breaks) was signed into law by President Obama in 2009 and extended several times, but was never made permanent. The New Year’s Day deal enacted to avoid the so-called “fiscal cliff” extended the AOTC through 2017. If Congress fails to act before then, it will expire and its precursor, the less targeted Hope Credit, will come back into effect.

The biggest reason why the AOTC is better targeted to low-income families than the Hope Credit is the fact that the AOTC is partially refundable. The working families who pay payroll taxes and other types of taxes but earn too little to owe federal income taxes will benefit from an income tax credit only if it is refundable, like the Earned Income Tax Credit.

The proposals described in the CLASP report would expand the refundability of the AOTC, among several other reforms.

When the Supreme Court ruled in June that the new penalty for not obtaining health care was actually a tax (and therefore permissible under Congress’s taxing power) we pointed out that hardly anyone would pay it because low-income families would be eligible for Medicaid, and because subsidies would be available to help make coverage affordable for middle-income families (making up to $90,000 for a family of four).

We also pointed to a study from the Urban Institute and Robert Wood Johnson Foundation concluding that “About 7.3 million people—two percent of the total population (three percent of the population under age 65)—are not offered any financial assistance under the ACA and will be subject to penalties if they do not obtain coverage.”

This week, the Congressional Budget Office (CBO) released estimates that a smaller number than that — 6 million people — would be subject to the penalty for not obtaining health insurance. Naturally, some anti-tax politicians like Governor Bobby Jindal of Louisiana have pounced on this as evidence of a crushing tax increase during the Obama administration.

CBO explains that their previous estimate, that only 4 million people would pay the penalty, had to be revised for several reasons, like continuing gloomy unemployment figures and technical changes. But CBO also says that:

A small share—about 15 percent—of the increase in the number of uninsured people expected to pay the penalty results from the recent Supreme Court decision [which also allows states to opt of the Medicaid expansion that was part of health care reform]. As a result of that decision, CBO and JCT now anticipate that some states will not expand their Medicaid programs at all or will not expand coverage to the full extent authorized by the ACA. Such state decisions are projected to increase the number of uninsured, a small percentage of whom will be subject to the penalty tax.

And who are these governors that will opt to not have their states participate in the Medicaid expansion and thus increase the number of people subject to the penalty for not having health insurance? Well, one of them is Governor Jindal of Louisiana.

Photos of Bobby Jindal via Gage Skidmore Creative Commons Attribution License 2.0


On Taxes, Romney Projects onto His Opponent


| | Bookmark and Share

“Unlike President Obama, I will not raise taxes on the middle class,” Republican presidential candidate Mitt Romney said during his acceptance speech. It was a startling statement because it describes one of the facts about Romney’s own tax plan and attributes it to the policies of his opponent, President Obama.

Romney’s Tax Plan: Breaks for the Rich No Matter How You Look at It, Leaving the Bill for Low- and Middle-Income Americans

A recent CTJ report shows that the basics of Romney’s tax plan would give out huge tax cuts to those who make between half a million and one million dollars and those who make over a million dollars, no matter how the missing details are filled in. Romney cannot possibly meet his goal of offsetting the costs of the tax cuts (besides the enormous Bush tax cuts, which he doesn’t think need to be paid for) without raising taxes on people farther down on the income ladder.

The CTJ report finds that Romney’s proposed tax cuts would reduce taxes by an average $80,000 for people who make between half a million and one million dollars and by an average $400,000 for people who make over a million dollars.

Now, Romney promises to offset the cost of these tax cuts (aside from the enormous Bush tax cuts, which he would make permanent) by reducing or eliminating “tax expenditures,” which are the credits, deductions, exclusions and loopholes that lower people’s tax bills. But even if Romney made the very rich give up all the tax expenditures that he has put on the table, they’d still be getting huge tax cuts —  an average $48,000 for people who make between half a million and one million dollars, and an average $250,000 for people who make over a million dollars.[1]

If Romney’s plan is going to be revenue-neutral (not counting the huge cost of the Bush tax cuts) as he claims, then someone is going to have to pay higher taxes than they do now so that the people who make over half a million dollars a year can pay less. The loss of tax expenditures for low- and middle-income people can be larger than the benefits they receive from Romney’s rate reductions and other proposed breaks, meaning they face a net tax increase. In fact, this must happen for Romney to keep his promise about not losing more revenue, as the Tax Policy Center has already pointed out.

Obama’s Problem Is that He’s Cut Taxes Too Much, Not that He Raised Taxes

Romney’s claim that Obama has raised taxes on the middle-class is initially hard to understand, given Obama’s two-year extension of all the Bush tax cuts and his call to again extend the Bush tax cuts entirely for 98 percent of Americans while letting them expire partially for the richest 2 percent of Americans. (In fact, we pointed out that many of the taxpayers within the richest 2 percent, like those with incomes just over $250,000, would only have to give up a tiny fraction of their tax cuts under Obama’s plan.)

Romney’s claim that Obama has raised taxes on the middle-class appears to refer to the new mandate to obtain health insurance, which the Chief Justice of the Supreme Court decided was actually a tax and therefore within the Constitutional powers of Congress.

As we pointed out at the time the Supreme Court ruled on the health care mandate, very few people would ever actually pay the “tax,” which is the fee that will be imposed on people who choose to go without health insurance. As we explained,

It’s a tax that hardly anyone will pay.

That’s because for the vast majority of Americans who don’t have employer health coverage, the government subsidies to buy insurance will be so large that it would be foolish not to buy insurance.

For starters, any family with income less than 133 percent of the poverty line (that means all families of four with incomes of $30,000 or less) will be eligible to sign up for free coverage under Medicaid.

Above that level of income, the government will provide cash subsidies to buy insurance, starting at almost 100 percent of the cost and gradually phasing down. But the subsidies won’t disappear for a family of four until its income exceeds about $90,000.

An Urban Institute study found that fewer than 3 percent of households would be subject to the fee.

Another point that Romney and his allies seem to forget is that the 2009 economic recovery act that they criticize so much actually cut taxes for 98 percent of working families. (See the national and state-by-state estimates from CTJ.)  

If President Obama has made any mistakes on taxes, it’s that he has been entirely too willing to extend too many tax cuts for too many Americans at a time when we desperately need revenue.

 

 


[1] Notice we say that the $48,000 and $250,000 figures are the tax cuts these groups would get if they had to give up all the tax expenditures that Romney has put on the table. That’s because he has pledged to keep the tax expenditures that benefit the rich the most — breaks for investment, like the low rates for capital gains and stock dividends.

 


Will Conservative Governors Reject the Deal of a Lifetime?


| | Bookmark and Share

According to one of the latest counts, officials in 30 state governments have indicated that their state plans to opt out of the Medicaid expansion that was enacted as part of health care reform, or are at least leaning in that direction. The reason many conservative state officials, like Florida Governor Rick Scott, cite for opting out (putting aside general criticism of the evils of “Obamacare”) is that participating would “strain state budgets.”

In reality, the Medicaid expansion is the deal of a lifetime for state governments. The nonpartisan Congressional Budget Office (CBO) estimates that the federal government will take on nearly 93 percent of the costs of the Medicaid expansion over its first nine years. On average, that means that states will receive over 9 additional Medicaid dollars for every 1 they spend themselves.

While this may already sound like a great deal, many states may end up actually saving money by embracing the Medicaid expansion. An in-depth study by state officials in Arkansas found that it would actually cost the state $3.4 million more to not participate in the Medicaid expansion. Similarly, a study by the Urban Institute found that health care reform overall will save state budgets between $92-129 billion dollars from 2014-2019.

In some cases, the failure of the state government to accept the Medicaid expansion may also have the side effect of putting even more strain on local budgets. Last year in Texas, for example, the decision by the Republican Governor Rick Perry and state legislators to cut Medicaid forced the El Paso County Hospital District to raise property taxes to make up for the increasing costs from nearly uninsured patients. This dynamic explains why many local officials in Texas support the Medicaid expansion, even as Governor Perry is one of its most outspoken critics.  

While many conservative governors are claiming that the Medicaid expansion would cost too much, they are at the same time continuing budget-busting tax breaks for the wealthy. Iowa Republican Governor Terry Branstad for instance has said that the Medicaid expansion would be “unaffordable” and “unsustainable”, even though its estimated cost would be less than 4 percent of the revenue that could be raised by ending the Iowa’s bizarre and regressive deduction for federal income tax payments.

Considering the generous deal that governors are being offered, many commentators believe that most if not all the states will ultimately take the deal, despite the recent election year grandstanding. The CBO is not so sure. On Tuesday, CBO released its latest cost projections of health care reform, which predicts that many states will choose to opt out of the Medicaid expansion resulting in 3 million fewer people insured.

Photo of Gov. Terry Branstad via Iowa Politics Creative Commons Attribution License 2.0


Mitch McConnell Misleads on Health Care Mandate


| | Bookmark and Share

According to official estimates, once the Affordable Health Care Act takes effect, it will provide about $26 billion a year in tax credits to help middle-income families lacking health insurance to purchase it. At the same time, the act will impose about $7 billion a year in fees on middle-income families that choose not to purchase insurance.

Senate Minority Leader Mitch McConnell (R-KY) said this $19 billion-a-year net middle-class tax cut is "a middle class tax cut — tax increase."

Well, that's sort of correct. But when you combine the two tax provisions, they clearly add up to a middle-class tax cut.

Here's another way of looking at the fees and the tax credits. The health law will make about 28.6 million people eligible for the tax credits. The number of people who will not be eligible for these credits or the newly expanded Medicaid and who will be subject to the mandate is 7.3 million, which is just two percent of the population (three percent of the non-senior population). Even fewer — just 1.2 percent of Americans — would actually choose to pay the fee rather than obtain health insurance, according to the Congressional Budget Office.

(Photo courtesy Fox News)

So the modest fee that the Affordable Health Care Act will impose on people who choose not to have health insurance is a “tax,” according to a majority of Supreme Court justices. Hooray! That characterization made the Act pass constitutional muster even in the opinion of this very conservative Supreme Court.

There’s more good news. It’s a tax that hardly anyone will pay.

That’s because for the vast majority of Americans who don’t have employer health coverage, the government subsidies to buy insurance will be so large that it would be foolish not to buy insurance.

For starters, any family with income less than 133 percent of the poverty line (that means all families of four with incomes of $30,000 or less) will be eligible to sign up for free coverage under Medicaid.

Above that level of income, the government will provide cash subsidies to buy insurance, starting at almost 100 percent of the cost and gradually phasing down. But the subsidies won’t disappear for a family of four until its income exceeds about $90,000.

For example, a family of four earning $50,000 that buys health insurance will get a government subsidy equal to 60-70 percent of the cost of the premiums.

Because of these large subsidies to buy insurance, it’s estimated that the new “tax” on those who fail to get health insurance will apply to less than 3 percent of all households. So don’t worry. You’re almost certainly not one of them.

Nonsensical Claim of Largest Tax Increase in History

Some opponents of the health care reform law have taken to calling it the largest tax increase in history. The fee for not having health insurance would be, of course, relatively small, raising around $7 billion a year (just 0.03 percent of GDP) and increasing federal revenue by 0.15 percent (one sixth of one percent).

Even if you count all the tax increases in the health law, that still amounts to less than the tax increases President Reagan enacted from 1982 through 1983. When you subtract the tax cuts (the refundable credits to help families obtain health insurance and the tax credits for small businesses) the net effect of the law is to increase taxes by $653 billion over the next decade, which is about 0.3 percent of GDP. By way of comparison, from 1982 through 1983, President Reagan raised taxes by 1.8 percent of GDP. (And of course, there were much larger tax increases in our history, like the tax increase during World War II that equaled 14.8 percent of GDP.)

It’s also important to note that about three-fourths of the tax increases in the health reform law apply to corporations (drug companies, medical device manufacturers, insurance companies) and married couples making over $250,000 and single people making over $200,000.

Health Reform Law Includes a Major Win for Tax Fairness

The tax increase on high-income individuals is particularly important because it reduces the bias in the tax code in favor of investment income and against income from work.

This provision, which was proposed in 2009 by Citizens for Tax Justice, reforms the Hospital Insurance (HI) tax that funds part of Medicare so that it’s more progressive and no longer exempts the income of people who live off their investments. The HI tax will effectively have a top rate of 3.8 percent that applies to both earnings and most investment income, and which only applies to taxpayers with incomes in excess of $250,000/$200,000.

This provision reduces, but does not eliminate, the ability of people who live off their investments to have a lower effective tax rate than people who live on earnings. It’s another reason why the health law is victory for middle-income working Americans.

Photo of Supreme Court via OZ in OH Creative Commons Attribution License 2.0


Neo-Vouchers: The New Corporate Tax Subsidy (Seriously)


| | Bookmark and Share

School vouchers are always controversial, but a front-page story in the New York Times describes how at least eight states have embarked on a quiet strategy of back-door vouchers which divert taxpayer money through tax rebates to private donors. While two states allow individuals to exploit this tax break, most are structured as corporate tax breaks.  So they are like conventional vouchers, except minus the accountability, and offering a special tax shelter for corporate profits.

You’d think you can’t make this stuff up, but somebody did.  

Sometimes called “neo-vouchers,” (PDF) the system involves corporate tax credits being doled out to businesses that contribute money to private-school scholarship funds. At their worst, they allow profitable corporations to actually make money from these contributions (they also get a write-off for charitable contributions on top of the dollar-for-dollar tax break match), reducing their income taxes by more than they actually contributed to schools.  And of course, this funnels needed public school funds (and those are taxpayer dollars) to private schools that often aren’t even subject to the same educational standards as a state’s public schools.

This trend is especially troubling now because elementary and secondary school funding already faces a perfect storm: the bursting of the home-value bubble is depressing property tax collections nationwide, and the end of stimulus-related federal aid to states has further constrained education funding. And as the Times documents, these tax credits cum vouchers are often poorly designed and subject to little oversight: some states don’t require the private schools receiving these scholarships to administer the same achievement tests as public schools, while others have no mechanism for directing scholarships to needy families. In fact, there is anecdotal evidence that some students benefitting from the scholarships would have attended these private schools anyway—which means their parents are being paid, by other taxpayers in their state, to do what they were planning to do anyway. 

Why, at a time when adequately funding K-12 education has been so difficult for states, are lawmakers in these states so cheerful about directly siphoning tax revenue away from cash-starved public schools through these “neo-vouchers?” Maybe because they think that tax breaks aren’t the same thing as direct government spending? One source tells the Times, “there are private dollars coming from a private individual and going to a private foundation. It drives the N.E.A. completely off the wall because they can’t say this is government funding.”  Another piece similarly argues that “[v]ouchers and tax-credits vary in important ways. Both programs enable students to attend public or private schools of their parents’ choice, but unlike tax-credit scholarships, vouchers are publicly funded, paid for with government appropriations.”

But these statements are both ludicrous.  When a state government provides tax breaks for corporate contributions to private schools, the effect on state budgets is exactly the same as if the government had spent the money directly. It’s “government funding” either way. The critical difference is that tax breaks typically involve less oversight and public debate than dilrect spending, even as they divert public resources away from families still enrolled in underfunded public schools.

Some advocates of these tax giveaways have argued that this approach actually saves money, because the per-pupil cost of educating children in the private schools receiving the scholarships is lower than the per-pupil cost of public schools. Yet as a helpful new analysis from the National Education Policy Center shows, this claim assumes that the credit allows parents to move their children from public schools to private schools—and there is no evidence that it is having that effect.

And on top of all this, neo-vouchers are an actual money-maker for corporations. Remember, the system offers not only dollar-for-dollar state tax credits for contributions, but the ability of corporations to write off charitable contributions on their federal tax forms.  Companies can actually make a profit from these tax giveaways, collecting more in federal and state tax breaks than they actually spent on the contribution! And Florida’s credit, which was expanded by lawmakers earlier this year, is now the single most expensive (PDF) corporate tax credit allowed by the state, at $72 million a year.

So far, despite growing scrutiny of these perverse tax breaks in Georgia (PDF) and other states, lawmakers in New Jersey and North Carolina (details) appear undeterred and are poised to enact similar plans.

Photo of North Carolina Private School Students via  Harris Walker Creative Commons Attribution License 2.0


Super Bowl Ad about Taxes from Corporate Astroturf Group


| | Bookmark and Share

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.

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.


Senate Continues Battle Over Bill on Jobs, "Extenders," and Loophole-Closers


| | Bookmark and Share

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.

 


AND SO IT BEGINS: Big Business Takes Aim at Parts of Health Care Reform


| | Bookmark and Share

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.


HEALTH CARE VICTORY


| | Bookmark and Share

This week, the United States Congress and President Obama gave us another reason to be proud that we are Americans. On Tuesday, the President signed into law a major health care overhaul. Yesterday, the House and Senate both approved a second bill that completes the job.

Events like this — the creation of Social Security, the passage of the Civil Rights Act, the first manned visit to the moon, comprehensive health care reform — don't happen very often. We feel privileged and awed to belong to a generation that has witnessed this sort of change.

There is work ahead to ensure that the health care reform is implemented properly and improved upon. And the reform itself must be protected from opponents who already call for its repeal.

But in the years to come, we will look back and remember this as the time when our health care system stopped being a black spot on the nation's conscience and started to grow into another reason to love this country. 

This legislation to extend health insurance to 32 million Americans and protect Americans who already have insurance from the industry's abuses was nearly thwarted by several disputes over issues both real and imaginary, and some of these disputes were over taxes.
 
For thirty years, Citizens for Tax Justice has argued that the Americans who benefit the most from the educated workforce, infrastructure, stability and other public goods provided by government are those Americans who have made fortunes in this dynamic country. It is entirely reasonable that the richest Americans pay taxes at higher effective rates, particularly to finance concerted action to resolve the problems that threaten to unravel our society.

Over the last several years, lawmakers have moved dangerously far from that ideal. The tax cuts enacted during the previous administration went disproportionately to the wealthy investor class. The massive bailout for financial institutions enacted under the previous administration only seemed to shovel more benefits to the same wealthy investor class.

When it came time for Congress to consider how to finance health care reform, progressives demanded that the wealthy pay their fair share. Congress answered that call by reforming the Medicare tax, the one significant tax that we already have to pay for health care. It will be transformed from a regressive tax to a progressive tax that no longer exempts the income of wealthy investors.

The new health care legislation has many imperfections, and yet it undeniably is a vast improvement over the status quo. Tax policy is not the centerpiece of this reform, but disputes over tax policy could have sunk it altogether.

We applaud the House and Senate for working through these disputes and putting the public interest above special interests.

We hope that the lawmakers who supported reform like the way success feels. We hope that members of Congress realize that they're good at making history, and they should do it more often.

Read about How Health Care Was Reformed (and Financed Partly with a Progressive Tax)


How Health Care Was Reformed (and Financed Partly with a Progressive Tax)


| | Bookmark and Share

The House and Senate yesterday approved the final piece of the historic health care reform that will extend health insurance to 32 million Americans currently uninsured and prevent health insurers from discriminating against people with pre-existing conditions and capping benefits when people are sick. The legislation will also make it easier for small businesses to provide affordable health coverage without locking workers into employer-provided plans that they will lose if they switch jobs.

The bill passed by both chambers yesterday was the smaller "corrections" bill that made several fixes to the larger bill that the House approved on Sunday and that the Senate approved on Christmas Eve. The President signed the larger bill into law on Tuesday.

The corrections bill increased the number of Americans receiving subsidies to make health care affordable and removed some "sweetheart" deals that individual Senators demanded in the larger bill and later came to regret. The corrections bill also scaled back an excise tax on high-cost employer-provided health insurance while adding an expansion of the Medicare tax.

The debate over how to finance health care reform went through several tumultuous stages over the past year. From the start, lawmakers wanted to finance the reform with savings from within the health care system as much as possible, but it was clear that other revenue sources would be needed.This was one of the key sticking points for many lawmakers.

Progressive Action on Revenue for Health Care Reform

In May of last year, CTJ first presented some ideas about how Congress could finance health care reform in a progressive way. All changes made to the tax code in the previous eight years under President George W. Bush had disproportionately benefited the wealthiest Americans. The bailout for the financial industry seemed to reward Wall Street for its mismanagement, at the expense of ordinary taxpayers. It was time for the wealthy investor class to pay their fair share to help fix America's broken health care system.

We worked for several months with a broad coalition of policy advocates, think-tanks, faith-based groups and labor unions to bring progressive financing options to the attention of members of Congress. State-based groups released reports with state-specific figures while national organizations educated lawmakers about progressive financing options and dispelled the myths that were manufactured to block any increase in revenues.

One of the progressive revenue measures that we championed would reform the Medicare tax so that it is more progressive and no longer exempts investment income.

CTJ worked to significantly modify another revenue measure, the excise tax on high-cost employer-provided health insurance plans. We pointed out that this tax, in the form originally proposed, would affect more middle-income taxpayers than most people realized and would actually make the tax system less progressive overall.

Eventually, the excise tax on high-cost employer-provided plans was scaled back to a reasonable level and Congress adopted the proposal to reform the Medicare tax. But the path to this success was not an easy one.

Attempts at Bipartisanship

It's difficult to remember this now, but a year ago lawmakers and their aides, particularly in the Senate, seemed to honestly believe that a bipartisan agreement on health care reform was possible if enough compromises were made. Democrats were negotiating with Republicans. And not just the Republicans that are often considered "moderates" like Olympia Snowe (R-ME) and Chuck Grassley (R-IA), the ranking Republican on the Senate Finance Committee. Democrats even negotiated with Mike Enzi (R-WY), an unabashed conservative and the ranking Republican on another relevant committee.

