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
Tax Credits for Working People News
New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal
Community organizations, state tax departments, and editorial pages across the country celebrated National EITC Awareness Day last Friday. Roughly 80% of those eligible for the federal Earned Income Tax Credit take advantage of it each year, a higher participation rate than most other social programs. But keeping this figure high -- and ensuring that busy, working people are also aware of state and local EITCs they may qualify for -- requires continued vigilance. One way to boost participation, and to save beneficiaries from wasting their refund on paid tax preparers, is by joining the volunteer income tax assistance (VITA) program. We also need anti-poverty advocates on the front lines fighting plans in some states to eliminate or weaken their state EITC, as North Carolina did last year.
Like many Americans, Grover Norquist is apparently sick of Congressional gridlock (despite having played no small part in causing it through his inflexible no-new-taxes pledge). But rather than sit around while federal tax reform continues to stall, Grover has turned his sights toward Tennessee. Grover wants to see Tennessee repeal one of the few bright spots of its staggeringly regressive tax system (PDF): its “Hall Tax” on investment income. The Massachusetts native and current DC resident is signaling his intention to push lawmakers to repeal the tax, according to The Tennessean.
With an election just a few months away, Florida Governor Rick Scott has made clear that he wants tax cuts, yet again, to be a top priority in the Sunshine State. His newest list of ideas includes cutting motor vehicle taxes, cutting sales taxes on commercial rent, cutting business taxes, and cutting business filing fees. He’d also like to give shoppers a couple of sales tax holidays — a perennial favorite among politicians that like their tax cuts to be as high-profile as possible.
Check out the Kansas Center for Economic Growth’s new blog! Their latest post makes the salient point that two rounds of radical income tax cuts “have failed to create prosperity and are leaving low- and middle- income Kansas families struggling to make ends meet.”
In what has been a cherished annual tradition for tax accountants everywhere, the day is approaching—January 1, to be precise—when dozens of temporary federal income tax provisions are set to expire. The so-called “extenders”—tax breaks enacted by Congress on a temporary basis and extended at the last minute, usually because lawmakers can’t find a way to pay for making them permanent—include a rogue’s gallery of ineffective giveaways ranging from the research and experimentation tax credit to a special write-off for race horses. One of these temporary tax breaks is an increase in the income tax exclusion for employer-provided mass transit to make it equal the existing exclusion for employer-provided parking benefits. As an NPR story recently explained, the expiration of the mass transit increase would create a glaring inequity between workers who use mass transit and those who drive: come January 1, Americans who drive to work will be able to write off $250 a month in employer-provided benefits for commuting-related costs, while those relying on mass transit will only be able to exclude $130 a month of such expenses from income.
If this seems unjustifiably discriminatory, that’s because it is: there’s no defensible rationale for systematically giving car commuters a bigger tax break than those relying on mass transit. Policymakers sensibly want commuters to rely on public transit because it reduces highway gridlock and pollution—benefits that accrue to all Americans, however they get to work. No one thinks it’s a smart idea to encourage more Americans to drive to work rather than using mass transit—yet that could be the impact of allowing the mass transit subsidy to fall at year’s end.
One seemingly-obvious solution, promoted by Oregon Representative Earl Blumenauer, would maintain the status quo, which gives the exact same tax benefit for mass transit that is available for those driving to work. But this approach is disturbingly discriminatory as well: like any exclusion from the progressive federal income tax, it offers bigger benefits to the upper-income taxpayers who pay at the highest marginal rates—and offers the least to those low-income workers who earn too little to pay federal income taxes. (Since fringe benefits like parking subsidies are excluded from the federal payroll tax as well, the exclusion does offer some benefits to even the poorest workers.)
This isn’t to say that making commuting more affordable is a bad idea: for the many low-wage workers who can’t afford to live in the central cities where they work, a long and costly commute is often a harsh reality. Yet the current tax subsidies for driving and mass transit are at best an inefficient way of solving this problem. For every dollar of tax break given to a low-wage worker, these subsidies give a much bigger tax break to the best-off Americans. Allowing the temporary higher benefit for mass-transit commuters to expire would be the worst possible way of paring back this tax break. A more straightforward alternative would be to simply end all tax subsidies for costs of commuting to work and instead put this revenue toward public investment in better and more affordable transportation infrastructure.
During a year in which far too many tax proposals have been focused on cutting taxes for the affluent, and in some cases actually raising them on the poor, Montgomery County Maryland’s decision to expand its Earned Income Tax Credit (EITC) is very welcome news.
As we noted in August, Montgomery County’s EITC is just one of two local EITCs in the country (the other is in New York City). The credit is a powerful tool for blunting the regressivity (PDF) of Maryland’s sales and property taxes, and is an effective way to alleviate poverty, encourage work, and improve the long-term prospects of children raised in low-income families.