It did not work. After being heavily involved in health care negotiations, Senator Grassley abruptly changed his tune. He held up a chart on the Senate floor one day with a children's book drawing of a dragon to illustrate the "Debt and Deficit Dragon," and then held up another chart illustrating a character he called "Sur Taxalot." He then rambled on about how "the surtax [included in the House health bill] is a large, heavy, painful weapon, and lethal to America's job engine, the goose that laid the golden egg," and said that Sur Taxalot "does nothing to slow the dragon's exponential growth."

Then Senator Enzi, during a committee markup, offered countless amendments that essentially contradicted the most fundamental goals of reform.

Meanwhile, the grassroots base of the conservative movement made it clear that they could not be appeased by anything other than a continuation of the status quo. Right-wing organizations such as "FreedomWorks," "Americans for Prosperity," and "Conservatives for Patients Rights," organized a campaign to send hecklers to town hall meetings held by any member of Congress who might possibly vote in favor of any health care reform bill.

The anti-reform protesters, whose main goal seemed to be shutting down any public discussion on the topic of reform, even admitted in some cases that they were not constituents of the lawmakers they were heckling. In other cases, those town hall protesters who claimed to be merely “just a mom from a few blocks away” and “not affiliated with any political party” turned out to be Republican party officials.

Congress Moves Forward and then Stops

By the fall, the battle lines were clearly drawn. On September 9, the President made a special address to Congress and told lawmakers that his health care objectives could be accomplished for less money than was spent on the Iraq and Afghanistan wars and less money than was lost due to the Bush tax cuts for the wealthy.

A day earlier, CTJ had released figures showing that the Bush tax cuts actually cost two and a half times as much as the House Democrats' health care plan. The figures showed that the President was right. The Bush tax cuts for the richest 5 percent alone cost more than the $900 billion price tag that President Obama put on health reform.

In early November, the House approved a health reform bill that included a surcharge on adjusted gross income (AGI) above $1 million for married couples and AGI over $500,000 for unmarried taxpayers. Only one Republican in the House voted for the bill.

On Christmas Eve, the Senate passed its own health care bill, and this one included the version of the excise tax on high-cost employer-provided health plans that CTJ found problematic. In addition to having less progressive revenue provisions, the Senate bill was also less bold in terms of how it reformed health care. For example, unlike the House bill, the Senate bill did not have a "public option," a government-sponsored health plan that could compete with private insurers.

The bizarre rules of the Senate usually require 60 out of 100 votes to pass legislation. Since Democrats had exactly 60 seats in the Senate, every member of the caucus had to vote for the bill for it to pass.

The House and Senate seemed to be on their way, with the help of the White House, to working out the differences between the two bills. The public option was, unfortunately, lost. The high-income surcharge in the House-passed bill was also out. But the excise tax on employer-provided health plans would be scaled back to a reasonable level and the Medicare tax reform would be included.

Then in January the Democrats lost their 60th vote in the Senate when Scott Brown won the Massachusetts Senate seat formerly held by the late Ted Kennedy.

Pro-Reform Lawmakers Stop Panicking and Start Making History

After a period of hysteria among the members of Congress who supported health care reform, a strategy was devised to finish the job even though the Senate now had only 59 members who supported reform.

First the House would pass the Senate bill, which the President would sign into law. To complete this step, the House passed the Senate bill on Sunday while anti-reform protesters swarmed the Capitol in an attempt to intimidate and harass lawmakers. The President signed this bill into law on Tuesday.

Then Congress needed to pass the various amendments that would make the health reform look like the compromise that the House and Senate were moving towards before the Senate lost its 60th vote for reform. These amendments would all be included in a second bill that the Senate would pass through the "budget reconciliation" process. Reconciliation is simply a procedure to allow the Senate to pass legislation that has some impact on the federal budget picture with a simple majority of votes.

Despite their howls of protest against this procedure, the Republicans had actually used it to enact the Bush tax cuts (which actually worsened the fiscal outlook by running up huge deficits) and several other measures.

The "corrections" bill was passed by the Senate on Thursday using the budget reconciliation process and then was passed by the House later that evening. After this long, tortured journey, the dream that has eluded progressive Americans for a century is now a reality.


Democratic Leaders Revise Medicare Tax Change in Health Care Reform Compromise


| | Bookmark and Share

The Medicare tax reform proposal included in the President's proposal several weeks ago was slightly modified in the compromise health bill that was released by Democratic leaders in Congress yesterday.

The revised proposal would change the existing 2.9 percent Medicare tax so that it no longer exempts investment income and would make the tax more progressive. The Medicare tax rate would be raised by 0.9 percent for earnings exceeding $200,000 for unmarried taxpayers and exceeding $250,000 for married taxpayers, creating a top Medicare tax rate of 3.8 percent. (Employers would still pay part of this, 1.45 percent, as they do now, while self-employed people would pay the whole tax themselves, as they do now.)

The entire 3.8 percent Medicare tax would also apply to investment income to the extent that adjusted gross income (AGI) exceeds $200,000/$250,000. The President's proposal would have applied the Medicare tax to unearned income at a rate of 2.9 percent, and included a phase-in that worked a little differently. CTJ's recent report on the President's proposal found that only 2.3 percent of taxpayers would be affected by it in 2014. (The change would go into effect in 2013). Given how similar the revised version is, the percentage of taxpayers affected would be very similar.

Dispatch from Anti-Tax La La Land: Health Care Edition


| | Bookmark and Share
The Institute for Research on the Economics of Taxation (IRET) is at it again. If you've ever wondered where the Wall Street Journal's editorial board gets its most half-baked ideas about taxes and economics, the IRET is your answer. Last year, they released a remarkable report concluding that repealing the estate tax would actually increase federal revenue. (See CTJ's response.) 
 
Now the IRET claims that the Medicare tax reform included in the health care compromise before Congress would decrease GDP by 1.3 percent and actually reduce federal revenue by $5 billion a year. 
 
The problem, according to IRET, is that taxes on investment income reduce incentives to invest, which results in less economic activity, fewer jobs and lower incomes. They believe that business profits and wages would fall so much that the resulting loss of tax revenue would more than offset the gain resulting from the increase in the Medicare tax. This is the flip side of the coin for "supply-side" theorists who believe that tax cuts (particularly tax cuts for investment income) will result in increased revenue.
 
Proponents of this analysis call it "dynamic" revenue scoring. Sadly for IRET, no one believes it. Even George W. Bush's Treasury concluded that the gross increase in revenue resulting from the economic impact of tax cuts is tiny and comes nowhere near the level needed to actually offset the cost of tax cuts (much less result in a net revenue gain). Economic advisers to conservative Republican presidents agree. For example, Martin Feldstein, Chairmen of Council of Economic Advisers under President Reagan, and Glenn Hubbard and Greg Mankiw, both CEA chairmen during the George W. Bush administration, all have been quoted as saying that tax cuts do not raise revenue. One would assume that they believe the reverse, that tax increases do not reduce revenue.
 
Some more moderate supply-siders (if such a thing is possible) concede that many tax increases do raise revenue and many tax cuts do reduce revenue, but they argue that taxes on investment income are something different. Certain types of investment income like capital gains and dividends, are more responsive to tax rates, they argue. 
 
But there is no evidence to back this up. Proponents of this argument often point to the upticks in revenue from income taxes on capital gains income and claim that they are caused by the latest increase in the tax preference for capital gains. As we've pointed out before, capital gains tax revenue was higher at the end of the Clinton years, when the top rate for capital gains was higher, than any time since. The truth is that investment income simply bobs up and down in response to whatever is happening in the broader economy, without much discernable impact from tax policy.  
 
There are other problems with the IRET's claims. In some places they are just factually wrong. One claim IRET makes is that the new Medicare tax on investment income "would be triggered by earning even a single dollar above the thresholds, after which all of the taxpayers’ passive income would be immediately subject to the tax. This creates a huge tax rate spike or 'cliff' at the thresholds."
 
Wrong. The memo and revenue estimates that the Joint Committee on Taxation (JCT) distributed by lawmakers on February 24 made clear that the President's version of the Medicare tax on investment income would be phased in over a range of income exceeding $200,000/$250,000, while the text of the revised version says it would apply only to unearned income to the extent that AGI exceeds the $200,000/$250,000 threshold. In other words, if a single person has AGI of $201,000 and $51,000 of this income is investment income, the 3.8 percent Medicare tax would only apply to $1,000 of investment income (not the entire $51,000). 
 
In other words, IRET either talks about a tax policy that no one has proposed (such as a "cliff" for people with one dollar of income over the $200,000/$250,000 threshold) or retreats into a theoretical and fantastical world (where increasing taxes causes revenue to plummet and cutting taxes causes revenue to rise).
 
Of course, if we could raise revenue to pay for health care reform by actually cutting taxes, surely Democrats in Congress would have passed health care reform long ago.

The President's Medicare Tax Reform: The Facts Are Not in Dispute


| | Bookmark and Share

Tax policy is an area in which two people can look at the exact same set of facts and come to exactly opposite conclusions. Take the American Enterprise Institute's latest assault on the Medicare tax reform that President Obama has included in his health care reform plan.

The President has adopted an idea that CTJ has championed for months, to change the Medicare tax so that it no longer exempts investment income and to make the tax more progressive. The President would raise the Medicare tax rate for earnings exceeding $200,000 for unmarried taxpayers and $250,000 for married taxpayers, and he would apply the existing 2.9 percent Medicare tax to investment income for those with adjusted gross income (AGI) above $200,000/$250,000.

CTJ's recent report on this proposal found that only 2.3 percent of taxpayers would be affected by this tax in 2014. (The tax would go into effect in 2013).

But that's no comfort to Alan D. Viard and Amy Roden, who argue against this tax reform in AEI's online journal. They write:

"Of course, the high-income cutoffs mean that the new Medicare tax wouldn’t apply to most American savers. But the savers hit by the tax are precisely the ones who provide the largest volume of funds to finance investment in our economy. In 2007, tax returns from households with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends, and a staggering 84 percent of all net capital gains. We can’t afford to discourage this group from investing in America’s future."

So they fully agree with us that the sort of income they don't want Congress to tax predominately flows to the rich.

As a judge would say, the facts in this case are not in dispute.

What is in dispute is whether we have to avoid taxing the types of income that mostly flow to the wealthy in order to keep our economy running smoothly. AEI says yes, we need to have preferential rates in some taxes for these types of incomes (like the capital gains and dividends break in the income tax) and wholesale exemptions in other taxes (like the Medicare tax).   

We disagree. We have seen no evidence that the economy functions better when taxes on investment income are slashed or eliminated. Even when it comes to capital gains, which is where libertarians think they have their strongest case, there is no evidence that tax cuts have enhanced economic efficiency. Capital gains income certainly has fluctuated as a result of the ups and downs in the overall economy, and libertarians often attribute the upswings to tax cuts for capital gains. Sadly for them, capital gains realizations have, throughout the Bush years and today, been lower than they were at the end of the Clinton years, when the top rate for capital gains was higher.

Taxing investment income the same way that income from work is taxed is only fair. The President's Medicare tax reform is a step in the right direction. It would end the current exemption in the Medicare tax for investment income to help finance a health care reform that really will help our economy to function more efficiently.

A new report from Citizens for Tax Justice examines the Medicare tax reform included in the health care plan recently put forward by President Obama. The report concludes that this reform would affect only 2.3 percent of taxpayers in 2014. The richest one percent would pay about 84 percent of the resulting tax increase, and the richest five percent would pay virtually all of the tax increase.

The report also discusses one flaw in the President's proposal: It would preserve what is often called the "John Edwards loophole," which is a scheme that some wealthy owners of "S corporations" use to avoid the Medicare tax.

Read the report.


President Obama's Health Care Proposal Includes Reform of Medicare Tax Championed by CTJ


| | Bookmark and Share

On Monday, the White House released its health care reform proposal, bringing together the elements of the health bills already approved by the House and Senate. The proposal is the result of months of negotiations between Democratic leaders in the House and Senate and is an attempt by the President to nudge the chambers along towards agreement.

One of the disagreements between the House and Senate has been over how to finance the reform. Both chambers would rely partly on savings from within existing government health programs and partly on new revenue measures. The largest revenue-raiser in the House version is a high-income surcharge on millionaires, while the largest revenue-raiser in the Senate version is an excise tax of 40 percent on insurance companies for each high-cost benefits plan they provide.

Analyses from CTJ concluded that the House surcharge is very progressive and, despite claims to the contrary, would have no noticeable impact on small businesses. The Senate's excise tax, on the other hand, would impose costs that would be passed on to many middle-income families, and would make the overall tax system less progressive than it is now.

Before the Senate approved its bill on Christmas Eve, the excise tax was softened somewhat, and another revenue-raiser was added: an increase in the Medicare tax by 0.9 percent for wages in excess of $200,000 for unmarried taxpayers and $250,000 for married couples. While this made the bill more progressive overall, there were still rumblings, particularly in the House, about the potential impact of the excise tax for high-cost health insurance plans.

President Obama's Proposal

The President's proposal has resolved this issue to a significant degree by further softening the excise tax for high-cost health insurance and adding another element to the Medicare tax. The Medicare tax would now apply to investment income, which is currently exempt.

In other words, the Medicare tax would be expanded in two ways. First, an additional 0.9 percent would apply to wages in excess of $200,000 for unmarried taxpayers and $250,000 for married couples. Second, the existing 2.9 percent Medicare tax would apply to investment income for the first time (but only for taxpayers with adjusted gross income above $200,000/$250,000).

Citizens for Tax Justice is currently working to produce estimates of the impact of this change, but given that only the richest two percent have incomes over the $200,000/$250,000 threshold, this is obviously a tax increase that does not affect low- or middle-income people at all.

Why the Medicare Tax Needs to Be Reformed

Starting in May of last year, Citizens for Tax Justice worked with a broad coalition of policy advocates, think-tanks, faith-based groups and labor unions to bring progressive financing options like this to the attention of members of Congress. Early on, CTJ pointed out that while lawmakers scrambled to find revenue to finance health care reform, they were ignoring a huge hole in the one large tax we already have to finance health care.

The Medicare payroll tax is a 2.9 percent tax on earnings, half of which is nominally paid by employers while the other half is nominally paid by workers. (Economists agree that workers ultimately pay the employer half as well, in the form of reduced wages or benefits.) We noted that this existing tax for health care completely exempts people who live off of investment income.

Imagine someone who does not have to work because he or she collects capital gains, stock dividends, interest, rents, royalties, or others type of investment income. This individual does not have to pay any payroll tax (Medicare tax or Social Security tax) on this income. Eligibility for Medicare is still possible upon reaching age 65 as long as he or she worked (and thus paid the Medicare payroll tax on earnings) for about ten years at some point in the past.

By the time she reaches age 65, even Paris Hilton may have appeared on television and in other venues enough to have worked a full ten years (and thus be eligible for Medicare). But something tells us that there will be a whole lot of years when she did not work and didn't have to pay a cent towards Medicare. Under the President's proposal, everyone will contribute towards the health of the nation, and the tax system will be fairer overall.


Message to Lawmakers Who Favor Health Care Reform: Keep Calm and Carry On


| | Bookmark and Share

At the start of World War II, the British government designed a poster with the words "Keep Calm and Carry On," to motivate the public during trying times. Perhaps they'd be getting this poster out again if a minority of their non-representational House of Lords found a way to halt any and all legislation during a health care crisis. Fortunately for the clear-thinking Brits, they decided long-ago that having a simple majority of elected legislators approve a bill was a sensible and democratic way to legislate.

On our side of the pond, Senate Republicans voted in lockstep against the health care bill approved by the chamber on Christmas Eve. It will be difficult to pass another health care bill in the Senate. Under the chamber's current rules, the Republicans only need 41 votes to filibuster a bill, and they appear to have obtained that 41st vote with the election of Scott Brown as the new U.S. Senator from Massachusetts.

The House, which had already passed a bill that most advocates find superior, may not have the votes to pass the Senate bill as it is, according to Speaker Nancy Pelosi. Of course, that's presumably because the Senate bill does not do as much to make health care affordable and because the Senate's main revenue-raiser is an excise tax on insurance companies offering high-cost benefit plans, which is less progressive than the high-income surcharge in the House bill.

There is a simple way around this logjam. The House and Senate seemed to be on the brink of agreeing to a final health care bill. Whatever changes would be needed to make the Senate bill look more like that final agreement can probably be passed through the "budget reconciliation" process.

That's the process that the Senate uses from time to time to pass legislation by majority vote (meaning 51 votes are needed instead of 60). One would think that all legislation would be passed this way. The reconciliation process was originally created in the 1970s to fast-track bills that would help balance the budget, but since then has been used for all sorts of legislation. (President Bush and the Republican-led Congress used it to cut taxes and increase the budget deficit.)

Reconciliation can only be used to pass legislation that has a quantifiable budgetary impact, and many parts of health care reform might not meet that standard. But Congress does not have to pass an entire health care bill using reconciliation. It could just use reconciliation to pass those changes that are needed to make the Senate bill look more like the final bill that the Democratic leadership has been negotiating. And these changes, according to our sources, would meet the standard of having a budgetary impact.

So, the Senate could pass a reconciliation bill to improve the original bill they passed on Christmas Eve, and then the House could pass the original Senate bill and the reconciliation bill almost simultaneously.

Some Senators have historically been hostile to reconciliation, claiming that it's unfair to change the rules to pass legislation. This argument is incoherent and bizarre. We are quite confident that passing a law with a majority vote in the House, a majority vote in the Senate, and the President's signature (that's approval from three separately elected institutions) is a sufficiently democratic process that no one should feel that their rights have been trampled.

The Senate Budget Committee chairman, Kent Conrad, a traditional foe of reconciliation, seems to agree with us now.

The path ahead is clear. Keep calm and carry on.


Congress May Close a Gap in the Medicare Tax to Help Fund Health Care Reform


| | Bookmark and Share

In May of last year, Citizens for Tax Justice proposed several progressive options to raise revenue to finance health care reform. Our favorite idea was to close a gap in the one big tax for health care that we already have, the Medicare payroll tax. The Medicare payroll tax is a 2.9 percent tax on earnings, half of which is nominally paid by employers while the other half is nominally paid by workers. (Economists agree that workers ultimately pay the employer half as well, in the form of reduced wages or benefits.) We noted that this existing tax for health care completely exempts people who live off of investment income.

Imagine someone who does not have to work because he or she collects capital gains, stock dividends, interest, rents, royalties, S corporation income or some other type of investment income. This individual does not have to pay any payroll tax (Medicare tax or Social Security tax) on this income. Eligibility for Medicare is still possible upon reaching age 65 as long as he or she worked (and thus paid the Medicare payroll tax on earnings) for about ten years at some point in the past.

By the time she reaches age 65, even Paris Hilton may have appeared on television and in other venues enough to have worked a full ten years (and thus be eligible for Medicare). But something tells us that there will be a whole lot of years when she did not work and didn't have to pay a cent towards Medicare.

CTJ's Proposal to Reform the Medicare Tax

Our initial proposal was to make the individual portion of the Medicare tax (the 1.45 percent nominally paid by workers) apply to investment income as well as wages, and then introduce a second, higher rate for singles with income over $200,000 and couples with income over $250,000. In other words, the Medicare tax would become a health care tax that would apply to all income, and the portion paid by individuals would have two rates, 1.45 percent and 2.5 percent. Employers would still only pay 1.45 percent on earnings of their employees. And we also proposed an exemption of $50,000 for seniors ($100,000 for married seniors).

CTJ worked for several months with a broad coalition of policy advocates, think-tanks, faith-based groups and labor unions to bring progressive financing options like this to the attention of members of Congress. State-based groups released reports with state-specific figures while national organizations educated lawmakers about progressive financing options and dispelled the myths that were manufactured to block any increase in revenues.

Lawmakers Seek Medicare Tax Reform

Some version of the Medicare tax reform proposal might end up in the final health care reform legislation.

As lawmakers became interested in different variations of this proposal, we analyzed several versions of it, one of which was included in an amendment filed by Senator Debbie Stabenow (D-MI) during a committee markup. The provision that eventually becomes law might be similar to our original proposal. The health care bill approved by the Senate on Christmas Eve included a provision to increase the individual portion of the Medicare payroll tax on earnings from 1.45 percent to 2.35 percent for those above the $200,000/$250,000 threshold. This was estimated to raise about $87 billion over the first ten years after enactment.

Now there is talk that the final bill might include that and also apply the individual portion of the Medicare tax (apparently at a rate of 2.35 percent) to investment income for those taxpayers above the $200,000/$250,000 threshold. The current incarnation entirely exempts all pension income and Social Security benefits.

One tax expert mistakenly told the LA Times that this proposal "could hit some of the elderly who are relying on savings to get by." If the expansion of the Medicare tax only applies (as seems likely) to incomes over $200,000 for singles and $250,000 for married couples, we would hardly call that a tax increase on people who are just "getting by." Only around 2.1 percent of all taxpayers will have adjusted gross income (AGI) above that threshold next year.

What Congress Might Do with the Revenue

The additional revenue that results from extending the Medicare tax to investment income could be used to address two complaints that many Democrats in the House have about the bill approved by the Senate. The first is that the Senate bill's subsidies are not sufficient to make health care affordable for low-income people, as explained in a recent report from the Center on Budget and Policy Priorities.

The second complaint against the Senate bill is that it relies too much on an excise tax on health insurance companies offering high-cost benefit plans. As explained in a report from CTJ, this excise tax is not particularly progressive. Health insurance plans are often high-cost just because a company's workforce is older, more female, or engaged in a riskier activity like mining.

The best case scenario is that many people, including a lot of middle-income people, who currently have high-cost plans will see a portion of those health benefits replaced by wages. That's not as good a deal as you might think, since wages are subject to both the income tax and the payroll tax, while health care benefits are currently tax-free.

And the usual criticism of tax deductions -- that they are worth more to a rich person in the 35 percent bracket than a middle-class person in the 25 percent bracket -- does not apply as much in this case. As the CTJ report explains, if tax-free compensation (like employer-provided health care) is turned into taxable income, rich folks get a break on one of the taxes that would otherwise apply. Taxable earnings are subject to the income tax, the Medicare payroll tax and the Social Security payroll tax, but for the last one there's a limit on how much wages are subject to it.

As of this writing, Congressional leaders are trying to finish up lengthy talks with the President at the White House, and there seems to be an agreement to limit the excise tax on high-cost health insurance plans.


Major Federal Tax Issues Left to Be Resolved as 2009 Ends


| | Bookmark and Share

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 Wednesday night, Senate Majority Leader Harry Reid (D-NV) released his health care bill, which is a combination of the health bills approved by the Senate Finance Committee and the Senate Health, Education Labor and Pensions (HELP) Committee. The excise tax on high-cost insurance plans is scaled back a bit from the version included in the Finance bill, probably because Senator Reid heard from health experts and unions who pointed out that plans have high costs sometimes simply because they serve an older workforce or a workforce with more health risks.

One revenue-raising provision that Reid included that had not been in any health bill so far is his proposal to increase the Medicare payroll tax rate (from 1.45 percent to 1.95 percent) for those earning over $200,000, or over $250,000 for married couples. This provision may be inspired by a proposal Citizens for Tax Justice made in May to reform the Medicare tax. CTJ joined forces over the summer with dozens of non-profits, faith-based groups, unions and other members of a coalition called Rebuild and Renew America Now (RRAN) to promote this and other progressive revenue options to help finance health care reform. 

But CTJ's proposal would reform the Medicare tax by raising the rate for those with adjusted gross income above $200,000/$250,000 and by expanding the tax so that it applies to investment income as well as wages. The second part of that proposal -- changing the Medicare tax so that it no longer exempts investment income -- is the more significant reform of the two, and we hope it will be added to the health bill as a floor amendment.

To understand why the Medicare tax should apply to investment income, it helps to remember that there are some Americans, most of whom are extremely wealthy, who live entirely off of their investments. A person who lives off his or her investments pays no Medicare taxes. But they can still be eligible for Medicare benefits as long as they worked about ten years (usually) and thus paid Medicare taxes during that time.

Almost all Americans have collected a paycheck for at least ten years before they retire, but some are lucky enough to drop out of the workforce before retirement and collect stock dividends, capital gains, interest and profits from businesses they own a stake in. It's likely that even Paris Hilton will do enough television work and other types of work to become eligible for Medicare -- but she could also spend a whole lot of years not working and not paying the Medicare tax.

Some economists have pointed out that increasing the Medicare tax on wages alone, as Senator Reid proposes, is a problematic idea because it encourages the wealthy to find ways to convert their work income into investment income. This fear may be a little overblown, since Reid's proposal is a mere 0.5 percent tax increase on wages. And the methods that can be used to convert wages into investment income are somewhat limited. (Compensation in the form of stock or stock options is already subject to the Medicare tax, for example.)

But it's true that Senator Reid's proposal does nothing to address the disadvantage our tax system creates for income from work relative to income from wealth. Income from wealth is not subject to the Medicare or Social Security payroll taxes and some income from wealth (like capital gains and stock dividends) is subject to special, low rates in the regular income tax that have no justification.

Expanding the part of the Medicare tax that is paid by individuals (which is currently the 1.45 percent payroll tax paid by employees) to investment income would reduce this unfairness while providing more revenue for health care. And it would do so by closing a gap in the one major health care tax we already have.

Momentum for health care reform continues to build following the passage on Saturday in the House of Representatives of H.R. 3962, the most sweeping health care legislation in decades. The House bill includes a surcharge of 5.4 percent on adjusted gross income (AGI) above $1 million for married couples and $500,000 for singles. As CTJ's new report explains, our calculations confirm statements from the House Ways and Means Committee that this would affect only the richest 0.3 percent of taxpayers in 2011, the first year the surcharge would take effect.

Meanwhile, press reports indicate that Democratic leaders in the Senate are considering changing the Medicare tax as a way to help finance health care reform. It's unclear exactly what is being contemplated, but one option seems to be reforming the Medicare tax so that it no longer exempts investment income. This is one of the revenue proposals that has been championed by CTJ for the past several months.

We currently have one major tax for health care, the Medicare tax, and it applies only to wages and salaries. People who live off their stock dividends, capital gains, interest and other types of investment income contribute nothing to it. What's worse is that the people who have most of this investment income are the wealthiest among us. CTJ and many other organizations have argued that one sound way to raise revenue is to reduce the many ways we subsidize investment income through the tax code.

Another option that Democratic Senate leaders are considering would leave the Medicare tax as a tax on wages and salaries only, but would increaes the rate for those who earn more than $250,000 a year. This would also be a sound, progressive way to raise revenue. But it would be less preferrable, since it would actually increase the disparity between how we tax income from work and how we tax income from wealth.


New CTJ Report on the Unemployment Bill: Must Everything Involve Tax Cuts?


| | Bookmark and Share

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.


Update on Health Care Reform


| | Bookmark and Share

The fifth and final Congressional committee with jurisdiction over health care reform is poised to approve its version of reform next week, bringing the nation a step closer to a goal that has eluded lawmakers and Presidents for a century. The Senate Finance Committee bill would increase the number of Americans with health insurance from 83 percent to 94 percent and will not increase the budget deficit, according to the Congressional Budget Office.

Three committees in the House of Representatives and the Senate Health, Education, Labor and Pensions (HELP) Committee have all approved health care reform bills. Approval of a bill by the Senate Finance Committee will be an important breakthrough, partly because it is the most conservative of the five committees.

After the Finance Committee approves its bill, the next step will be for Senate leaders and the chairmen of the HELP and Finance Committees to combine the two versions into a bill that will be brought to a vote on the Senate floor. A similar process is currently taking place in the House, where leaders need to combine the three committee bills into one that can be passed on the House floor.

Dispute in the Senate Over Taxing Health Care Benefits and other Revenue-Raisers

The Senate Finance bill includes an excise tax on insurance companies equal to 40 percent of any premiums they charge over certain thresholds ($8,000 for plans for individuals and $21,000 for plans for families). The idea behind this tax is to discourage the use of high-cost health insurance plans, often called "Cadillac plans." As we've reported before, there is a dispute over whether expensive plans really represent over-consumption of health care or merely represent people with greater health risks being charged more for insurance.

Some adjustments were made to the excise tax during the Finance Committee markup. One raises the premium thresholds for the excise tax for people in high-risk jobs and people over age 55. (The thresholds would be $1,850 higher for individuals and $5,000 higher for families.)

The initial proposal from the Finance Committee's chairman, Max Baucus (D-MT) would have required people to obtain health insurance unless there was no policy available that cost less than 10 percent of their adjusted gross income (AGI). One amendment adopted in committee lowered that threshold to 8 percent of AGI. The penalties for individuals without health insurance were also changed to be lower and phased in over time, so that the bill now would create maximum penalties of $200 in 2014, gradually rising to $750 in 2017.

Several Senators have expressed interest in offering amendments on the Senate floor that would do more to make health care affordable for working families. The costs of any such amendment must be offset by revenue-raising provisions. Some of the revenue-raising provisions that were discussed among Finance Committee members and which could be proposed as amendments on the floor were recently analyzed by Citizens for Tax Justice. They include reforming the Medicare tax so that it no longer exempts investment income and limiting itemized deductions for very wealthy taxpayers, among others.

Other issues not related to taxes could receive more attention over the next couple weeks. For example, the Finance Committee bill is the only of the five bills that does not include a public option, which most health experts believe will reduce the overall costs of health care reform.

More Progressive Revenue Provision in House Bill

The revenue-raiser in the House bill is a graduated surcharge on adjusted gross incomes above $280,000 for singles and $350,000 for married couples. There has been some talk of changing the surcharge so that it only applies to AGI above $500,000 for singles and $1 million for married couples. This change is unnecessary, and CTJ has calculated that it would reduce the revenue from the surcharge by over 18 percent. (These variations on the surcharge are also analyzed in CTJ's recent report on revenue options for health care.)


Measure to Crack Down on Offshore Tax Evasion Could Be Used to Help Pay for Health Care Reform


| | Bookmark and Share

Senator Levin to Offer Tax Haven Legislation to Help Pay for Health Care Reform

This week, Senator Carl Levin of Michigan indicated that he will offer a measure to crack down on offshore tax evasion as a revenue-raiser to help pay for health care reform.

The Stop Tax Haven Abuse Act

The measure Senator Levin plans to offer is one he introduced earlier this year, along with four co-sponsors, as a stand-alone bill called the Stop Tax Haven Abuse Act (S.506). It would enact important new rules to deter offshore transactions designed to evade U.S. income tax.  Rep. Doggett introduced the same measure in the House the next day, with 59 co-sponsors (H.R. 1265). A description of the bill’s provisions is available here.

When the bill was originally introduced, Sen. Levin said “our bill provides powerful tools to end offshore tax haven and tax shelter abuses [which] contribute nearly $100 billion to the…annual tax gap.” Sen. Levin said, “With the financial crisis facing our country today and the long list of expenses we’re incurring to try to end that crisis, it is past time for taxes owing to the people’s Treasury to be collected.  And it is long past time for Congress to stop tax cheats from shifting their taxes onto the shoulders of honest Americans.

Paying for Health Care Reform with the Tax Haven Bill

A preliminary projection by the Joint Committee on Taxation estimates that the legislation would raise $29.8 billion in revenue over ten years. The ultimate amount of revenue may be many times that. Because these assets and income are not reported to the IRS, the true magnitude of the revenue loss is a mystery.

Attaching the Stop Tax Haven Abuse Act would be a progressive way to help pay for health care reform because it is generally wealthy Americans that are able to take advantage of tax havens. (See CTJ's additional suggestions for progressive ways to pay for health care reform.)

The Tax Haven Problem

It is estimated that the international tax gap — the amount of taxes American companies and wealthy Americans evade through offshore tax activities — is as much as $100 billion per year.

U.S. citizens and residents are taxed on all their income, whether it is earned here or abroad. If a foreign government also taxes the income, that tax may be credited against their U.S. tax.

Wealthy taxpayers are able to avoid paying U.S. taxes that they legally owe by moving assets and income offshore to what are known as “tax havens.”  Tax havens are offshore jurisdictions that have low or non-existent income taxes as well as bank secrecy laws that they use to justify being uncooperative with investigations by tax authorities from other countries. Evading U.S. income tax by using tax havens is illegal and U.S. citizens that do it are subject to civil and criminal penalties, including possible prison terms.

The U.S. government’s investigation of banking giant United Bank of Switzerland (UBS) revealed that as many as 52,000 accounts there are owned by Americans. That’s just one bank in one of the dozens of offshore financial centers. Several UBS account owners have already pled guilty to tax evasion.

The latest plea came Tuesday when a Seattle area man, a former sales manager for Boeing, appeared before the court in connection with his plea agreement. Roberto Cittadini faces possible criminal penalties of three years in prison and a maximum fine of $250,000. He has already agreed to a civil penalty for failure to file a Foreign Bank Account Report (FBAR) of up to one-half of the maximum balance of his offshore accounts which at one time contained as much as $1.9 million dollars. The great irony of this particular case is that since Boeing is a multi-billion dollar contractor for the U.S. government, part of Cittadini’s salary was paid by the U.S. government. He moved that money outside of the country to invest it and avoid paying U.S. income tax on the investment earnings.

The National Association of Realtors (NAR) and other groups representing the real estate industry have been a case study in special interest politics for some time. A quick glance a the Congressional Joint Committee on Taxation's tax expenditure report reveals that tax breaks related to housing cost over $100 billion a year, but that's not enough to satisfy NAR and its followers.

The Battles Over the "Carried Interest" Loophole

Two years ago, the Real Estate Roundtable (of which NAR is a member) hired Douglas Holtz-Eakin to defend the "carried interest" loophole, which basically allows those investing other people's money to pretend that they put up their own money, thus entitling them to pay taxes at the low capital gains rate of 15 percent rather than the regular rate of 35 percent that other highly compensated workers pay. (CTJ released a fact sheet debunking Holtz-Eakin's arguments.) The Obama administration continues to support closing the carried interest loophole.

The Homebuyer's Credit

In the last year of the Bush administration, the real estate industry managed to get Congress to adopt, as part of the economic stimulus law enacted in 2008, a $7,500 homebuyer credit that taxpayers would have to pay back to the IRS. This, year, they persuaded Congress to upgrade that to a $8,000 homebuyer credit that does not have to be paid back and that is available to taxpayers under certain income limits if they purchase a home before the end of November of this year.  

The homebuyer tax credit was estimated at the time of enactment to have a cost of $6.6 billion, but is actually on track to cost more than twice that.

Since the economic crisis was caused by inflated home prices, it is not at all clear how subsidies provided through the tax code to boost home prices could possibly be good policy. 

Ted Gayer at the Brookings Institution has written that:

"The tax credit is very poorly targeted. Approximately 1.9 million buyers are expected to receive the credit, but more than 85 percent of these would have bought a home without the credit. This suggests a price tag of about $15 billion – which is twice what Congress intended – for approximately 350,000 additional home sales. At $43,000 per new home sale, this is a very expensive subsidy."

Perhaps most alarming is the possibility that the homebuyer credit could become another "tax extender," the term used by Congressional staff and lobbyists to describe tax breaks that are ostensibly in effect for only a year or two, but which everyone believes Congress will extend again and again. NAR is, of course, pushing for Congress to extend the homebuyer credit.

Health Care

Perhaps the worst example of special interests fighting to block the common good is the real estate industry's interference in Congress's attempts to reform health care. Early this year, the Obama administration proposed to limit the value of itemized deductions for wealthy taxpayers to 28 percent as a way to raise revenue that would partially fund health care reform. CTJ found that this would affect only the richest 1.3 percent of taxpayers and would merely reduce some of the unfairness that occurs when Congress subsidizes certain activities (like home ownership and charitable giving) through the tax code. NAR, naturally, would have none of it, since this proposal would curtail the savings received by high-income taxpayers when they claim the itemized deduction for home mortgage interest.

In fact, NAR recently has come out against a much more scaled back version of this proposal, which would merely cap itemized deductions at 35 percent.

Currently, the top income tax rate is 35 percent, so the richest Americans can save, at most, 35 cents for each dollar of itemized deductions they claim. But the Bush tax cuts, which lowered the top income tax rate from 39.6 percent to 35 percent, will expire at the end of 2010. That means that in 2011, under current law, each dollar of itemized deductions claimed by a very wealthy person could result in almost 40 cents of savings. Capping itemized deductions at 35 percent would therefore merely freeze in place their current value after the Bush tax cuts expire and rates go back up.

NAR recently issued a statement saying that it opposes even this scaled back proposal to limit itemized deductions and that it "rejects in the strongest possible terms any proposal that would limit the deductions for mortgage interest and real property taxes." NAR is unabashed in its defense of subsidies provided through the tax code for families in the top income tax bracket.

Do the Realtors Oppose the Bush Tax Cuts?

But if the realtors believe that the very rich should receive 39.6 cents for each dollar of itemized deductions they claim, that seems to imply that they think the top income tax rate should revert back to the pre-Bush level of 39.6 percent. Their position seems to be that it is unacceptable for the richest Americans to only save 35 cents for each dollar they claim in itemized deductions. The only way for that number to go back up from 35 to 39.6 is for President Bush's reduction in the top rate to expire. Surprisingly, NAR and CTJ seem to have one position in common, albeit for vastly different reasons.


New CTJ Report Reviews and Compares Six Progressive Tax Options to Finance Health Care Reform


| | Bookmark and Share

Are you feeling confused about the myriad revenue options being discussed to finance health care reform? What's the difference between the President's initial proposal to limit itemized deductions and Senator Jay Rockefeller's proposal, which is similar but would result in less of a tax increase? What exactly is the Medicare tax reform included in an amendment filed by Senator Debbie Stabenow, and how does it differ from a similar concept described by CTJ several months ago? How would a "millionaires' surcharge" differ from the surcharge included in the health care bill working its way through the House of Representatives and, for that matter, what is a surcharge?

All these questions are answered in a new report from Citizens for Tax Justice. After describing each of six progressive tax proposals, the report compares their revenue impact and compares their distributional effects nationally and state-by-state.

Read the report.


Health Care Reform: Worth Paying for, and Plenty of Ways to Pay for It


| | Bookmark and Share

The good news from President Obama's address to Congress last week was that it included a clear explanation of how health care reform will improve our lives and juxtaposed the benefits of more affordable and efficient health care against other more costly initiatives.

"Add it all up, and the plan I'm proposing will cost around $900 billion over ten years - less than we have spent on the Iraq and Afghanistan wars, and less than the tax cuts for the wealthiest few Americans that Congress passed at the beginning of the previous administration."

President Barack Obama, Address to Joint Session of Congress, September 9, 2009

A recent report from Citizens for Tax Justice finds that the Bush tax cuts cost almost $2.5 trillion over the decade after they were first enacted (2001-2010). Preliminary estimates from the non-partisan Congressional Budget Office show that the House Democrats' health care reform legislation is projected to cost $1 trillion over the decade after it would be enacted (2010-2019).

President Obama said during his address to Congress that his health care plan would cost a little less than the House plan, at "around $900 billion over ten years."

As the President said, even the Bush tax cuts "for the wealthiest few" cost more than his health care plan. The direct cost of the tax cuts for just the richest five percent of taxpayers over the 2001-2010 period is $979 billion. (The cost is even greater if one includes interest payments that resulted because the Bush tax cuts were deficit-financed. 

But there is no obvious reason why the cost of health care reform needs to be less than what has been proposed in the House. There is reason to fear that "moderate" lawmakers will continue to negotiate the overall cost downward to some level chosen entirely arbitrarily, and the result will be fewer resources to make health care truly affordable for everyone.

Part of the problem is that the revenue measures that some lawmakers are considering are not substantial enough. The President suggested in his speech that insurance companies be taxed for each plan they offer that exceeds a certain premium level. Senate Finance Chairman Max Baucus has included a similar proposal in his recently released plan, which would require insurers to pay a tax of 35 percent of the portion of the premium exceeding $8,000 for singles and $21,000 for families for any plan.

There's no official estimate of how much revenue this would raise, but the available information indicates that it would be a great deal less than the $543 billion raised by the surcharge on high-income taxpayers included in the House Democrats' proposal. 

Congress and the White House can find ample revenue by turning to some of the progressive revenue options analyzed by Citizens for Tax Justice, including the surcharge in the House health care legislation. Other progressive options include the President's previous proposal to limit the benefits of itemized deductions for the wealthy and reforming the Medicare tax so that it no longer exempts people who live off their investments.

There is also a dispute among experts about whether or not taxing insurance companies is good policy. Analysts generally agree that, in effect, the tax would be passed on to employers and employees who have the high-cost plans, often called "Cadillac plans" because they're considered to be so generous. So the effect would be the same as a cap on the exclusion for employer-provided health benefits. 

A report from the Center on Budget and Policy Priorities concludes that this will bring down health care costs in a reasonable way, in addition to raising revenue. But some analysts, such as Karen Pollitz at Georgetown University's Health Policy Institute, believe that those with the more expensive plans are not receiving more generous benefits, but merely pay higher premiums because they are employed by companies that have an older workforce or workforce that faces greater health risks. Pollitz argues that "the whole notion of Cadillac plans is kind of a made-up notion."

Either way, Congress should turn to the most progressive revenue options possible, particularly given the shift in income towards the very rich over the past several years and given how much tax cuts have been targeted towards the rich since 2001. The high-income surcharge and the other proposals CTJ has analyzed over the past several months meet that standard.


CTJ Report Confirms Obama's Statement on Costs in Health Care Address


| | Bookmark and Share

The Bush Tax Cuts for the Richest Five Percent Cost More than the President's Health Care Proposal

During his address to a joint session of Congress Wednesday night to explain his health care proposal, President Barack Obama noted that his plan would cost less than the Bush tax cuts for the wealthy, a fact demonstrated in a report released earlier this week by Citizens for Tax Justice.

"Add it all up, and the plan I'm proposing will cost around $900 billion over ten years - less than we have spent on the Iraq and Afghanistan wars, and less than the tax cuts for the wealthiest few Americans that Congress passed at the beginning of the previous administration."

President Barack Obama, Address to Joint Session of Congress, September 9, 2009


A recent report from Citizens for Tax Justice finds that the Bush tax cuts cost almost $2.5 trillion over the decade after they were first enacted (2001-2010). Preliminary estimates from the non-partisan Congressional Budget Office show that the House Democrats' health care reform legislation is projected to cost $1 trillion over the decade after it would be enacted (2010-2019). President Obama said during his address to Congress that his health care plan would cost a little less than the House plan, at "around $900 billion over ten years."

As the President said, even the Bush tax cuts "for the wealthiest few" cost more than his health care plan. The direct cost of the tax cuts for just the richest five percent of taxpayers over the 2001-2010 period is $979 billion. (The cost is even greater if one includes interest payments that resulted because the Bush tax cuts were deficit-financed.) In 2010, when all the Bush tax cuts are finally phased in completely, an incredible 52.5 percent of them will go to this wealthiest five percent of taxpayers.

Oddly, many of the lawmakers who claim to be concerned about the cost of the President's health care plan are the same lawmakers who supported the Bush tax cuts, despite their much greater costs.