Unfortunately, when the Great Recession battered Montgomery County’s revenues, the County Council decided to scale back its EITC in order to help balance its budget. Rather than matching the state EITC dollar-for-dollar, the credit dropped as low as 68.9% of the state credit in Fiscal Year 2012, and stands (PDF) at 75.5% of the state credit for Fiscal Year 2013. Under a newly approved measure, however, that dollar-for-dollar match will gradually come back into effect by 2017.
As Councilman Hans Riemer explained, “Most of the services in the county have been restored from their cuts at the bottom of the recession. Except this one … So we are about back to where we were years ago.” Montgomery County’s decision to continue its long-running commitment to its poorest residents is one that officials in other states and localities would be wise to emulate.
There is a strong consensus among scholars, think tanks and advocates around the country that there are concrete benefits to providing earned income tax credits (EITCs) – refundable credits (PDF) designed to offset income tax liability for low-income families and individuals. Not only has the EITC been shown to help alleviate poverty, but it has also succeeded in encouraging greater participation in the workforce, improving infant health, and boosting school achievement, among other things.
While most discussions are about the federal and state EITCs, there are two local EITCs that are often overlooked, including Montgomery County, Maryland’s Working Families Income Supplement (WFIS). Originally introduced in 2000 as a tool to help the county’s poorest residents cope with an extremely high cost of living, the WFIS is one of only two local EITCs in the country (the other is in New York City).
When originally implemented in 2000, the WFIS was set at 100 percent of the state EITC – that is, if a worker received $600 from the Maryland EITC, he or she would also receive $600 from the county. This supplement provided low-income Montgomery County families with the most generous combined EITC in the country. It also gave these households the ability to pay for basic day-to-day necessities like child care, school books, utility bills, and groceries – and most of all it helped reduce poverty and promote upward mobility. (Other reference materials on the WFIS can be found here.)
Through the mid-2000s, the number of people living in poverty declined even as unprecedented numbers of people moved into the county. When the Great Recession began to take hold in late 2007, however, these advances were reversed. As jobs were lost and incomes fell, Montgomery County experienced a spike in poverty even as the Washington, DC region as a whole weathered the recession better than most.
In a case of terrible timing, as county tax revenues began to fall, the Montgomery County Council decided to save a little money by scaling back the WFIS to 72.5 percent of the state EITC in FY 2011, 68.9 percent in FY 2012, and 72.5 percent in FY 2013. This decision only made things worse for low-income families: now, not only were they facing wide-spread layoffs prompted by a weak economy, but they were seeing a significant cut in a critical source of income.
Now, however, members of the Council have proposed a plan that would restore the 100 percent credit that was in place for nearly a decade.
Introduced in March and having undergone public hearings in July, Expedited Bill 8-13 (PDF) would gradually return the WFIS to 100 percent of the Maryland credit by Fiscal Year 2016. This expansion is estimated to help over 30,000 low-income households meet their basic day-to-day needs at a cost to the County of $3 million. (For context, Montgomery County tax revenues are projected to grow by $30 million a year for the foreseeable future – even when factoring in the possible impact of the federal sequester).
With a committee hearing scheduled for early October, the Council members promoting the bill have just under two months to garner support and move its restoration forward. For over a decade, the Council has demonstrated its dedication to the needs of its low-income residents as it championed one of the most forward-looking income tax credits in the nation. By restoring the Working Family Income Supplement to 100 percent of the state credit, the Council would be offering critical help to its most vulnerable residents, providing a ladder for upward mobility, and adding a boost to the local economy.
For more information on the structure and benefits of Earned Income Tax Credits:
Institute on Taxation and Economic Policy, September 2011
“Low-wage workers often face a dual challenge as they struggle to make ends meet. In many instances, the wages they earn are insufficient to encourage additional hours of work or long-term attachment to the labor force. At the same time, most state and local tax systems impose greater responsibilities on poor families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve meaningful economic security. The Earned Income Tax Credit (EITC) is designed to help low-wage workers meet both those challenges. This policy brief explains how the credit works at the federal level and what policymakers can do to build upon it at the state level.”
Center on Budget and Policy Priorities, April 9, 2013
“The Earned Income Tax Credit (EITC), which went to 27.5 million low- and moderate-income working families in 2010, provides work, income, educational, and health benefits to its recipients and their children, a substantial body of research shows. In addition, recent ground-breaking research suggests, the EITC’s benefits extend well beyond the limited time during which families typically claim the credit.”
Brookings Institution, April 18, 2011
“The Earned Income Tax Credit (EITC) … has grown to be called the nation’s largest federal anti-poverty program. The EITC has had significantly beneficial effects for its recipients and their communities. These include encouragement of work, reduction of poverty, and boosting of local economic activity.”
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.