Read the new report from Citizens for Tax Justice.
 
These figures make clear that costs cannot be the real concern of lawmakers who oppose health care reform and yet supported the Bush tax cuts. Their position seems to be that showering benefits on the wealthiest five percent of taxpayers and leaving the bill for future generations is preferable to making health care available for all at a much lower cost and paying that cost up front. That demonstrates a different set of priorities than most Americans have, but it doesn't demonstrate much concern about costs.

We've already told you that there are plenty of ways to pay for health care reform without burdening working families and without harming the economy. We've already told you why an overhaul of the health system is worth paying for. And we've told you about how opponents of reform in Congress are using different tactics, but have the same goals, as the opponents of reform who show up at town hall meetings to heckle and threaten lawmakers.

The only thing left to do is to make sure members of Congress actually get this message. Many members are finding that their town hall meetings are packed with supporters of reform. Of course, the media often prefers to write about the meetings that turn into shouting matches between right-wingers and main-stream constituents. But there are stories coming out of Arizona, Colorado, Florida, Georgia, Illinois, and New Mexico, to name just a few places, about town halls filled with people calmly explaining why health care must be reformed now.

We need to make sure more town hall meetings turn out like this, and we need to make sure that lawmakers get the message in every other way possible. Our friends at the Coalition on Human Needs suggest the following:

1. Call your Members of Congress toll-free, 1-888-245-0215. You'll be connected to the Capitol Switchboard; ask to speak to your Member's office. When connected, tell them you support health insurance reform.

2. Attend an event held by your U.S. Representative and/or Senators and write a letter to the editor about the meeting.

Here's a list of town hall events: http://chn.org/pdf/2009/HealthTownHallsAug09.pdf.
(We strongly suggest you call your Member's office to confirm the time and location before setting out for the meeting. Call too if you don't see details for an event near you).

You can use these sample letters to the editor to write to your local paper about the event: http://chn.org/pdf/2009/TownHallLTE.pdf.


The Fight of Our Generation: What You Can Do for Health Care Reform


| | Bookmark and Share

Americans take pride in the fact that their country provides incredible opportunities for people from all backgrounds. But those opportunities, and our very idea of what it means to live in America, are threatened when we cannot provide for our basic health needs.

One out of three of us have gone without health insurance at some point over the last two years. Thousands of Americans file for bankruptcy every day, and medical expenses contribute to about two thirds of these bankruptcies. Tens of thousands of Americans die each year as a result of not having health insurance. And to top it all off, we actually pay more per capita than other developed countries for our health care!

The facts make clear that the status quo is unacceptable and unconscionable. But those who are heavily invested in the current health care system and those with extreme anti-government views are not engaging us with facts. Instead, right-wing politicians, media personalities and extremist organizations are peddling lies about what health care reform will accomplish and are encouraging their vocal supporters to shout down any public figure who wants to discuss the facts.

(See our take on the extremists that have shown up to shout down members of Congress at town hall meetings.)

It's Time to Fight

Citizens for Tax Justice has worked for several months with other advocacy groups, faith-based organizations, service providers and unions to educate lawmakers and the public about progressive ways to pay for health care reform. (See our state-by-state figures on various proposals to pay for reform.) The efforts of this coalition, Rebuild and Renew America Now (RRAN) and the efforts of health care advocates will be for nothing if the small minority of extremists is allowed to shut down any rational discussion of reform.

Here are some suggestions from our friends at the Coalition on Human Needs on how you can fight for health care reform:

1) Attend a meeting held by your U.S. Representative and/or Senators. Let them know you support comprehensive health care reform!
Here's a list of meetings:  http://chn.org/pdf/2009/HealthTownHallsAug09.pdf
[Note:  It is strongly suggested that you call your member's office to confirm meeting details.]

2) Call your Member of Congress, if he/she is on one of the three House committees that approved health care legislation. 
Here's a list of all Committee members and how they voted: http://chn.org/pdf/2009/HR3200Committeevotes.pdf
Thank them if they voted in favor; express disappointment if they didn't.  You can use this toll-free number to be connected to the Capitol Switchboard:  1-888-245-0215.

Fortunately, you won't be alone in supporting reform. Plenty of the town hall meetings held by lawmakers have been friendly, calm affairs. At one recent meeting, a Republican Congressman even told the crowd that he was leaning towards voting for the health care reform legislation in the House!


Does Anyone Still Think the Anti-Health Care Reform People Can Be Appeased with Compromises?


| | Bookmark and Share

By now everyone knows that right-wing organizations such as "FreedomWorks," "Americans for Prosperity," and "Conservatives for Patients Rights," have organized a campaign to send hecklers to town hall meetings held by any member of Congress who might possibly vote in favor of a health care reform bill. This campaign has been boosted by right-wing media personalities like Rush Limbaugh and Lou Dobbs, who have encouraged their followers to show up at town hall meetings to shout down lawmakers.

The anti-reform protesters, whose main goal seems to be shutting down any public discussion on the topic of reform, have even admitted in some cases that they are not constituents of the lawmakers they are heckling. In other cases, those town hall protesters who claim to be merely “just a mom from a few blocks away” and “not affiliated with any political party” have turned out to be Republican party officials.

Conservatives at Town Halls, Conservatives in Congress: Same Goals, Different Methods

Now, one cannot simply assume that conservative members of Congress are just as crazed and extreme as the anti-government ideologues showing up at these town hall meetings with the intent to shut them down. Members of Congress, after all, have an image of sobriety to maintain (which is hard to do when you're hanging your opponents in effigy or making death threats against them).

So conservatives in Congress have taken a different approach to accomplish the same goal (killing reform). Instead of shutting down the discussion, conservative lawmakers want the discussion to continue... forever.

Many members of Congress have given up on the willingness of Republicans to truly change how the health insurance industry operates, but one exception is the chairman of the Senate Finance Committee, Max Baucus (D-MT). His negotiations with two other Democrats and three Republicans (the so-called "gang of six") have moved very, very slowly.

While Baucus has said he wants a bill to at least be made public by September 15, his ranking member, Charles Grassley (R-IA) has said he doesn't see the rush (after he already refused to agree to anything before the August recess).

The Rush to Compromise

Some Senate Democrats continue the rush to compromise away key elements of health care reform, even though there is little indication that this will win over their Republican colleagues. Particularly alarming are statements from certain Democratic Senators that a Senate health care reform bill will have no new taxes on individuals at all. Revenue will come from savings (which makes sense to the extent that it's possible) and from charging an excise tax on insurance companies for plans that exceed a certain cost level.

The idea that any revenue-raiser is going to be embraced by conservative members of the Senate seems a little naive to say the least. And one has to worry about the logic being employed. If the only "politically viable" taxes are those enjoying unanimous support and affection, then it's difficult to see how Congress can do anything that costs money.

So-Called Centrists Don't Seem Promising

To gauge the chances that the bipartisan approach will be successful, let's consider the three Republicans who are part of the "gang of six."

We have Senator Grassley of Iowa. He recently held up a chart on the Senate floor with a children's book drawing of a dragon to illustrate the "Debt and Deficit Dragon," and then held up another chart illustrating a character he called "Sur Taxalot." He then rambled on about how "the surtax is a large, heavy, painful weapon, and lethal to America's job engine, the goose that laid the golden egg," and said that Sur Taxalot "does nothing to slow the dragon's exponential growth."

It's hard to decide what's more objectionable: conflating numerous bedtime stories, fables and metaphors into a couple sentences, or regurgitating myths about the effects of the House's proposed surcharge on small business -- myths that have already been discredited.

Then we have Senator Mike Enzi (R-WY). In addition to being a member of the Finance Committee, he's also the ranking member of the Senate Health, Education, Labor and Pensions (HELP) Committee (you know, the Senate committee that actually approved a health care bill). During the HELP debate, Enzi offered countless amendments that essentially contradicted the most fundamental goals of reform. It's perhaps unfortunate that no Republicans could bring themselves to vote for the bill that the HELP committee eventually approved, but it would be far more unfortunate if the committee had approved no bill at all.

Then there is Olympia Snowe of Maine, who is something of an enigma. She is thought of as the quintessential centrist in the Senate. She voted against one of the key components of the Bush tax cuts, the 2003 law that slashed taxes on capital gains and dividends. But she has supported plenty of regressive tax cuts (like the proposed repeal of the estate tax) and managed to get a failing grade on CTJ's Congressional Tax Report Card covering the years of Republican control. (Grassley and Enzi each received scores of zero percent.)

Compromise with Those Who Oppose Reform?

The bottom line is that the conservatives in the Senate are likely to be about as helpful as the conservatives rushing to lawmakers' town hall meetings to shout and harass. The former hope to stretch the health care debate into infinity while the latter hope to prevent the discussion from happening, but the goal -- stopping health care reform -- seems to be the same.

Some of the so-called centrists are fundamentally opposed to progressive taxation just as they are fundamentally opposed to health care reform. Compromising on either the tax provisions or the health reform provisions may therefore prove pointless.


Health Care Reform Debate Continues to Focus on Small Businesses


| | Bookmark and Share

As members of Congress return to their districts during the August recess, they are sure to be bombarded by anti-government activists claiming that small businesses will be hurt by health care reform.

In the House of Representatives, the three committees with jurisdiction have approved a bill. The Ways and Means Committee and the Labor and Education Committee each approved a health care reform bill several weeks ago while the Energy and Commerce Committee finally approved its version on Friday, just before adjourning for the August recess. The Energy and Commerce Committee was hung up over disagreements between the committee's more conservative "Blue Dog" Democrats and main-stream Democrats like chairman Henry Waxman.

In the Senate (which has one more week before starting its recess), one of the two committees with jurisdiction over health care reform has approved a bill while the other, the Senate Finance Committee, has not yet found the bipartisan agreement that Finance chairman Max Baucus hopes for.

The Surcharge and Small Businesses

There are several unwarranted complaints about how the House bill (H.R. 3200) would impact small business. One involves the high-income surcharge that would partially finance the overhaul. Opponents of health care reform have argued that the surcharge would reduce small businesses' incentives to hire workers.

CTJ has previously released a report showing that only 1.3 percent of taxpayers would even pay the surcharge in 2011. Of the taxpayers who can realistically be called "small business owners," only 4 to 5 percent would pay the surcharge.

More importantly, taxes don't reduce the amount of money a small business owner has to pay workers. A taxpayer's income for tax purposes does not even include any money that the taxpayer pays to someone else as wages or salaries. So the surcharge would have no effect on incentives to hire workers. And any business owner who needs to purchase equipment to expand will probably be able to write these purchases off under the special expensing breaks available to small businesses.

In other words, opposition to the surcharge has more to do with opposition to progressive taxes and little or nothing to do with small businesses.

"Pay-or-Play" Rules

Another small business-related complaint concerns the "pay-or-play" rules that would require companies to either offer health insurance to their employees or pay a penalty. Some complain that the proposed pay-or-play rules do not exempt enough small businesses and that the tax credits for small businesses that provide health insurance are not generous enough.

Under the bills approved by the House Ways and Means and Labor and Education Committees, companies would be required to provide health insurance meeting certain standards to their employees or they would be subject to a payroll tax of 8 percent. Companies with a total payroll of less than $250,000 would be exempt. The payroll tax would be phased in gradually for companies with a total payroll between $250,000 and $400,000.

The version approved Friday by the Energy and Commerce Committee would exempt companies with an annual payroll under $500,000 and the full 8 percent payroll tax would only apply to companies with annual payrolls above $750,000.

Last weekend, the President's Council of Economic Advisers (CEA) released a report showing that firms with less than $250,000 in total annual payroll accounted for 77 percent of all firms, and 13 percent of all private sector employment, in 2006. (The CEA report also shows, indirectly, that 75 percent of all private sector employment that year was in firms with total payroll of more than $1 million.) In other words, a significant portion of the labor force would be in companies that are exempt from the "pay-or-pay" rules under H.R. 3200, and it's not obvious that expanding that exemption is a good idea.

The CEA report also explains why small businesses have the most to gain from health care reform. Small businesses that offer coverage to their employees often pay high fees to brokers. They pay more for the fixed administrative costs of insurance companies since they have fewer employees to spread those costs over. They suffer from insurance companies' practices of charging higher premiums to entities that have a workforce with greater health needs (which can mean a single sick employee in the case of a true small business).

The bills approved in the House would allow small businesses to purchase insurance in an exchange where administrative costs would be driven down through competition (thanks to an efficient public plan that competes with private insurers). Discrimination based on health status would be prohibited.

The CEA report also points out that even small businesses that do not offer health insurance to their employees could be helped tremendously by the reform, since it includes subsidies to low- and middle-income families who buy health insurance on their own in the exchange. This will make many people more willing to work for a company that cannot afford to offer health insurance to its employees.

Will Business Associations Ever Be Happy?

In some cases, it is unclear what outcomes critics of the current proposal desire. The National Federation of Independent Business (NFIB) published ten reasons why it opposes H.R. 3200, and some of them contradict each other.

NFIB finds the payroll tax imposed on firms not offering health insurance to be unfair. "Payroll taxes are especially onerous," NFIB argues, "because they tax labor rather than profits. No matter how profitable or unprofitable a business might be, they are forced to pay this tax."

One would think NFIB would be happier with the surcharge. The surcharge is not aimed at businesses at all but at high-income individuals. For taxpayers who are small business owners, the surcharge would only apply to their profits, and even then it would only apply to the 4 or 5 percent of small business owners with enough profits to be impacted.

Sadly, NFIB cannot support this either, because "small businesses are struggling to find capital." (Never mind that equipment purchases by any true small business would probably qualify for small business expensing, as already explained.)

NFIB's release also argues that the tax credits available for small businesses are not sufficiently generous. Since NFIB seems to oppose all taxes, it's unclear how they would pay for an expansion of the tax credits. Perhaps they feel that Congress should try harder to squeeze savings out of the pharmaceuticals, hospitals, insurance companies and other players in the health care system. When NFIB is ready to campaign for that, they will have our support.

The three committees in the U.S. House of Representatives that share jurisdiction over health care are expected to release a bill today that will include a surcharge on high-income families to help finance health care reform. Based on the details that have been made public so far by the Ways and Means Committee, Citizens for Tax Justice has estimated the national and state-by-state impacts of the surcharge and incorporated this information into reports that are being released by several state-based organizations.

CTJ finds that the surcharge would be paid by the richest 1.3 percent of taxpayers nation-wide. The percentage of taxpayers impacted varies by state, but not by much. The state with the largest percentage of taxpayers affected is Connecticut, where 2.8 percent would pay the surcharge. The state with the lowest percentage of taxpayers affected is West Virginia, where only 0.5 percent of taxpayers would pay the surcharge.

You can find this analysis, as well as CTJ's other recent work on health care financing options, here: http://www.ctj.orgpayingforhealthcare.htm

CTJ is a member of the coalition of organizations called Rebuild and Renew America Now (RRAN), which has been working for several months to educate lawmakers and the public about progressive options for financing health care reform. Besides a surcharge, another option that RRAN has focused on is the President's proposal to limit itemized deductions for high-income families. Another is the proposal formulated by CTJ to reform the Medicare tax so that it applies to the income of wealthy investors the same way it applies to the wages and salaries of workers. CTJ's Medicare tax proposal has been a topic of discussion among some members of the Senate who are reported to be considering it as one of their revenue measures to finance health care reform.

Meanwhile, state-based organizations have released reports on these proposals in Indiana, New Jersey, New Mexico, West Virginia, Wisconsin and several other states last week and this week. This follows the release last week of a statement of principles signed by over 600 national, state and local organizations from every state in support of a progressive approach to financing health care reform and other major initiatives.

As Congress debates health care reform, increasing attention is being paid to the question of how reform can be financed, even though no major decisions on financing have been announced by key lawmakers.

Earlier this week, the Congressional Budget Office (CBO) released estimates for proposals from the Senate Health, Education, Labor and Pensions (HELP) Committee and the Senate Finance Committee. The HELP proposal was clearly only a partial proposal, as it did not yet include several expected provisions that would likely further reduce health care costs overall, and it's unclear how complete was the Finance proposal that CBO also scored. (It seems unlikely that the Finance proposal was complete given that Finance Committee chairman Max Baucus has long been laboring to create bipartisan consensus.)

Nevertheless, the costs estimates, $1 trillion over ten years for the HELP proposal and $1.6 trillion over ten years for the Finance proposal, have prompted some to say the proposals should be scaled back. Senator Baucus stated a desire to hold the total cost under $1 trillion -- an entirely arbitrary number. The Finance Committee subsequently released plans for a scaled back health care plan that would not include a public option and that would provide far less support to help poor and working class families obtain health insurance.

Over in the House, the Ways and Means Committee is reported to be considering several revenue options, some of which are progressive (like a surtax on high-income people and the President's proposed limit on the benefits of itemized deductions for high-income people). But there are some items on the list that would impact low- and middle-income families, like a national sales tax and its cousin, a value-added tax (VAT), and a simple increase in the flat rate Medicare tax.

There Is Another Way

Congress does not need to scale back reform and it does not need to turn to regressive revenue sources. First, there are ways to reduce the costs of a plan that involve stronger reforms rather than weaker reforms. For example, a public plan could more aggressively compete with private insurance and force down the costs of care overall.

Second, if health care reform will require additional revenue, then Congress has several options to raise revenue in progressive ways. That is the message that the Rebuild and Renew America Now (RRAN) coalition is taking to America in the coming weeks. The religious organizations, service-providers, unions, advocates and other types of organizations that belong to RRAN have turned their attention to educating Congress and the public about the myriad ways that Congress can raise substantial sums of revenue without hurting struggling families and without harming the economy.

These progressive financing options include the many revenue-raising provisions the President proposed in his budget to fund health care and several other initiatives. (See the CTJ report explaining these options put forth by the President.) They also include several additional options formulated by CTJ and endorsed by Health Care for America Now (HCAN) and RRAN. (See CTJ's report laying out these additional progressive revenue options to fund health care reform.)

The Medicare Tax

For example, Congress might want to expand the Medicare tax, given that it is the one tax we currently have that is dedicated to health care. But there is a much better way than simply increasing the single rate (currently 1.45 percent paid by employees and another 1.45 percent paid by employers) that applies to all wages and salaries. As the CTJ report on health care financing options explains, the Medicare tax currently only applies to wages and salaries. This means that a wealthy person whose income takes the form of capital gains, stock dividends and interest could pay no Medicare tax at all in a given year, while someone who works for a living but has a much smaller income will pay the Medicare tax on every dollar they earn.

To address this obvious unfairness, Congress could extend the Medicare tax to apply to the investment income that is currently exempt. CTJ's report includes a version of this that would raise over $40 billion a year even while exempting most of the investment income of seniors. This would primarily impact just the richest one percent of taxpayers and would simply end an unfair feature of our tax system.

President Obama's Proposal to Limit Itemized Deductions for the Rich

There are plenty of other progressive revenue options (laid out in both reports) which Congress can turn to, particularly the President's proposal to limit the benefits of itemized deductions to 28 percent. Currently itemized deductions subsidize certain activities (like buying a house) through the tax code, and it subsidizes them at a higher rate for high-income people than it does for low-income people.

For example, the itemized deduction for home mortgage interest is supposed to encourage home ownership, but it does so in an outrageously unfair manner. Someone rich enough to be in the 35 percent income tax bracket will save $350 for each thousand dollars they spend on home mortgage interest, while a family in the 15 percent tax bracket will save only $150 for each thousand dollars they spend on home mortgage interest. The President would reduce, but not eliminate, this disparity by limiting the savings for each dollar of deductions to 28 cents.
A_Capital_Idea.pdf


Debate Over Health Care Reform, and How to Pay for It, Continues


| | Bookmark and Share

All eyes are on Congress as members of key committees discuss a comprehensive health care reform package. The President has asked to have a bill on his desk by October 1. This week the Senate Health, Education, Labor and Pensions Committee released its draft plan on the same day that House committee chairmen briefed House Democrats on key features of their plan. Both of those plans are long on details about reforming the health care system, but short on ways to pay for it. For now, Congressional committees are focusing on the features of the plan itself and putting off the discussion of the financing.

The Senate Finance Committee, which will have to tackle the financing, in May released a 41-page list of far-ranging options for financing health care reform which included changing the tax exclusion on employer-provided health benefits, raising excise taxes on alcohol, and imposing excise taxes on sugar-sweetened drinks. Earlier this month, the non-partisan Joint Committee on Taxation (JCT) provided lawmakers with revenue estimates for certain financing options currently being discussed.

The President is still talking about his budget proposals for financing health care reform, including limiting the value of itemized deductions for higher-income taxpayers to 28 percent, which would raise revenue in a more progressive manner than the other options listed in the Finance Committee document. (See the CTJ report describing this and other revenue proposals in the President's budget.)

As the bills wind their way through Congress, organizations in the Rebuild and Renew America Now (RRAN) coalition are reminding lawmakers that there are many progressive ways to raise revenue to fund health care and other initiatives. Besides the President's revenue proposals, several additional options are described in CTJ's May 21 report on health care financing.

For example, one option is to expand the Medicare tax to apply to all income (with an exemption for seniors), whereas today it only applies to wages and salaries. This proposal does not complicate the tax code the way many other proposals would and it raises revenue with a tax already in place to fund health care. It is also more progressive than many other options being considered.

Representatives of RRAN member organizations are meeting with lawmakers and their staff to discuss progressive revenue-raisers like this.

Organizations that want to sign RRAN's two-page statement of principles on progressive revenue sources can go to the Coalition on Human Needs website or simply click here. For more information about the coalition visit www.rebuildandrenew.org.

Citizens for Tax Justice (CTJ) has joined forces with a broad coalition of organizations called Rebuild and Renew America Now (RRAN) to promote a simple message: Congress has a whole lot of options to raise revenue to pay for health care reform and other initiatives without unfairly impacting low- or middle-income people and without harming the economy.

These progressive revenue options include both the tax changes included in President Obama's fiscal year 2010 budget proposals as well as additional options formulated in a recent report by CTJ and endorsed by Health Care for America Now (HCAN) and the Service Employees International Union (SEIU). (See CTJ's report on the President's tax proposals and CTJ's report on additional revenue options to fund health care reform.)

RRAN is a coalition that engaged in education, communications and lobbying efforts in support of the President's budget and other progressive initiatives earlier this year and has mobilized advocates and activists all over the country. Many of the organizations involved are usually focused on particular public services or progressive reforms, but have realized that all public services and reforms are in danger if Congress can't bring itself to raise the revenue needed to pay for them.

RRAN has invited organizations (both national organizations and state organizations) to sign onto its two-page statement of principles for this new campaign for progressive revenue options. Signing does not commit an organization to do anything (although all are also encouraged to become active in RRAN's activities) but simply states support for efforts to pay for initiatives in progressive ways. Anyone who is authorized to sign on behalf of an organization can visit the website of the Coalition on Human Needs (CHN) or simply click here.

The statement lists three broad principles to guide Congress's efforts to find revenue:

1. Adequacy. The federal tax system should raise sufficient revenue over time to meet our shared priorities and invest in our common future.

2. Fairness. Tax preferences that overwhelmingly benefit the wealthy and corporations should be eliminated, and individuals and businesses should contribute their fair share of taxes, based on ability to pay.

3. Responsibility. We should not saddle future generations with unsustainable levels of debt.

The statement also lists examples of the kinds of tax policies RRAN supports:

  • raising revenues from upper-income households;
  • assessing a significant tax on large estates;
  • reducing abuses among corporations and individuals who shelter income in offshore tax evasion or avoidance schemes;
  • closing financial industry, oil and gas, and other inefficient corporate loopholes; and
  • reducing tax preferences for unearned as opposed to earned income.

For more information in the coming days, visit RRAN's website: www.rebuildandrenew.org


New CTJ Report Proposes Progressive Revenue Options to Fund Health Care Reform


| | Bookmark and Share

A new report from Citizens for Tax Justice explains that Congress has several options to fund health care reform in a progressive way. The report was made public today by Citizens for Tax Justice (CTJ), the Service Employees International Union (SEIU), and Health Care for America Now (HCAN), at a press conference in which representatives of each group discussed the need to fund health care reform in a fair way.

Read the report.

The report describes several options that would accomplish three objectives simultaneously. First, they would raise a significant amount of revenue, more than a trillion dollars over a decade. Second, they would simplify the tax code, since they involve eliminating special deductions and loopholes and moving closer to taxing various types of income received by individuals in the same way. Third, they would ensure that the federal income tax continues to be a progressive tax. Almost all of the new revenue would be paid by taxpayers with adjusted gross income (AGI) above $200,000 for singles and above $250,000 for married couples, in keeping with President Obama's approach to tax policy.

Politicians and pundits have lately written or spoken of the "difficult choices" and "sacrifices" that will be necessary if the United States is to find a way to fund health care reform in a fiscally responsible way. Some have suggested new taxes on health insurance premiums. A few have even proposed a highly regressive national sales tax, or its cousin, a value-added tax. In fact, however, there are straightforward ways to raise revenue that will not be overly burdensome for taxpayers and which will not harm the economy. They involve eliminating or reducing several subsidies and preferences provided in the federal tax code to the wealthiest and most powerful among us. Combined with savings in the existing health care system, these measures could raise enough revenue to adequately fund health care reform.

Americans may not know the details of every tax break enjoyed by corporations or wealthy individuals, but they might be particularly keen to focus on them after providing Wall Street (and thus the richest people in America) the biggest taxpayer-funded bailout in history.

After propping up major corporations and their CEOs and shareholders, Congress might find it reasonable to make the following deal. Main Street is paying to make Wall Street healthy. Wall Street, when it is healthy, will return the favor.

Read the report.


House and Senate Approve Final Budget Resolution


| | Bookmark and Share

Approval Marks a Major Step Towards Enacting President's Agenda

On Wednesday, both the House and Senate approved a Congressional budget resolution for fiscal year 2010 that paves the way for several of the President's major initiatives. The resolution allows Congress to make new investments in education and clean energy and puts in place procedures that will make it easier for Congress to enact comprehensive health care reform. It also allows Congress to extend the Bush tax cuts for all but the richest Americans.

The budget resolution allows for about $3.5 trillion in federal spending in fiscal year 2010 and includes important tax and spending provisions related to years after that. It is not a law and is not binding, but puts in place caps on the spending that Congress appropriates each year, sets targets for tax and spending changes and includes certain procedural changes that make it more likely Congress will meet these goals.

Tax Cuts Extended for All but the Rich

For example, the budget resolution allows Congress to reduce revenues by a certain amount by extending the Bush income tax cuts. It is understood that the amount of revenue-reduction allowed would be sufficient to extend the Bush tax cuts for those with incomes below $250,000. It also allows for Congress to reduce revenues by preventing the Alternative Minimum Tax (AMT) from expanding as it is scheduled to under current law. Similarly, it allows Congress to extend the estate tax rules in effect in 2009 instead of allowing the estate tax to revert to the rules put in place during the Clinton years, before Bush's cuts in the estate tax were enacted.

The resolution allows for Congress to enact these tax cuts without finding new revenue to pay for them -- on one condition, which is that Congress enacts a statutory pay-as-you-go (PAYGO) rule that will (in theory) prevent Congress from enacting any more legislation that will increase the deficit. That means that any additional tax cuts (say, an extension of the Making Work Pay Credit that was enacted for two years as part of the economic stimulus package) would have to be combined with revenue-raising provisions to offset the costs.

Predictably, allies of former President George W. Bush have expressed horror that Democratic leaders and President Obama wish to extend the Bush tax cuts for 97.5 percent of Americans rather than 100 percent. The Democrats and the President would allow the Bush tax cuts to expire for singles with incomes over $200,000 and married couples with incomes over $250,000 (which make up roughly the richest 2.5 percent of taxpayers).

For their part, House Republicans used the budget debate to demonstrate to the public just how lopsided the tax code would be if their goals were ever realized and just how much government would have to shrink because of the revenue losses that would result. Earlier this month, the ranking Republican on the House Budget Committee presented his tax and spending plan which would cut and privatize Medicare, convert Medicaid into limited block grants to states, repeal the recently enacted economic stimulus law and deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs.

Citizens for Tax Justice published a report concluding that under this GOP plan, over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes than they would under the House Democratic plan in 2010, while the richest one percent of taxpayers would pay $75,000 less, on average.

Final Budget Leaves Out the Senate's Outrageous Estate Tax Cut

Progressives scored a victory when Democratic leaders agreed to exclude from the final budget an amendment adopted by the Senate during its budget debate on April 2 which would slash the estate tax to benefit multi-millionaires. Before the Senate approved this amendment, Majority Leader Harry Reid (D-NV) said, "It is so stunning, so outrageous that some would choose this hour of national crisis to push for an amendment to slash the estate tax for the super wealthy." His common sense view carried the day as negotiators hammered out the final resolution.

The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax would disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton would come back into effect in 2011.

The budget resolutions passed out of the House and Senate budget committees in March both assumed that the estate tax rules in place in 2009 would be made permanent, meaning the Bush estate tax cut would be partially made permanent but the estate tax would not disappear entirely in 2010. The Center on Budget and Policy Priorities released a report finding that about 99.7 percent of estates would be untouched by the tax under this proposal.

Incredibly, 51 Senators voted in favor of the amendment offered by Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) to cut the estate tax even more than this. The 2009 estate tax rules exempt the first $7 million of assets passed on by a married couple (as well as assets they leave to charity) and tax the rest at a rate of 45 percent. The Kyl-Lincoln amendment called for a $10 million exemption for married couples and a 35 percent rate.

Taking Steps Towards Enacting the President's Priorities

Progressives scored another victory in the area of health care. House and Senate leaders decided to include in the final budget resolution a mechanism known as "reconciliation" which will allow the Senate to enact health care reform and higher education loan changes with a simple majority vote.

The practice of filibustering legislation in the Senate has, over the years, turned into a default rule that three fifths the Senate's members must agree to pass a bill. This means that legislation supported by Senators representing a majority of Americans is often blocked. Many advocates fear that this is exactly what could happen to health care reform and many other of the President's important initiatives.

Reconciliation is a way around this obstacle. A budget resolution can include reconciliation instructions specifying that committees will pass legislation that can then pass the full House and Senate under a streamlined process. In the Senate, that streamlined process means that the bill can be passed with just 51 votes.

The particular version of reconciliation included in this budget is optional, meaning Democratic leaders will resort to using it only if bipartisan consensus proves elusive.

Several Republican Senators, and some Democratic Senators, have taken the view that majority rule is undemocratic, and have called reconciliation a partisan ploy to "ram through" the President's agenda. (The idea of the Senate moving too quickly is a little hard for any Hill observer to understand.) More importantly, enacting health care reform will require Congress to raise a great deal of revenue, and finding a large bipartisan majority for that might be a challenge.

Finally, some have complained that reconciliation is only to be used for deficit-reduction, but this is entirely unconvincing because these are largely the same members who voted in favor of reconciliation bills during the Bush years that actually increased the deficit by cutting taxes.


Budget Resolutions Approved by House and Senate


| | Bookmark and Share

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

 

 

 

 

 

 

 

 

Unlike the Senate budget resolution, the House resolution includes "reconciliation" instructions that would protect a bill from the filibuster that can thwart legislation in the Senate even if it has majority support. It is understood that the reconciliation procedure would be used to enact health care reform.

Opponents of the President's agenda have been surprisingly effective at casting as unfair the procedure that would allow legislation to be enacted by a majority vote in both chambers. The media has in many cases uncritically quoted lawmakers who feel it would be partisan and divisive to allow the Senate to approve a bill with only 59 out of 100 members voting in favor.

Some have complained that reconciliation is only to be used for deficit-reduction, but these are largely the same members who voted in favor of reconciliation bills during the Bush years that actually increased the deficit by cutting taxes. Even putting that aside, it's not clear that the original purpose of reconciliation is any more important than the original purpose of the Senate filibuster, which was originally used only on rare occasions but has turned into a 60-vote requirement to pass any bill introduced in the Senate.

It's true that there are rules limiting what sorts of measures can be enacted through the reconciliation process. (Provisions that have no quantifiable budget impact in the next few years may be impossible to pass through reconciliation.) But the limits imposed by a potential filibuster may be greater. Whether health care reform happens at all hinges on whether or not Congress can raise the revenue to pay for it. Hopefully, bipartisan agreement can be found on how to do that. But Congressional leaders would be smart to leave themselves the option of reconciliation in case such consensus proves elusive.

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.


President Obama Should Expand Government Performance Reviews to Include Tax Expenditures


| | Bookmark and Share

Citizens for Tax Justice called uponPresident Obama this week to stand by his message of transparency by finally making "tax expenditure" performance reviews a regular part of the OMB's evaluations of government effectiveness.

Simply put, tax expenditures differ from the rest of the tax code in that they focus on encouraging a specific activity or rewarding a particular group of people, rather than on trying to improve the efficiency, simplicity, or fairness of our tax system.Since tax expenditures are usually enacted with primarily non-tax goals in mind (e.g. encouraging investment, encouraging research and development, encouraging home ownership, etc.) it is important that the government make an effort to gauge their effectiveness in achieving those goals.

But despite calls from the GAO, past Congresses, and outside experts in favor of subjecting tax expenditures to regular performance reviews, the most comprehensive performance measure currently in place, the OMB's Program Assessment Rating Tool (PART), continues to focus narrowly on only traditional spending programs.

Encouragingly, language in the President's recently released budget blueprint suggests that a more comprehensive approach for evaluating the government's performance will be used under the Obama Administration (see. pp.39).It's hard to see how anything approaching true comprehensiveness could ignore the hundreds of billions of dollars the government directs toward programs administered via the tax code.Hopefully, the brief language addressing performance reviews that was included in this blueprint is the first signal that an end is coming to the free-ride thus far enjoyed by tax expenditures.

Read the full statement from CTJ


New Report from Citizens for Tax Justice: President Obama's First Budget Proposal


| | Bookmark and Share

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


President Obama's First Budget: Not Perfect, But a Massive Improvement Over the Recent Past


| | Bookmark and Share

Revised March 4, 2009

On Thursday, President Obama sent his budget blueprint to Congress. While many of the details remain to be seen, it's the most progressive budget we've seen in years. It's also a more honest budget than the last administration ever proposed. For example, it doesn't pretend that the Alternative Minimum Tax (AMT) will expand its reach to tens of millions of additional taxpayers (which Congress never allows), and it includes the cost of the Iraq and Afghanistan wars instead of pretending that they will end this year.

It goes a long way towards making the tax system fairer and more progressive. The tax portion of the budget would allow the Bush tax cuts to expire for the very rich and includes revenue-raising provisions that are progressive, environmentally friendly and which, in some cases, would make the tax code simpler.

But the budget blueprint does muddle the cost of extending the Bush tax cuts for all but the top 2 percent of individual taxpayers by using a baseline that assumes the Bush tax cuts have already been made permanent, when in reality they are scheduled to expire at the end of 2010. (In other words, the Obama administration is using a baseline that assumes John McCain won the presidential election and his allies swept both chambers of Congress and were able to enact his tax policies!)

Continuing the Bush tax breaks for 98 percent of taxpayers and providing AMT relief will cost $2.6 trillion over the 10-year budget period. That's a steep price to pay for tax cuts that have not delivered their promised benefits. As the budget moves through Congress, we hope that the goal of long-term deficit reduction will prevail and the Bush tax breaks will be reduced even more. This could mean, for example, further raising the rates on capital gains and scaling back the cut in the estate tax. These changes would help move us towards the day when the government actually collects enough revenue to pay for the services it provides.

In addition to extending a lot of the Bush tax cuts and providing AMT relief, the President's budget would also provide around $770 billion in additional tax breaks targeted to working class people, plus over $70 billion in tax cuts for business. These are offset with several revenue-raising provisions, including a "cap and trade" program to limit carbon emissions, cleaning up the international tax system and eliminating loopholes for energy companies and other corporations.

These provisions are all included in the tax portion of the budget proposal. Other parts of the proposal include other revenue-raisers. For example, the budget includes a new provision that would limit the benefit of itemized deductions so that they could not reduce taxes by more than 28 percent (instead of, say, 35 percent for people rich enough to be affected by the 35 percent income tax rate). This provision would raise revenue to offset new health care spending.

This budget may not be perfect, but it does take several steps to find revenue to invest in our future and support working class families.

Next week, CTJ will provide a more detailed analysis of the President's budget and its tax provisions.


The Coming War Over the Federal Budget


| | Bookmark and Share

The President's Fiscal Responsibility Summit

Expect to see some drama next week around the federal budget. First, on Monday, President Obama will convene a "Fiscal Responsibility Summit" with Congressional leaders and others to "to send a signal that we are serious" about the long-term deficits faced by the federal government, focusing on entitlement programs. Obama has been sending signals that he is open to any and all ideas about how to get the federal budget back under control once our economy is back on track. Which is alarming, because a lot of ideas floating around out there are incredibly bad.

For one thing, the supporters of the Bush tax cuts still fail to acknowledge that those tax cuts account for about half of the federal debt piled up by the Bush administration before the financial crisis. Pretty much all of the Republican leaders in Congress claim to be deeply concerned about the deficit, but none have waivered in their commitment to the policies that have created much of it.

Another problem is the focus on entitlements. Medicare faces a crisis, which is the crisis of exploding health care costs that we can only contain by reforming the entire health care system. Exploding health care costs are, many analysts have concluded, the single largest cause of long-term federal budget deficits.

But several right-wing policy advocates have made a cottage industry out of claiming that Social Security must be slashed in order to save America. The most notorious is Peter Peterson, the trillionaire who has set up a foundation to promote his version of "fiscal responsibility" and who apparently has been invited to the summit. CTJ director Robert McIntyre lambasted Peterson back in 1994 in a column in the American Prospect, saying, "Along with tax cuts for the rich, he explicitly endorses tax increases for the poor and the middle class as well as sharp reductions in what average families receive from the government."

McIntyre's criticism is mild compared to the assessment progressives give Peterson today. "Peterson, who made his fortune on Wall Street," writes Robert Borosage, "never raised a word about the dangers of hyper-leveraged finance houses gambling other people's money. He never expressed qualms about the leveraged buyout artists who were using debt finance to rip apart companies. He didn't fund an all-out effort to stop Bush from raiding the Social Security surplus to pay for tax cuts for the rich. But now he wants folks headed into retirement who have already prepaid a surplus of $2.5 trillion to cover their Social Security retirements to take a cut or work a few years longer to cover the money squandered on bailing out banks, wars of choice abroad and tax cuts for the few."

The President's Fiscal Year 2010 Budget Proposal

The drama won't end at the President's Fiscal Responsibility Summit. The President is also expected to release the outlines of his budget proposal next week, and it could contain some very important tax proposals. During his presidential campaign, Obama proposed to extend the Bush tax cuts (which mostly expire at the end of 2010) for all taxpayers except those with incomes above $200,000 (or $250,000 for married couples). CTJ calculated that this would essentially mean that the Bush tax cuts are extended for all but the richest 2.5 percent of taxpayers. It would also cost well over a hundred billion dollars a year, and that's before you add the cost of Obama's promised reform of the Alternative Minimum Tax or his other tax proposals. Meanwhile, he also pledged to repeal the Bush tax cut early for those taxpayers with income above the $200,000/$250,000 threshold, but he has hedged on that promise in recent months.

Obama also campaigned on promises to close some tax loopholes (like the carried interest loophole and loopholes enjoyed by the oil and gas industry) and clean up other parts of the tax code. It will be interesting to see what components of his campaign promises are included in his budget proposal.

Interestingly, the administration has stated that it will not engage in the same gimmicks used by the previous administration to conceal the true size of the budget deficit. For example, the Bush administration always assumed that the Alternative Minimum Tax (AMT) would be allowed to extend its reach to tens of millions of additional taxpayers, which of course made the budget appear more balanced than it truly was, even though everyone knew that Congress would enact a "patch" every year to prevent the AMT from expanding its reach. So this budget process may be more transparent than any we've seen in years.

On January 28, the House of Representatives approved an economic stimulus bill with an official cost of $819 billion, and $275 billion of that went to tax cuts. One alternative stimulus bill that received quite a lot of support from the House Republicans consisted entirely of tax cuts and included provisions that would clearly not provide an immediate boost to the economy (like making permanent the Bush tax cuts for capital gains and dividends, which do not even expire until the end of 2010). CTJ released state-by-state figures showing that the poorest 60% of taxpayers would receive over half of the benefits of the key tax cuts under the House Democrats' plan and less than 5% of the benefits of the House GOP plan.

House Republicans put forth another plan, this one with strong backing from their leadership, that would reduce the bottom two income tax rates from 10% and 15% to 5% and 10%, and provide more tax cuts for businesses. CTJ released state-by-state figures showing that less than a quarter of the benefits of the individual tax cuts in this House GOP plan would go to the poorest 60% of taxpayers.

The House Democrats' plan was passed without a single Republican vote. Progressives found that the House-passed bill did contain some tax cuts that were basically giveaways for business (as CTJ also argued in its reports). But overall the House-passed bill promised to be an effective boost for the economy.

The Senate took up its bill the following week and managed to lard it up with several ineffective tax cuts. Fortunately, the House-Senate conference that met to work out the differences between the two chambers significantly scaled back many -- but not all -- of the ineffective tax cuts.

Amnesty for Offshore Tax Avoidance: Rejected on Senate Floor

As the stimulus package was being debated on the Senate floor, progressives did score several defensive victories. For example, the body rejected an amendment offered by Senator Barbara Boxer (D-CA) that would provide a tax amnesty for corporations that had moved profits offshore (often only on paper to avoid taxes). Profits that were "repatriated" to the United States would be subject to an almost non-existent 5.25 percent tax rate instead of the usual 35 percent tax rate. As explained in a CTJ report on "repatriation," this idea was tried five years ago and did not lead to any of the job creation that was promised. Worse, repeating this debacle would only encourage companies to move profits offshore, since they would figure that if they waited a few years, Congress would once again be in the mood to enact a tax amnesty. Fortunately, a solid majority of senators saw that this was terrible tax policy and rejected this amendment.

The Senate's Senseless Six

But plenty of ill-advised tax cuts did make their way into the Senate-passed bill, some as provisions included in the bill reported out of the Finance Committee, and others adopted as amendments on the Senate floor. Earlier this week, CTJ ranked several tax cuts included only in the Senate bill (or taking a larger form in the Senate bill) as the "Six Worst Tax Cuts in the Senate Stimulus Bill." (Read the full report here or the two-page summary here.) The largest of those six tax cuts is included in the final package, but several others have been excluded (or mostly excluded) from the deal.

1. One-year AMT "patch": included in conference agreement.

This one-year reduction in the Alternative Minimum Tax will provide essentially no benefit to the poorest 60 percent of Americans -- and unfortunately was included in the final stimulus package. For more details, as well as state-by-state figures showing how taxpayers would be affected, see CTJ's new report on the AMT "patch."

2. Homebuyer tax credit: dramatically scaled back in conference agreement.

The House-passed bill had a version of this provision that waived the repayment requirement for the limited $7,500 first-time homebuyer credit that Congress enacted in its housing bill last year. The Senate adopted an amendment by Senator Johnny Isakson (R-GA) (who voted against the bill itself) to provide a $15,000, non-refundable tax credit with no income limits for any home purchase (not just for first-time home purchases). The Senate version would cost $35 billion more than the House version. Fortunately, this provision is scaled down in the conference agreement to something closer to the House version, with an increase in the maximum credit to $8,000, at a cost of $6.6 billion.

3. Deduction for automobile purchases: dramatically scaled back in conference agreement.

This $11 billion provision was added to the Senate bill as an amendment offered by Senator Barbara Mikulski (D-MD) as an above-the-line deduction for interest payments on an automobile purchase as well as the state and local sales taxes paid on that purchase. Apparently, members of the House-Senate conference decided that subsidizing consumer debt is not such a great idea. This provision has been reduced to a $1.7 billion provision allowing a deduction for just the sales taxes paid, but not the interest, on an automobile purchase.

4. Suspension of taxes on UI benefits: included in conference agreement.

The Senate included in its bill this provision to eliminate federal income taxes on the first $2,400 of unemployment insurance benefits in tax year 2009. The best way to target aid to those who could use some help is to target aid by income level. This provision would target aid to those whose income takes a particular form rather than those whose income is below a particular level, meaning a person whose spouse earns $300,000 a year would still get this tax break if they have unemployment benefits. This provision is included in the conference agreement.

5. Five-year carryback of net operating losses (NOLs): dramatically scaled back in conference agreement.

This provision would put money in the hands of business owners but do nothing to change their incentives to invest or create jobs. The version of this tax cut included in the House-passed bill would cost $15 billion while the Senate version would cost $19.5 billion. Fortunately, the version of this tax cut in the conference agreement is smaller than either of these, with a cost of only $1 billion (officially). The conference agreement would allow this tax cut only for companies with gross receipts under $15 million.

6. Delayed recognition of certain cancellation of debt income: included in conference agreement.

Under current law, any debt forgiveness that you enjoy is considered income subject to the federal income tax. (If it was not, then we would all want our employers to issue us loans and then forgive the debt, rather than paying us salaries.) This provision, which was included in the Senate bill and also in the conference agreement, weakens this essential rule. It allows companies that have debt cancellation income to defer taxes on that income for five years and then pay the tax in increments over the following five years.


CTJ Ranks the Six Worst Tax Cuts in the Senate Stimulus Bill


| | Bookmark and Share

The economic stimulus bill that the Senate approved today includes several tax cuts that are not in the stimulus bill approved by the House of Representatives two weeks ago and which should be excluded from the final bill that goes to the President.

The bill approved by the House of Representatives two weeks ago has a total cost of about $819 billion, while the cost of the Senate bill had grown last week to about $940 billion. A group of self-styled centrist Senators then put forth a compromise that took exactly the wrong approach to cutting down the costs: They mostly removed government spending that economists believe will stimulate the economy -- like aid to state governments, school construction, food stamps -- while they left in most of the regressive tax cuts that Senators have added to the bill.

A new report from Citizens for Tax Justice lists the six most regressive and ineffective tax cuts included in the Senate stimulus bill that are not in the House bill (or, in some cases, are much more limited in the House bill).

Legislation to kickstart the economy is badly needed. Lawmakers who are sincere in their desire to stimulate the economy in the most cost-effective manner should seek to exclude from the final bill these tax cuts, which economists believe will do little to boost consumer demand. They add $124 billion (according to official projections) to the cost of the Senate's stimulus bill compared to the House stimulus bill. The real cost of these provisions is considerably more.

Here are CTJ's worst six tax cuts in the Senate stimulus bill:

1. One-year AMT "patch"
2. Home buyers' tax credit
3. Deduction for automobile purchases
4. Suspension of taxes on UI benefits
5. Five-year carryback of net operating losses (NOLs)
6. Delayed recognition of certain cancellation of debt income

Read the CTJ Report: http://www.ctj.org/pdf/sixworsttaxcuts.pdf
Read the Summary:
http://www.ctj.org/pdf/sixworsttaxcutssummary.pdf

The report also explains that some tax cuts could actually be effective in stimuluating the economy -- if they are extremely targeted to poor and working class families. The Making Work Pay Credit and the EITC expansion that appear in both the House and Senate bills accomplish this. So do the provisions in each bill to make the Child Tax Credit more available to poor families, but the report explains that the House provision does a much better job of this than the Senate provision.

A House-Senate conference will now attempt to work out the differences between the House and Senate bills and settle on a final bill, which President Obama wants to sign by the end of this week.

A new report from Citizens for Tax Justice compares the tax cuts proposed as economic stimulus by the House Democrats to the tax cuts proposed by their Republican counterparts. The report includes both national and state-by-state figures showing the average tax cut and the share of total tax cuts that would be received by taxpayers in various income groups under the different proposals.

The report finds that the Democrats' proposal (H.R. 598) includes some tax cuts that are far more targeted to low- and middle-income people than any of the tax cuts included in the Republican alternatives. This is largely because H.R. 598 includes a new refundable credit (the Making Work Pay Credit) and expands two others (the Earned Income Tax Credit and the Child Tax Credit) while the Republican alternatives do not. Working people who pay federal payroll taxes but do not earn enough to owe federal income taxes will only benefit from an income tax cut if it takes the form of a refundable credit. Many economists have argued that any effective stimulus policy would have to boost demand for goods and services by causing immediate spending -- and one way to do that is to put money in the hands of low- and middle-income people who are more likely than wealthy taxpayers to spend it quickly.

The House of Representatives is expected to vote this week on the Democratic proposal, H.R. 598. Many of the provisions of this bill have wide support from progressive advocates. The Coalition on Human Needs is distributing a sign-on letter for organizations in support of the expansion in the Child Tax Credit. If you are authorized to sign on behalf on an organization in support of this provision, click here for more information.

Read the CTJ Report

On Thursday, House Ways and Means Committee Chairman Charlie Rangel (D-NY) released the outlines of a $275 billion tax cut package to be included with a larger stimulus bill that Democratic leaders hope to enact by President's Day. In many ways it is an improvement over the proposal initially floated by the Obama transition team, but it also keeps many of Obama's ill-advised tax cuts for business that will have little or no stimulative effect on the economy.

Most economists believe that the current economic downturn is largely the result of a collapse in demand for goods and services, and that direct government spending can boost demand and prevent the recession from becoming more severe and destructive. Tax cuts are less effective because it's difficult to ensure that they will result in the sort of immediate spending needed to boost demand quickly. But if tax cuts can at least be targeted to those people who are likely to spend the extra money right away (like low-income families), then they could have a decent chance of accomplishing the goal of stimulating the economy.

More Progressive Tax Cuts for Families

Last week, Citizens for Tax Justice released a report that showed how some of Obama's proposed tax cuts would be targeted to those who would likely spend the money right away (thus immediately pumping the money into the economy) while others were more likely to be ineffective giveaways to business. Obama's proposed Making Work Pay Credit would reach people at lower income levels, but it would not be particularly targeted towards the bottom half of the income ladder. (The poorest 60 percent of taxpayers would only get 48 percent of the benefits while the richest 20 percent would get 25 percent of the benefits.) A proposal to increase the availability of the refundable portion of the $1,000 Child Tax Credit looked more promising because nearly all of the benefits would go to the poorest 60 percent.

The Ways and Means Committee proposal improves on Obama's tax cuts for individuals. For example, the improvement in the Child Tax Credit (CTC) would be even more progressive. Under current law, some working families who pay federal payroll taxes but who do not earn enough to owe federal income taxes are actually too poor to benefit from the CTC. That's because people with no income tax liability do not benefit from a tax credit unless it is refundable, and the refundable portion of the CTC is limited to 15 percent of earnings above $12,550 in 2009. The Ways and Means Committee proposal would remove that earnings threshold so that the refundable portion of the CTC is equal to 15 percent of all earnings (with the maximum credit limit unchanged at $1,000 per child).

The refundable Making Work Pay Credit, which Obama proposed during his campaign and which would generally offer working people $500 (or $1,000 for a couple if both spouses work), is also included. A new addition to the package is an improvement in the Earned Income Tax Credit (EITC). It is unclear at this time how extensive the change in the EITC will be. (It may be similar to the EITC expansion Obama proposed during his campaign.) But it's quite clear that expanding the EITC is a promising way to put money in the hands of families who have probably cut back on purchasing all sorts of needed goods and services and who will therefore spend that money quickly.

Tax Cuts for Business: One Bad Idea Dropped, Several Others Included

The Ways and Means proposal does not include Obama's proposed refundable $3,000 tax credit for businesses that create jobs, which was roundly criticized as unworkable. Democrats in the House and Senate are said to have been doubtful that the credit could possibly be implemented in a way that did not result in a huge tax giveaway for companies that were merely hiring people they would hire anyway.

Unfortunately, many other business tax cuts in Obama's proposal that CTJ and others criticized are included in the Ways and Means package. Earlier attempts at using bonus depreciation to boost the economy have proven to be ineffective, but lawmakers apparently insist on this giveaway to business-owners. A 2006 Federal Reserve study reached a similar conclusion to our own findings, finding that previous versions of this tax break had "only a very limited impact... on investment spending, if any." Worse, the proposal would allow businesses to use their losses to reduce taxes they already paid going back five years (the current limit is two years). As Dean Baker explains, this tax cut must have even less stimulative effect than other business tax cuts because it does nothing to change the incentives of business-owners or investors going forward. The net operating loss carryback provision simply hands money to businesses without requiring any sort of investment (or anything) in return.

House Democratic Proposal Would Rescind the Infamous "Wells Fargo Ruling"

Another provision in the package would reverse IRS Notice 2008-83, also called the "Wells Fargo ruling" after its largest beneficiary. In October, the IRS issued this two-page notice declaring, with no authorization from Congress, that banks could ignore a section of the tax code enacted under President Reagan to prevent abusive tax shelters. In December, over a hundred organizations signed a letter to the House and Senate asking them to rescind the Wells Fargo ruling. That call is now being answered.

The Ways and Means package contains provisions addressing many other needs, including a partially refundable credit for higher education, increased availability of bonds for state and local government, energy tax incentives, child support funding and many others.

On Friday, President Bush signed into law the financial rescue plan that had been approved by the House of Representatives just hours earlier. The House had rejected a similar financial rescue bill on Monday, but on Wednesday the Senate passed a version that was loaded with tax breaks in order to woo more votes in the House. The Senate bill combined the financial rescue plan with legislation to extend several temporary tax breaks (often called tax "extenders") as well as a measure to keep the Alternative Minimum Tax (AMT) from expanding to reach more taxpayers. The sweeteners added by the Senate were apparently enough to win over a majority of members in the House, who approved the bill on Friday and sent it on to the White House for Bush's signature.

The political dynamic was somewhat confusing throughout the debate over the bill. The financial rescue plan and the tax legislation were both bills that were opposed by the House, largely because of their costs. Counter-intuitively, the compromise was to pass both as one bill.

It almost sounded like a joke: What is bipartisanship? It's what happens when some lawmakers want new spending we cannot afford while other lawmakers want new tax cuts we cannot afford, and in the end Congress compromises by doing both and paying for none of it.

The Financial Rescue Plan

In all fairness, there are conservatives and progressives who supported and opposed the bailout legislation. Some argue that it is truly necessary to keep lines of credit open, and that its cost will be less than the widely-cited $700 billion figure. And there are surely some provisions among the tax cuts that we would all support. (One that comes to mind would make the child tax credit more accessible for low-income families.)

In theory, the government will eventually sell the assets it buys from financial institutions and recoup much of the costs (and it's possible, though unlikely, that the taxpayers could actually profit). And if the costs are not recouped after five years, the President is to propose legislation to Congress to recoup the money from the financial sector. (What shape this would take is unclear, but House Speaker Nancy Pelosi and others had earlier discussed a fee on financial institutions after the five-year period.) As discussed in last week's Digest article, Congressional leaders did win some concessions that improved the President's initial proposal. One involves limiting the deductibility of compensation to highly paid executives in the entities participating in the bailout. (However, some astute observers have pointed out that serious loopholes in that rule remain, including the fact that stock options are apparently not covered).

AMT Relief

The tax cut package has had a long and tortuous history. Generally speaking, the Democrats in the House have opposed passage of any type of tax cut legislation that will result in an increase in the budget deficit. This is entirely reasonable, especially given the massive deficits racked up throughout the Bush years, and in practice this means that any tax cuts must be accompanied by revenue-raising provisions or cuts in spending. In the Senate however, a minority of Republican Senators can block any legislation that has any sort of revenue-raising provision, and the result has been a long feud between the two chambers over whether to pay for AMT relief and other tax breaks.

The AMT is a backstop tax designed to ensure that well-off people pay some minimum tax no matter how proficient they are at finding loopholes to reduce or wipe out their tax liability. Tax liability is calculated under the regular rules and the AMT rules, and you only have to pay the AMT if your AMT liability exceeds your regular income tax liability.

For most middle-class taxpayers, this is usually not an issue. But the Bush administration chose to lower the regular income tax without making any permanent change to the AMT, so of course that means that more people are going have to pay the AMT. Another problem, albeit a less important one, is that inflation is eating away at the value of the exemptions that keep most of us from paying the AMT. The Clinton administration increased these exemptions, but no permanent increase in those exemptions has been made during the Bush years.

The adjustment in the AMT that was included in the bill will increase these exemptions so that most of us will continue to be unaffected by the AMT.

Earlier this year, the House approved AMT relief and the tax exenders, but included provisions in each that would offset the cost by closing tax loopholes. Republicans in the Senate objected to the offsets and vowed to block these bills.

More recently, the House actually relented somewhat and passed a bill that would provide AMT relief without paying for it, increasing the deficit by over $60 billion. Unfortunately, this was not enough for the Senate, which insisted on increasing the deficit even more by including the tax extenders without offsetting all of their costs.

Tax Extenders

The Senate had been insisting on the passage of a bill combining the AMT relief with the "tax extenders." The extenders include all sorts of handouts that either subsidize businesses that don't need subsidies (like the research credit), cut taxes in ways that are not particularly progressive (like the deduction for state sales taxes and the deduction for tuition which really only benefits fairly well-off families), or just offer very trivial benefits (like the provision allowing teachers to deduct $250 in classroom expenses, which yields a benefit of about $60 for teachers lucky enough to be in the 25 percent bracket).

The legislation includes one very wise provision to offset $25 billion of the cost by shutting down offshore tax schemes that help the already highly compensated avoid taxes on their deferred compensation. Generally, when a company pays into a deferred compensation plan for an employee, if that plan is "non-qualified" (meaning it exceeds certain limits that the super-compensated don't want to deal with) the company cannot take a tax deduction for the payment until it is actually received as income in later years by the employee. But some have figured out how to have their deferred compensation routed through an offshore entity in some tax haven so that there is no tax paid to the U.S. government or any other government, so not being able to deduct the payment is not an issue. This provision would make the deferred compensation in this situation immediately taxable to the individual, so that there would no longer be an incentive to use this scheme.

The passage of this reform is a positive development, but this still leaves a total $110 billion increase in the deficit as a result of the tax cuts.

As Isaiah Poole at the Campaign for America's Future observed this week,

"Whatever the merits of these tax measures -- and you can be sure that the merits of many of these provisions are highly questionable and exist only at the behest of lobbyists or lawmakers pandering for votes -- they certainly make a mockery of all the protestations of not turning the economic rescue effort into a "Christmas tree" of special-interest provisions. As it turns out, the "Christmas tree" concern only applies to provisions that would, for example, fund community organizations that have a track record of helping homeowners avoid foreclosure. You know, things that would help ordinary people directly affected by the financial crisis."

The Senate is poised to add a hundred billion dollars to the federal budget deficit by enacting more tax cuts. Democratic Senate leaders have stated that they believe new tax cuts should be paid for, but many Republicans insist on blocking any bill that increases anyone's tax bill, even if the legislation merely closes an egregious tax loophole. Their blocking tactics can succeed in the Senate, where a minority of 41 lawmakers can block most legislation. The House of Representatives, which is governed by the majority rule principle recognized by most modern democracies but not in the U.S. Senate, has passed legislation that includes most of these tax cuts but also includes revenue-raising provisions to offset their costs.

Senate leaders have apparently made a deal that would allow them to enact relief from the Alternative Minimum Tax (AMT) for a year and extensions of several temporary tax cuts targeted to various special interests (often called the tax extenders) at a cost of around $130 billion, and including a revenue-raising provision that would offset just $25 billion of that cost. The Senate is scheduled to take several votes on Tuesday, including one to provide AMT relief with the costs fully offset by revenue-raising provisions, but this is expected to fail because a minority of Senators will block it. The Senate is then expected to move on to approve AMT relief that is not paid for.

Important Revenue-Raising Provision Would Crack Down on Tax Avoidance Through Deferred Compensation

The revenue-raiser is certainly a worthy provision. It would shut down offshore tax schemes that help the already highly compensated avoid taxes on their deferred compensation. Generally, when a company pays into a deferred compensation plan for an employee, if that plan is "non-qualified" (meaning it exceeds certain limits that the super-compensated don't want to deal with) the company cannot take a tax deduction for the payment until it is actually received as income in later years by the employee. But some have figured out how to have their deferred compensation routed through an offshore entity in some tax haven so that there is no tax paid to the U.S. government or any other government, so not being able to deduct the payment is not an issue. This provision would make the deferred compensation in this situation immediately taxable to the individual, so that there would no longer be an incentive to use this scheme.

But this provision, worthy as it is, pays for less than a fifth of the total cost of the tax cuts included in the bill. The Bush administration and its allies in Congress have promoted the bizarre idea that any tax cut that is enacted for one year can be extended indefinitely without offsetting the cost because such an extension is merely "preventing a tax increase."

Republican Leaders Are Shocked -- Shocked I Tell You! -- that the AMT Will Affect More Taxpayers

This is most ludicrous in the case of AMT relief. The AMT is basically a backstop tax geared towards getting well-off people to pay some minimum tax no matter how proficient they are at finding tax loopholes to reduce or wipe out their tax liability. Tax liability is calculated under the regular rules and the AMT rules, and you only have to pay the AMT if your AMT liability exceeds your regular income tax liability. For most people who are not rich, this is usually not an issue. But the Bush administration chose to lower the regular income tax without making any permanent change to the AMT, so of course that means that more people are going have to pay the AMT. Another problem, albeit a less important one, is that inflation is eating away at the value of the exemptions that keep most of us from paying the AMT. The Clinton administration increased these exemptions, but no permanent increase in those exemptions has been made during the Bush years.

The AMT will affect over 20 million people this year if Congress does not act. In recent years Congress has passed several temporary "patches" to the AMT to prevent this from happening, and this year's patch will cost over $60 billion.

The Bush administration chose to not include a permanent fix to the AMT in its tax plan in 2001 because that would have increased the cost of the proposal. During George W. Bush's first presidential campaign in 2000, CTJ's initial analysis of the governor's tax proposal assumed that it did include a fix to the AMT, but Bush's advisers insisted that this was not true. Of course, we have ended up paying for AMT relief anyway, the only difference is that now President Bush and his allies can pretend that the need for AMT relief was entirely unexpected and that this somehow means it can be deficit-financed.

The Center on Budget and Policy Priorities helps us out with a little history lesson. This is what Senate Finance Committee ranking Republican Charles Grassley said in January of last year. It typifies what the President and his allies have been saying about the AMT:

"It's ridiculous to rely on revenue that was never supposed to be collected in the first place... It's unfair to raise taxes to repeal something with serious unintended consequences like the AMT."

Compare this to what Senator Grassley said when the first Bush tax cut bill was being debated:

"Roughly one in seven taxpayers will come under the shadow of the Alternative Minimum Tax by the end of the decade... That figure will significantly be higher if President Bush's tax plan is adopted, and that is according to the Joint Tax Committee of the Congress."

The Tax Extenders and Other Tax Cuts -- Some Bad, Some Good

The extenders include all sorts of handouts that either subsidize businesses that don't need subsidies (like the research credit), cut taxes in ways that are not particularly progressive (like the deduction for state sales taxes and the deduction for tuition which really only benefits fairly well-off families), or just offer very trivial benefits (like the provision allowing teachers to deduct $250 in classroom expenses, which yields a benefit of about $60 for teachers lucky enough to be in the 25 percent bracket). CTJ has explained in detail why Congress would be better off ending the ritual of passing "extenders" and should simply let these provisions expire.

There are surely some good provisions in the bill as well. A portion of the tax cuts (about six percent) are targeted towards disaster relief. One particularly progressive provision would make it easier for low-income people to receive the refundable portion of the child credit. Over a thousand organizations from all over the country supported this provision, including CTJ. This improvement in the child credit accounts for only around 2 percent of the cost of the entire bill, and we certainly wish that progressive provisions like this made up a much larger proportion of the tax legislation coming out of Congress lately.

Energy Tax Provisions

The Senate will also vote on a package of extensions and modifications of energy tax breaks on Tuesday. This package at least includes revenue-raising provisions to offset its $17 billion cost. One would limit -- but not eliminate -- the use of the section 199 deduction for manufacturing by oil and gas companies. (Apparently many Senators still believe that pumping oil or gas is "manufacturing" and scaled back an earlier proposal that would completely stop the energy companies from using the manufacturing deduction). Another requires securities brokers to report the "basis" of securities they buy and sell, which will help prevent evasion of capital gains taxes.

While some environmental organizations are applauding this package of incentives for everything from wind and solar power to electric cars, other green groups have thrown cold water on the party by criticizing the compromises that were made leading to passage.

"Unfortunately," wrote the president of the National Wildlife Federation in a letter to the Senate, "by including sweeping new federal subsidies for oil shale, tar sands and liquid coal refining, the bill no longer represents the kind of progress America needs to confront global warming."


Housing Bill Near Enactment


| | Bookmark and Share

The long-sought housing bill is likely to become law by next week. President Bush dropped his veto threat this week and the House passed a revised version of the bill by a vote of 272-152. On Friday, the Senate voted 80-13 for cloture on the bill and a final vote is expected on Saturday.

The bill will temporarily allow the Treasury Department to prop up the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac and will also create a federal regulator to oversee them. It will also allow the Federal Housing Authority (FHA), to guarantee refinanced mortgages for homeowners in danger of foreclosure, and will provide communities with additional Community Development Block Grant funds to buy foreclosed or abandoned properties.

The bill includes about $15 billion in tax provisions that are presented as help for homeowners and people in the home-building industry. One provision will create a refundable $7,500 credit for first-time homebuyers that must be paid back in equal installments over the next 15 years. This is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $75,000 (or married couples with incomes of $150,000). It's not clear how helpful this could be, partly because it would not make any money available at the time a down payment is made but would be claimed afterwards.

Another provision will create a deduction for property taxes for non-itemizers, which is capped at $500 per spouse. Most people with a home mortgage do itemize in order to take advantage of the home mortgage interest deduction, so many struggling homeownders may not be helped by this.

The bill also includes provisions to expand the Low Income Housing Tax Credit and to increase the use of bonds by state and local government to address housing needs.

The cost of the tax breaks are offset by revenue-raising provisions. About $9.5 will be raised by requiring banks to report to the IRS credit card transactions for most businesses and $1.4 billion will be raised by limiting the provision of the tax code that currently allows someone who sells a home to exclude the resulting gains from taxable income.

Another 7.6 billion will be raised by delaying the implementation of a tax break for multinational corporations that should never have been enacted in the first place. The soon-to-take-effect law (the new "worldwide interest allocation" rules) is designed to make it easier for multinational corporations to take U.S. tax deductions for interest payments that are really expenses of earning foreign profits and therefore should not be deductible. Implementation of this tax break will be delayed two years, until 2011.


Senate Slowly Working Towards Passage of Housing Bill


| | Bookmark and Share

The U.S. Senate is now expected to wait until after the July 4 recess to vote on a bill (H.R. 3221) that reforms the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac, modernizes the Federal Housing Authority (FHA), allows the FHA to guarantee refinanced mortgages for homeowners in danger of foreclosure, and provides communities with additional Community Development Block Grant funds to buy foreclosed or abandoned properties.

The bill also includes over $14 billion in tax cuts aimed at housing. A provision costing $4.3 billion over ten years creates a refundable $8,000 credit for first-time homebuyers that must be paid back in equal installments over the next 15 years. This is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $75,000 (or married couples with incomes of $150,000). It's not clear how helpful this could be, partly because it would not make any money available at the time a down payment is made but would be claimed afterwards.

Another provision costing $1.5 billion over ten years creates a deduction for property taxes for non-itemizers, which is capped at $500 per spouse. Because of the home mortgage interest deduction that is currently available for itemizers, most people with a mortgage already itemize their deductions. That means that the main beneficiaries of this provision will likely be homeowners who don't have mortgages -- even though this is a bill that is supposed to address a mortgage foreclosure crisis.

The bill also includes provisions to expand the Low Income Housing Tax Credit and to increase the use of bonds by state and local government to address housing needs.

Limitation Interferes with State and Local Property Tax Decisions

Disturbingly, the new non-itemizer deduction for property taxes will be denied to people living in a jurisdiction that recently raised its property taxes, discouraging local governments from raising revenue needed to deal with growing fiscal problems. State and local governments hardly need an extra reason to avoid raising property taxes, given the unpopularity of that particular form of taxation at this time despite massive budget shortfalls in the states. The Center on Budget and Policy Priorities points out that this limitation interferes with state and local prerogatives and would create an administrative headache for the IRS.

Most Unjustified Tax Break Left Out of New Version in the Senate

Fortunately, the very worst provision of the previous Senate bill has been dropped from this version. That is the "net operating loss carryback" provision (or NOL carryback) that would have allowed companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed). This would basically be a tax break with no strings attached for any company (not just home builders). Citizens for Tax Justice and several other groups had issued harsh criticisms of the previous Senate bill because of this and other provisions.

Senate Bill Includes Revenue-Raising Provisions But Is Not Quite Deficit-Neutral

The bill replaces $9.8 billion of the revenue by requiring banks to report to the IRS credit card transactions for most businesses. It replaces another $1.4 billion by limiting the provision that currently allows someone who sells a home to exclude the resulting gains from taxable income. Some more revenue is replaced by increases in various penalties, but the bill still leaves about $2.5 billion of the $14 cost unpaid for, a shortcoming that Democrats in the House of Representatives will likely attempt to rectify when they receive the bill.

Bill Faces Amendment Dispute, Veto Threats

This week Senator John Ensign (R-NV) demanded that a $8 billion amendment to extend tax breaks for renewable energy -- without any revenue-raising provisions to offset the costs -- be attached to the housing bill. He has promised to use procedural mechanisms to slow the consideration of the bill if this amendment is not adopted. This forced Senate leaders to push consideration of the bill off into the week after the July 4 recess.

Even after the Senate approves the bill, the House may approve another version that improves upon the revenue-raising provisions or other parts of the bill, which would require another Senate vote of approval. Then it faces a veto threat from the White House, partly because it feels the credit for first-time homebuyers is a waste of resources.


House of Representatives Approves Housing Bills, Bush Threatens Veto


| | Bookmark and Share

On Thursday, the House of Representatives passed two bills that are part of a housing stimulus package promoted by House Democratic leaders. The first is the Neighborhood Stabilization Act (H.R. 5818), which would make available $15 billion in grants for state and local governments and non-profits to buy up and rehabilitate foreclosed homes, in order to prevent neighborhoods from being adversely affected by vacancies. The second, larger bill is the American Housing Rescue and Foreclosure Prevention Act. This consists of several separate pieces of legislation offered as amendments to replace the language in the housing bill passed in the Senate, H.R. 3221. It includes language that reforms the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac, modernizes the Federal Housing Authority (FHA) and allows the FHA to guarantee refinanced mortgages for homeowners in danger of foreclosure.

Housing Tax Provisions in the House Package

Another piece of legislation included in the larger bill is the $11 billion tax bill approved by the House Ways and Means Committee a month ago. It includes a refundable $7,500 credit for first-time homebuyers that must be paid back in equal installments over the next 15 years, which is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $70,000 (or married couples with incomes of $140,000). It's not clear how helpful this could be, partly because it would not make any money available at the time a downpayment is made but would be claimed afterwards.

The House bill also has a deduction for property taxes for non-itemizers, which is capped at $350 per spouse. Because of the home mortgage interest deduction that is currently available for itemizers, most people with a mortgage currently do itemize their deductions. That means that the main beneficiaries of this provision will likely be homeowners who don't have mortgages -- even though this is a bill that is supposed to address a mortgage foreclosure crisis.

The bill also includes provisions to expand the Low Income Housing Tax Credit and to increase the use of bonds by state and local government to address housing needs.

Senate Bill Widely Panned

A month ago, the Senate passed a housing bill that was widely panned by housing advocates, policy experts, and labor, partly because of its inclusion of a "net operating loss carryback" provision (or NOL carryback). This provision would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed). This would basically amount to a tax break with no strings attached for any company (not just home builders).

It's highly unlikely that this will prevent layoffs of employees as its proponents claim. Companies will always have an incentive to lay off workers if no one is seeking to buy whatever the company produces. Handing the companies a tax break with no strings attached does nothing to change that. Contrary to the claims of backers of the tax break, labor groups have argued that this provision could actually encourage construction companies to dump their excess housing inventory on the market more quickly since the tax break would cushion the losses that result from selling at lower prices.

The Senate bill also includes a $500 per-spouse deduction of property taxes for homeowners who do not itemize their deductions, which is larger than the similar deduction in the house legislation but will still save most families only $150 at the most. This deduction will be denied to people living in a jurisdiction that recently raised its property taxes, discouraging local governments from raising revenue needed to deal with growing fiscal problems.

Also included in the Senate bill is a $7,000 non-refundable credit for the purchase of a foreclosed home, which will do little to make housing more affordable and might actually encourage foreclosure. Unlike the credit in the House version, the Senate bill would not require the credit to be paid back over time, but it would be non-refundable, meaning fewer families could benefit from it. The Senate bill also includes provisions expanding the use of bonds by state and local government, like the House bill.

Unlike the tax provisions approved by the House, the Senate's tax cuts would not be paid for.

Veto Threats from the White House

President Bush opposes all of these bills, arguing that in many cases they reward lenders or homebuyers who acted irresponsibly. The President has threatened to veto the two House bills. White House Press Secretary Dana Perino even attacked the Senate bill, saying it "will likely do more harm than good by bailing out lenders and speculators and passing on costs to other Americans who play by the rules and honor their mortgage debt obligations." The differing provisions of the House and Senate bills and the opposition from the President make it very unclear what legislation -- if any -- will be enacted to address the housing situation.


John McCain: If the Issue Is Health Care, the Answer Is... Tax Cuts!


| | Bookmark and Share

On Tuesday, Senator John McCain refined his health care proposal a little bit in a speech in Florida. The main thrust of his plan is still to allow a tax credit for the purchase of health insurance, including non-group insurance (insurance purchased on the individual market rather than through an employer). The credit amount would be $2,500 for individuals and $5,000 for families.

To pay for this, McCain would eliminate the exemption for employer-provided health insurance. This would basically make the tax code tilted towards individually purchased health care and perhaps even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance.

The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous.

Responding to criticisms that people with preexisting health conditions would never be offered adequate health insurance, McCain on Tuesday added a detail that he calls a "Guaranteed Access Plan" which would "reflect the best experience of the states to ensure these patients have access to health coverage." Jonathan Cohn at The New Republic explains why the programs set up by the states to do this so far utterly fail to provide affordable care to the people who have a preexisting condition. In these state plans the premiums can run in the neighborhood of $600-$850 per month, cost-sharing runs in the thousands and the preexisting condition won't even be covered for at least several months.

McCain also wants to pass legislation that would make it easier for health insurance companies to sell policies across state lines, but health care advocates have opposed similar legislation because it would make null and void the differing regulations and standards that states have enacted for health insurance companies operating within their borders. McCain also said he would expand Health Savings Accounts (HSAs). Introduced as part of the Medicare prescription drug law in 2003, HSAs are accounts to which individuals can make tax-deductible contributions and which are connected with a high-deductible health insurance plan. They offer the most benefit to those who are in the highest tax bracket and need no or little medical care, and can therefore serve as tax shelters. The Government Accountability Office just found that HSAs are typically used by people with incomes far higher than average.


Progressive Organizations Blast Senate's Foreclosure Prevention Act as Giveaway to Business


| | Bookmark and Share

Several organizations came together on tax day to call on the House of Representatives to pass legislation dealing with the housing crisis -- and to criticize the Senate for passing a bill that mainly gives tax breaks to businesses. (Click here to view coverage by Lou Dobbs). At the press event organized by the Laborers' International Union of North America (LiUNA), the union's president Terence O'Sullivan and others blasted the Senate bill, which CTJ criticized earlier this month. "To call it pigs at the trough would give a bad name to pigs," O'Sullivan said. Representatives from the Economic Policy Institute, the Center for American Progress, ACORN, the Service Employees International Union (SEIU), as well as a woman facing foreclosure on her home all called for action by Congress, and several noted that most of the action needed would be outside the tax code. CTJ director Robert McIntyre said, "If we gave this issue to the agriculture committees, they'd probably give us farm subsidies, so if we give this problem to the tax-writing committees they give us tax breaks because that's what they do. I'm pretty sure we have committees in Congress to deal with housing."

In the House, that committee is the Financial Services Committee chaired by Barney Frank, who wants to allow the Federal Housing Administration to guarantee refinanced home mortgages. Another provision that many advocates want would allow a judge in some situations to rewrite the terms of a home mortgage, but Democratic leaders in the House have cast doubt about whether this can be passed.

The Ways and Means Committee (the tax-writing committee in the House) approved a package of tax provisions that was an improvement over those passed by the Senate and which may be attached to a broader bill. The Ways and Means bill does not include the very worst provision in the Senate bill, the "net operating loss carryback" provision (or NOL carryback). This provision would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed) even though it is highly unlikely that this will prevent layoffs of employees or do anything for home builders other than encourage them to dump their inventory.

Unlike the Senate legislation, the Ways and Means Committee bill includes revenue-raising provisions to offset the costs of the tax breaks. One would require that brokers of publicly traded securities report the basis of a given security in a transaction to ensure that capital gains taxes are paid properly. Another offset would delay and limit an unnecessary tax break for corporations, "worldwide interest allocation," which hasn't even gone into effect yet. (For more on these offsets, see last week's article on the House legislation.)

Both bills include a deduction for state and local property taxes available to people who don't itemize deductions (currently this is only allowed for itemizers). At Tuesday's event McIntyre pointed out that most people with mortgages are itemizers, so the people most likely to benefit from this are homeowners without mortgages, making it difficult to see how the provision has anything to do with a mortgage foreclosure crisis. Both bills also include a credit for buying a home, but in neither case would the credit be available for a down payment. It would not be received until after after a homebuyer files taxes after the home is purchased.

In the House version, this is a refundable credit of $7,500 of first-time home-buyers, but it must be paid back over 15 years. In the Senate version, it's a non-refundable $7,000 credit for the purchase of foreclosed homes, which actually might encourage foreclosure. The credit in the Senate bill is disallowed to taxpayers in jurisdictions that raise property taxes, which would hamstring state and local governments struggling with fiscal problems from raising revenue to avoid cuts in public services.

House leaders are hoping to have a full bill ready for a floor vote in early May.


Tax Day Bill Approved by the House Would End IRS's Use of Private Debt Collectors


| | Bookmark and Share

The House of Representatives approved a bill on "tax day" that would end the IRS's use of private debt collection agencies to locate unpaid taxes. The Taxpayer Assistance and Simplification Act of 2008 (H.R. 5719) would ban the federal government from entering into new contracts with the private collectors and the extension of the existing contracts with two companies. (A third company, a scandal-plagued firm based in Texas, was dropped from the program for reasons the IRS would not make public). Similar legislation was passed by the House last year but the Senate did not act.

The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission basis unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights.

In the Senate, Byron Dorgan (D-ND) has introduced legislation (S. 335), with 23 cosponsors, that would end the private debt collection program. However, the Senate Finance Committee chaired by Max Baucus (D-MT) has not yet acted, and the committee's ranking Republican, Charles Grassley (R-IA) has been particularly vocal about allowing the private debt collection companies, one of which is based in his state, to continue the work for IRS.

The Congressional Budget Office and the Joint Committee on Taxation have estimated that ending the private debt collection program will cost over half a billion dollars over a decade (since that's the net revenue the private companies would collect if allowed to continue). Of course IRS employees could collect much more for the same level of funding, but the budget "scoring" process does not treat funding for the IRS in a manner that accounts for the vast return on every dollar spent on tax collection.

As a result, the House had to come up with provisions that would raise revenue to offset the costs of the bill. One would require that people using money from a health savings account (HSA) provide more evidence that the money was used for a medical expense. HSAs, introduced as part of the Medicare prescription drug law in 2003, are accounts to which individuals can make tax-deductible contributions and which are connected with a high-deductible health insurance plan (plans with deductibles of at least $1,050 for an individual or $2,100 for a family). One fear health care advocates have about HSAs is that they will, over time, encourage healthier and wealthier people to leave the traditional health insurance market, which will make health insurance even less affordable for those at-risk workers and families who really need it. A fear tax fairness advocates have is that HSAs are just a way for better off people to shelter money from taxes. The deduction is worth the most to well-off families who will likely have health insurance with or without a tax incentive.

Another revenue-raising provision in the bill would close a tax loophole that is used by Kellogg Brown & Root (KBR), which until last year was a subsidiary of Halliburton. As we explained a month ago, KBR used the loophole to avoid hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees are working for a Cayman-Islands based "shell company."

Both of these are provisions that would be worthy even if Congress was not trying to raise revenue and they make the overall bill even more praiseworthy. Predictably, the President has threatened again to veto any legislation that ends the private debt collection program, in line with a pattern of positions that choose the private sector over the public sector even in situations in which the latter is able to operate far more efficiently.


Senate Approves Foreclosure Bill that Mainly Helps Business; House Takes a Different Approach


| | Bookmark and Share

On Thursday, the Senate approved the Foreclosure Prevention Act, an $18 billion package of tax breaks and spending that proponents argue will ameliorate the housing crisis, by a vote of 84 to 12. The bill consists of the tax breaks criticized here last week and costing about $10.8 billion over ten years, around $4 billion to be spent through the Community Development Block Grant for local governments to buy or redevelop abandoned and foreclosed homes, and other amendments approved before passage that raised the cost by around $3 billion.

The tax breaks include one provision that would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed) even though it is highly unlikely that this will prevent layoffs of employees or do anything for home builders other than encourage them to dump their inventory.

Another break included is a $500 per-spouse deduction of property taxes for homeowners who do not itemize their deductions, which will probably save families $150 at the most. It will be denied to people living in a jurisdiction that recently raised its property taxes, discouraging local governments from raising revenue needed to deal with growing state fiscal problems. Also included is a $7,000 non-refundable credit for the purchase of a foreclosed home which will do little to make housing more affordable and might actually encourage foreclosure.

The House Moves in a Different Direction

Democratic leaders in the House have indicated that they plan to move in a different direction. On Wednesday the House Ways and Means Committee approved an $11 billion package that does not include the loss carryback provision. It includes a refundable $7,500 credit for first-time homebuyers (of any homes, not just foreclosed homes) that must be paid back in equal installments over the next 15 years, which is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $70,000 (or married couples with incomes of $140,000). The House bill also has a deduction for property taxes for non-itemizers, but ,capped at $350 per spouse, it is even smaller than the one in the Senate version.

Whether these provisions will help many people obtain or keep a home seems questionable. Offering people a small interest-free loan and a tiny cut in property taxes doesn't seem useful for those who are facing foreclosure or for communities that want to preserve their neighborhoods. But at least the House bill does not include the Senate's giveaway to business, the loss carryback provision.

Other changes in the House bill include modifications to the Low-Income Housing Tax Credit and other provisions. Both the House version and the Senate version have provisions to allow increased use of tax-exempt housing bonds by states and localities.

The House bill also has provisions to offset the costs of the bill, and these are provisions that should be passed regardless of Congress's search for revenue. One would require that brokers of publicly traded securities report the basis of a given security in a transaction to ensure that capital gains taxes are paid properly. Very generally, a capital gain is the difference between the price a person pays for property and the price the person sells it for later. The "basis" is the initial purchase price, and if it is not reported correctly, this can lead to an underpayment in capital gains taxes.

Another offset would delay and limit an unnecessary tax break for corporations, "worldwide interest allocation," which hasn't even gone into effect yet. Tax rules already let multinationals take U.S. tax deductions for some of their interest expenses that are really foreign. In 2004, Congress actually expanded this loophole with worldwide interest allocation, a change that is scheduled to take effect starting in 2009.

The final outcome for this legislation is unclear given the disagreements between the House and the Senate and given that the White House has signaled that it has misgivings about the Senate bill.

The Foreclosure Prevention Act introduced in the Senate this week includes several measures that lawmakers argue will address the home mortgage foreclosure crisis and the problems plaguing the home construction industry. Judging from the information we have so far, it appears that the tax provisions in the bill are likely to help large corporate homebuilders and yet do little for ordinary Americans who are either struggling to keep their homes or who are hurt by the downturn in the home construction industry.

These tax provisions include:

Net Operating Loss Carryback

Cost: $6 billion ($25.5 billion over 2 years, $6 billion over 10 years)

As a general rule, a company operating at a loss in a given year will not have to pay taxes for that year, because its deductions will wipe out its taxable income. Under current law, if a company has excess deductions beyond its taxable income for the year, it can apply those excess deductions not only against earnings in later years, but also against income taxed in the previous two years. That allows it to get previously paid taxes refunded. The Senate bill would expand this benefit by allowing companies to apply losses in 2008 or 2009 to taxes paid in the previous four years.

This benefit would be available for all companies, but proponents in the Senate have argued that this will particularly ease the pain felt by home-construction companies. Proponents say the loss carryback provision will make it less likely that construction companies will need to lay off workers, and that it will somehow reduce the pressure on them to quickly sell their excess inventory at a loss.

But there is no reason to think that this tax break will have these positive effects. Companies will always have an incentive to lay off workers if no one is seeking to buy whatever the company produces. Handing the companies a tax break with no strings attached does nothing to change that. Contrary to the claims of backers of the tax break, labor groups have persuasively argued that this provision could actually encourage construction companies to dump their excess housing inventory on the market more quickly since the tax break would cushion the losses that result from selling at lower prices.

In terms of its effects on the housing industry, the main effect of this corporate giveaway will be to reward large corporate home-builders who helped perpetrate the sub-prime lending debacle. Other major beneficiaries will be large corporations who use the "bonus depreciation" tax break enacted earlier this year to reduce their taxable incomes below zero, and who will enjoy outright negative tax rates if this NOL carryback provision is enacted.

Non-Itemizer Tax Deduction for State and Local Property Taxes

Cost: $1.5 billion

Currently, homeowners are allowed to take an itemized deduction for state and local property taxes. But less than a third of taxpayers bother to itemize their deductions, because most find it more beneficial to use the standard deduction. The Senate bill would offer non-itemizers a deduction for property taxes on top of the standard deduction this year. The new deduction would be limited to $500 for single taxpayers and $1,000 for married couples.

Proponents of this provision apparently fail to understand the purposes of the standard deduction: (a) to make the tax code fairer and (b) to make tax filing simpler for most people by giving them a simple deduction that is bigger than what they'd get from itemizing.

Right now, the only homeowners who do not itemize their property taxes are those for whom the standard deduction ($10,900 for couples) is bigger than their total expenses for state and local taxes, interest, donations, etc. In effect, non-itemizing homeowners already get to write off more than their total property taxes.

Adding an additional property tax deduction on top of the generous one already implicitly allowed to non-itemizers would make tax filing more complicated and tax enforcement more difficult.

The new deduction would provide little help to those who take advantage of it. Families who have no taxable income already would not be helped at all. For couples with two children, that includes those making less than $25,000. For couples with two children making more than $25,000 but less than $41,000, the maximum tax saving would be only $100. From $41,000 to $90,000 the maximum tax saving would be only $150. And above that level, the vast majority of homeowners already itemize deductions, and would thus get no benefit.

To illustrate how little thought went into the design of this foolish tax break, the new non-itemizer property tax deduction would be denied to taxpayers if their locality raised its property tax rate this year or next. The apparent goal of this strange rule is to punish taxpayers whose state or local governments have mitigated revenue losses caused by declining home values and the economic downturn. The Senate apparently hopes to encourage local government to deal with falling revenues by cutting back on public services such as education instead.

Foreclosed Home Purchase Tax Credit

Cost: $1.6 billion

The bill also includes a $7,000 non-refundable tax credit that can be claimed over two years by people who purchase foreclosed homes during the next 12 months. It seems unlikely that this provision would make foreclosed homes more affordable for buyers who earn enough to take advantage of this subsidy (more than $57,000 for couples with two children). Instead, it will probably lead to higher prices for the foreclosed homes. Indeed, supporters of this provision admit as much. "The $7,000 tax credit for those who buy foreclosed properties should stimulate demand for them and prevent their prices from falling further, said Sen. Johnny Isakson (R-Ga.)," according to the Washington Post (Apr. 5, 2008, p. D1).

The Social Security and Medicare trustees released their report on Tuesday announcing that the fiscal foundations of Social Security and Medicare are essentially unchanged since last year. Once again, they project that the Social Security trust funds will be depleted in 2041, at which point payroll taxes flowing into the program will be large enough to pay only 78 percent of the benefits that would go to beneficiaries if the program was fully funded.

Of course, many Americans might be surprised to learn that any program is funded, on paper anyway, for the next 33 years, so most future retirees are probably reacting calmly to this announcement, as they should. It's difficult to project revenues and expenditures of any sort out more than a decade, since these projections are extremely sensitive to changes in the economy and other factors. Further, under current rules Social Security benefits increase annually to match the growth in wages, which generally increase more rapidly than inflation, meaning that even if the unlikely worst case scenario came true and benefits were reduced in 2041, they might still be greater, in real terms, than those benefits received today.

Medicare is a different story. As the report itself says, "Medicare's financial difficulties come sooner -- and are much more severe -- than those confronting Social Security." This is because Medicare is not just facing the coming retirement of the baby boomers in large numbers, which is the only challenge facing Social Security. Medicare costs are rising because health care costs generally are rising. The trust fund for Medicare hospital insurance will be exhausted in 2019 and payroll taxes flowing into the program will only cover 78 percent of projected expenditures. Medicare benefits are not automatically cut if this happens. Rather, it would put a huge strain on the rest of the budget, as more general revenues are diverted from other services.

The cabinet officials who presented these figures on Tuesday seemed to be uninterested in answering any detailed questions about them. The figures don't exactly support the administration's approach, which has been to play up the alleged "crisis" in Social Security to somehow justify siphoning money out of the program and into private accounts, while opposing Medicare reforms proposed by the Medicare Payment Advisory Commission (MedPAC), a panel of experts created by Congress in the late 1990s.


Bush Vetoes Children's Health Care Bill, Continues to Promote His Faulty Tax Proposal


| | Bookmark and Share

This week President Bush vetoed the bill to expand the State Children's Health Insurance Program (H.R. 976) that was approved by the Senate and House of Representatives last week. The bill would increase funding for the program by $35 billion over ten years by increasing the federal tobacco tax for cigarettes from 39 cents to a dollar per pack. The President has promoted his own idea for expanding health care -- a change in the tax code that would weaken the employer-based health care system without guaranteeing that it's replaced with a viable alternative.

The President's own proposal would eliminate the deduction for employer-provided health insurance and instead offer a deduction for health insurance purchased on the individual market (for the purchase of coverage that is not employer-provided). The President's proposal would basically make the tax code biased towards individually purchased health care and even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance. The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous. The Center on Budget and Policy Priorities explains this and other problems with the concept.

None of this is to say that the way the tax code currently treats health care is optimal. The deduction for employer-provided health insurance provides the greatest benefit for those in the highest income brackets and the lowest benefit for those in the lowest income brackets, making it an undeniably regressive policy. Also, it does nothing for the estimated 45 million Americans lacking health insurance.


Bush Prepares to Veto Expansion in Children's Health Care


| | Bookmark and Share

A bill to expand the State Children's Health Insurance Program (H.R. 976) was approved by the House of Representatives on Tuesday and the Senate on Thursday. The bill would increase funding for the program by $35 billion by increasing the federal tobacco tax for cigarettes from 39 cents to a dollar per pack.

President Bush has threatened to veto the bill, which did not pass the House by the two-thirds majority needed to override a veto. The White House argues that expanding SCHIP will "crowd out" private insurance. The Congressional Budget Office has found that two thirds of the children receiving health care as a result of an SCHIP expansion would be those who would otherwise not have health insurance.

Health care economist Jonathan Gruber has pointed out that the "crowd-out" effect of SCHIP is probably the lowest of any health care proposal. He has argued that, in comparison, the President's tax proposals to expand health care have benefits much more concentrated among those who already have health insurance.

Citizens for Tax Justice has noted that cigarette taxes (whether on the federal or state level) are regressive, meaning they take a larger proportion of income from a poor family than from a wealthy family, but they may nevertheless be the most viable option for funding an important health care initiative at this time.

It's true that if two smokers, one poor and one wealthy, are smoking the same amount and paying the same tax of one dollar a pack, that one dollar equals a larger percentage of total income for the poor smoker than for the wealthy smoker. It's always better to fund important programs with progressive taxes, but the health care crisis among low- and middle-income families requires compromise. Unlike President Bush, Democrats and many Republicans in Congress have shown that they are willing to make such a compromise.

The federal government's primary approach to helping the middle-class access healthcare is through the tax code. Most importantly, employers can deduct funds used to provide health insurance to employees, who generally exclude the benefits from income. This is not the most rational or comprehensive approach but has helped middle-class people obtain health insurance.

The deduction for employer-provided health insurance is projected by the Congressional Joint Committee on Taxation to cost the federal government $534 billion from 2006 through 2010. Deductions for health insurance premiums available to the self-employed will cost another $22.6 billion between 2006 and 2010. While many middle-class families have obtained health insurance through this route, there are many ways in which it may not be an efficient or equitable policy. For one thing, the tax benefit is greatest for those in the highest income brackets and lowest for those in the lowest income brackets, making it an undeniably regressive policy. Also, it does nothing for the estimated 45 million Americans lacking health insurance. The rising high cost of health care has caused many employers, particularly small businesses, to decide to not provide health insurance to their workers, despite the tax break that would benefit the employees.

White House Proposal Could Make Matters Worse

President Bush argues that his health care tax proposal would remedy this situation. He would eliminate the deduction for employer-provided health insurance and instead offer a deduction for health insurance purchased on the individual market (for the purchase of coverage that is not employer-provided) The reality is that his plan could weaken employer-provided health insurance without ensuring that an adequate alternative takes its place. The President's proposal would basically make the tax code biased towards individually purchased health care and even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance. The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous.

A recent summary of research from the Center on Budget and Policy Priorities notes studies showing that most low-income people trying to obtain coverage on the individual health insurance market have difficulty and over a quarter are denied coverage or are charged much more because of a pre-existing condition. The types of coverage available on the individual market often result in greater out-of-pocket expenses that will cause some low-income people to forego necessary health treatments.

Public Programs Like SCHIP More Efficient than Tax Subsidies - Yet Face Presidential Veto

The President has claimed his proposal would be more efficient than the House and Senate bills to expand the State Children's Health Insurance Program (SCHIP), which the two chambers approved this week. The White House argues that expanding SCHIP will "crowd out" private insurance. The Congressional Budget Office has found that two thirds of the children receiving health care under either bill would be those who would otherwise not have health insurance. Health care economist Jonathan Gruber has pointed out that the "crowd-out" effect of SCHIP is probably the lowest of any health care proposal, and that the majority of benefits from the President's health care proposals go to those who would have health insurance anyway.

On August 2, the Senate passed its SCHIP bill, which increases the federal cigarette tax by 61 cents to one dollar per pack to offset the costs. The House passed its broader bill, which increases the federal cigarette tax by 45 cents per pack and includes other revenue-raising provisions, on August 1. The President has indicated that he would veto either version.


Crunch Time for Congress


| | Bookmark and Share

Among those items pushed back to September is the Alternative Minimum Tax reform plan being developed by the House Ways and Means Committee. While no actual bill has been released, it is known that the House Democrats want to exclude families with incomes of up to $250,000 a year (or $125,000 for singles) from the AMT, reduce the AMT for those between $250,000 and $500,000, and pay for the reform with a surtax on those with incomes above $500,000. Anti-poverty advocates are excited that the plan would also include improvements in the child tax credit and Earned Income Tax Credit.

While there is some question of whether or not the President would sign such a bill, it's possible the White House would find it risky to veto a bill that saves millions of middle-income taxpayers from the AMT (which is scheduled to expand its reach from about 4 million to 23 million this year if Congress does not act) in order to protect the very wealthiest Americans, who have received most of the Bush tax cuts.

The Senate Finance Committee is said to be interested in simply passing a one-year or two-year "patch," or temporary extension of the exemption that keeps most people from paying the AMT. This would cost around $50 billion just for one year. Finance Chairman Max Baucus (D-MT) has implied that he might increase the federal budget deficit by this amount rather than find revenue to pay for it. The Finance Committee has not tried to introduce a bill before the August recess.

President Bush stated Wednesday that he opposed expanding the State Children's Health Insurance Program (SCHIP) and would rather Congress enact his proposal to create a standard deduction from federal taxes for health insurance, whether it's employer-provided or purchased in the individual health insurance market. The President's proposal, which he first announced during his State of the Union address in January, has little chance of being enacted. It is widely opposed by many in Congress because it could undermine employer-based health insurance without guaranteeing that an adequate alternative would take its place.

President's Proposal would Shift Risk onto Individuals and Families

The stated purpose of the proposal is to "even the playing field" between those with employer-provided coverage (which is currently subsidized through the tax code) and those who purchase coverage in the individual health insurance market (which is mostly not subsidized under the tax code). Unfortunately, rather than evening the playing field, the President's plan would make the tax code more biased towards individually purchased health care and maybe even high-deductible health care. There would no longer be any incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer and employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous. Since the amount of the new deduction would be indexed to regular cost inflation but not to health care inflation (which is steeper) more and more people over time would find that their coverage costs more than the new deduction.

Little Effort at Practical Solutions in the White House

The President's words seemed geared towards satisfying certain ideological interests rather than finding practical solutions. He cast the issue as a choice between government intrusion in people's lives and the freedom of individuals to make choices in the market. As the Center on Budget and Policy Priorities has pointed out, most SCHIP and Medicaid recipients already choose between different private health plans that have contracted with their state and that have agreed to meet certain standards.

The President also invoked the fear that public health insurance "crowds out" private health insurance. The preeminent health economist whose work is often used to make such claims, Jonathan Gruber, has said that the public programs like SCHIP result in an increase in coverage among children who would otherwise go without health insurance and this far outweighs any "crowding out" of private insurance.

As reported in last week's Digest, one proposal being considered by Congress would pay for an SCHIP expansion with increased federal tobacco taxes.


Federal Tobacco Tax Hike May be Used to Partially Fund SCHIP Expansion


| | Bookmark and Share

Should federal tobacco taxes be raised from their current level of 39 cents a pack to help pay for health insurance for uninsured children? That question may be addressed soon, as the Senate Finance Committee and the House Ways and Means Committee are expected sometime this summer to mark up legislation to fund an expansion in the State Children's Health Insurance Program (SCHIP) that will cost $50 billion over five years. In February Senator Gordon Smith (R-OR) proposed raising the federal tobacco tax to about a dollar per pack, which he has recently said would raise as much as $35 billion of the $50 billion needed for the SCHIP expansion. The Campaign for Tobacco-Free Kids released a survey recently showing that two thirds of voters support hiking the federal tobacco tax by as much as 75 cents a pack if the funds go towards health care for uninsured children.

As the Campaign for Tobacco-Free Kids has pointed out, cigarette taxes are an effective policy if the goal is simply to reduce smoking or to prevent young people from taking up the habit. But using this revenue source to fund important programs is more problematic. Cigarette taxes (whether on the federal or state level) are regressive, meaning they take a larger proportion of income from a poor family than from a wealthy family. (If two smokers, one poor and one wealthy, are smoking the same amount and paying the same tax of one dollar a pack, that one dollar equals a larger percentage of total income for the poor smoker than for the wealthy smoker). It's always better to fund important programs with progressive taxes. Tobacco taxes also provide less funding over time, since they do not increase with inflation or with the price of cigarettes generally, so they are rarely a "permanent" solution to any funding problem.

Nevertheless, expanding health insurance for children is an extremely important priority that may require compromise. Tobacco taxes are not an ideal funding source, but then again, legislation produced by Congress is rarely ideal.


Using the Tax Code to Promote Postsecondary Education: We Might as Well Do It Right


| | Bookmark and Share

Several members of Congress are considering how to improve tax provisions that are designed to help people obtain postsecondary education and training, and recent reports on this topic has been issued by the Center on Budget and Policy Priorities and the Tax Policy Center. The Senate Finance Committee is expected to mark up legislation on education tax benefits after the Memorial Day recess. Currently taxpayers paying college or training expenses, including those who are not itemizers, can deduct up to $2,000 ($4,000 for married couples) for tuition and fees. Also, the Hope credit is available at a maximum of $1,650 per student this year (indexed for inflation) and the Lifetime Learning Credit (LLC) is available at a maximum of $2,000 per family. There are also several tax-preferred savings vehicles for education (Coverdell Education Savings, Accounts, Qualified Tuition Programs, and education savings bonds).

Lack of Progressivity

There are several problems with these tax benefits. For one, they're not very progressive. This is particularly troubling because we usually think the whole point of these tax breaks is to encourage people to obtain postsecondary education who otherwise would not, and wealthier families will typically send their children to college regardless of what tax benefits are available. Lower-income families, who are more likely to respond to subsidies for education, are not well-targeted by the tax benefits.

The tuition and fees deduction and the Hope credit and LLC are unavailable for people without income tax liability, so a sensible reform would be to provide a refundable credit. Most families of modest means pay federal payroll taxes but are not wealthy enough to owe federal income taxes (a family of four with an income of $42,000 won't pay federal income taxes in 2007). For these families, only a credit that is refundable (that results in negative income tax liability and a check from the IRS) can help.

The maximum LLC cannot be used unless a family spends at least $10,000 on education (because it credits 20% of the first $10,000 in expenses, up to a maximum credit of $2,000). One speaker at a forum on this topic hosted by the Tax Policy Center on Wednesday pointed out that 90 percent of students have expenses below $10,000. The tuition and fees deduction is regressive because its value depends on the tax rate the taxpayer is subject to. A family subject to a 35% tax rate can deduct $4,000 and reduce their taxes by $1,400, but a family subject to the 10% rate could deduct $4,000 and reduce their taxes by only $400.

Complexity

Another problem is that many families may find the rules governing these tax breaks too confusing and may not even realize that these benefits are available. A taxpayer must choose to use either the tuition and fees deduction, the Hope credit, or the LLC. A GAO report in 2005 found that over a fourth of taxpayers eligible don't take advantage of any of these tax benefits, and those who do use them often don't use the most advantageous tax break for their situation.

New Proposals Could Solve Some of These Problems

A bill sponsored by Rahm Emanuel (D-IL), Dave Camp (R-MI) and others in the House and Evan Bayh (D-IN) in the Senate would combine the three main tax benefits into one credit of up to $3,000 for postsecondary education expenses, including a much broader range of expenses (such as room and board, books, supplies and transportation). These expenses other than tuition often make up the bulk of costs for students of modest incomes in community colleges. The credit would cover 50% of the first $3,000 and 30% of the next $5,000 of these expenses. Up to half of the credit calculated based on expenses would be refundable, adding to the progressivity of the proposal.

Other proposals are being discussed, including one from Senator Charles Schumer (D-NY) for a simplified credit that would not be refundable, and which the Finance Committee is likely to consider. Advocates for making postsecondary education more accessible are hopeful that the Finance Committee can be pushed to move in the direction of the bill being sponsored by Emanuel, Camp and Bayh.


The Benefits of Closing the Tax Gap


| | Bookmark and Share

Congressmen Rahm Emanuel (D-IL) and Ray Lahood (R-IL) have put forward a bipartisan proposal to use revenues collected through better enforcement of capital gains taxes to double the funding of the State Children's Health Insurance Program (SCHIP) over the next 5 years to $60 billion. Ten billion dollars of this increase would go to children not currently covered by SCHIP. Families whose income is between 200% and 350% of the federal poverty level ($20,000 for a family of 4) would receive an advanceable and refundable tax credit to purchase health insurance for children.

The proposal to improve capital gains enforcement has already been presented as a bill by Representative Emanuel (H.R. 878) that would require securities brokers to report a customer's basis (generally the purchase price) in securities transactions to prevent understating the capital gains on such transactions. This step was one the suggestions offered by Citizens for Tax Justice to the Senate Budget Committee in January. The President included a similar proposal in his budget for fiscal year 2008. As reported in last week's Tax Justice Digest, another proposal to expand SCHIP would use revenue from an increased federal cigarette tax. The Center on Budget and Policy Priorities has a new report that outlines various ways of paying for an SCHIP expansion.


Should Cigarette Taxes Be Used to Pay for Healthcare?


| | Bookmark and Share

Twelve states are considering proposals to hike cigarette taxes, mostly in order to pay for healthcare initiatives, while a proposal in the U.S. Senate would hike the federal cigarette tax to fund an expansion of the State Children's Health Insurance Program (SCHIP). Of the 12 states, seven would use the money for healthcare. The increase may now be off the table in one of those states, Indiana. Governor Mitch Daniels's proposal to increase the tax from 55.5 cents to 80.5 cents was just rejected by the State House of Representatives. In the U.S. Senate, Gordon Smith (R-OR) claims that using cigarette taxes for SCHIP would be justified by the link between cigarettes and healthcare, which is not exactly a watertight argument since the vast majority of children served would not be smokers. Of course, efforts to find revenue sources for SCHIP, which currently faces a shortfall, are welcomed. Smith has not put forth specific legislation but says he wants to make clear that he's open to such a move, and Senate Finance Chairman Max Baucus (D-MT) is said to be supportive.

But there are two problems with cigarette taxes. First, as is the case with sales taxes generally, they are highly regressive, taking a far greater percentage of income from poor households than the wealthy. Second, they are bound to be a declining revenue source. The value of the tax is reduced over time with inflation, and if smoking really does decline as a result of the tax increases, then the revenue also declines, leaving important health programs in a lurch. Of course, if the real purpose is simply to reduce smoking, then cigarette taxes can be quite effective in that regard. For more, see the ITEP policy brief on cigarette taxes.

In his State of the Union address on Tuesday, the President proposed a change in tax policy that would end the link between employment and health care ... but that could make health care less affordable overall. The stated purpose of his proposal is to "even the playing field' between those with employer-provided coverage (which is currently subsidized through the tax code) and those who purchase coverage in the individual health insurance market (which is mostly not subsidized under the tax code). This would be accomplished by giving all taxpayers a new deduction if they have health insurance, whether it's through an employer or otherwise. The deduction would be $7,500 for an individual and $15,000 for a family, regardless of how much the health insurance costs, and would reduce both income and payroll taxes. In addition, health insurance benefits provided by an employer would be counted as income for the first time. But most of the families receiving health insurance through their employer would get a tax break initially, since for most (although certainly not all), coverage costs less than $15,000 for a family or $7,500 for an individual.

Unfortunately, rather than evening the playing field, the President's plan would make the tax code more biased towards individually purchased health care and maybe even high-deductible health care. The new health care deduction could encourage some employers to "cash out" the health insurance benefits they currently offer to their employees, since the tax subsidy would no longer be limited to employer-provided insurance. If their employees try to buy health insurance individually, they will find that the plans offered on the individual market are much more expensive and less generous. Since the amount of the new deduction would be indexed to regular cost inflation but not to health care inflation (which is steeper) more and more people over time would find that their coverage costs more than the new deduction. And many people in more expensive plans are those with more critical health care needs or those who live in a part of the country where health care is simply more expensive. In the end, this plan is another attempt to shift risks back onto individuals who have little ability to cope with it on their own.

Sign Up for the Tax Justice Email Digest

CTJ Social Media


ITEP Social Media


Categories