Citizens for Tax Justice has a new online calculator that will tell you what you’d pay in federal taxes in 2013 under three different hypothetical scenarios:
1) Congress did nothing during the New Year and allowed the “fiscal cliff” to take effect.
2) Congress extended all tax cuts in effect in 2012 and delayed all tax increases that were scheduled to go into effect.
3) Congress enacted the American Taxpayer Relief Act, which extended most, but not all tax cuts. This is what actually happened.
The calculator illustrates the impact of the changes in personal income taxes (the expiration of some of the Bush tax cuts for the very rich and the extension of some 2009 provisions expanding the EITC and Child Tax Credit) as well as the health reform-related change to the Medicare tax and the expiration of the Social Security tax holiday.
The calculator demonstrates to the vast majority Americans that their personal income taxes are no different than they would be if all the Bush tax cuts were extended. (A CTJ fact sheet explains that less than one percent of Americans lost any part of the Bush tax cuts under the fiscal cliff deal that was enacted.)
But the calculator also demonstrates that the expiration of the payroll tax holiday — which lawmakers of both parties barely bothered to debate at all — affects middle-income people.
On Friday, the IRS held its EITC Awareness Day, working with local governments, non-profits and community groups to ensure that people potentially eligible for the Earned Income Tax Credit (EITC) file tax returns and claim it. The IRS says that one in five who are eligible for the EITC do not claim it.
The EITC, which is basically a tax credit equal to a certain percentage of earnings (up to a limit) to encourage work and reduce poverty, is widely misunderstood by many pundits and members of Congress. Like the Child Tax Credit, the EITC is a refundable tax credit, meaning it provides a benefit even when the credit is larger than the federal personal income tax that a taxpayer would otherwise owe. This can result in a negative income tax, meaning the IRS will send a check to the taxpayer.
These refundable credits are one reason why some Americans do not owe federal personal income taxes. (There are other reasons as well, like the fact that most of the Social Security benefits that retirees and people with disabilities receive are not subject to the income tax.)
Conservative Opposition to 2009 Expansions of EITC and Child Tax Credit
For the past couple years, conservative politicians and pundits have largely missed or ignored the fact that taxpayers with a negative income tax rate resulting from refundable credits do pay other types of taxes, which tend to be regressive. Federal payroll taxes, to take one example, are paid by everyone who works (and the EITC and the refundable part of the Child Tax Credit are only available to those with earnings). And all Americans pay state and local taxes, which are particularly regressive. The refundable credits in the federal personal income tax offsets some of the regressive impact of these other taxes.
Conservative politicians actually came out against expanding the EITC and the refundable part of the child tax credit in 2009, when President Obama proposed expanding the EITC for larger families and families headed by married couples and expanding the refundable part of the Child Tax Credit for very-low income working families. Those provisions were included in the economic recovery act enacted in 2009 and again in the deal the President made with Republicans at the end of 2010 to extend all the expiring tax cuts for another two years.
But each time Congressional Republicans introduced a proposal to extend tax cuts, it allowed these particular provisions to expire. CTJ’s figures showed what was at stake if these 2009 provisions expired. For example, CTJ’s state-by-state figures showed that in 2013, benefits for 13 million families with 26 million children would be lost if the provisions were not extended.
All Americans Pay Taxes
Conservative pundits claimed that these provisions led to nearly half of Americans not paying taxes. Paul Krugman at the New York Times, Ruth Marcus and Ezra Klein at the Washington Post and other observers have noted CTJ’s data showing that once you account for all of the different types of taxes, Americans in all income groups do, in fact, pay taxes and that our tax system overall is just barely progressive.
Mitt Romney and the 47 Percent
Perhaps the misinformation came to its spectacular climax when presidential candidate Mitt Romney was recorded making disparaging remarks about the 47 percent of Americans who, in his words, “believe that they are entitled to health care, to food, to housing, to you-name-it... These are people who pay no income tax.”
2009 Expansions of EITC and Child Tax Credit Extended for Only Five Years
One might think that the backlash produced by Romney’s comments, and his subsequent electoral loss, might have prompted conservatives to change their thinking. But they can only evolve so much, so fast. As an apparent concession to the right, the fiscal cliff deal approved by the House and Senate on New Year’s Day extended President Obama’s 2009 expansions of the EITC and Child Tax Credit for just five years — even though it made other tax cuts permanent.
Making permanent the EITC and Child Credit expansion would have cost in the neighborhood of $100 billion over a decade, and the five-year extension of these provisions cost around half that amount. This is real money, but insignificant compared to the $369 billion spent on making permanent estate tax cuts for millionaires or the $3.3 trillion spent on making permanent most of the income tax cuts first enacted under George W. Bush.
The EITC and the Child Tax Credit do a lot to offset the regressive impacts of the many types of taxes paid by low-income Americans. Congress should remember this and make the recent expansions of these refundable credits permanent.
Leading up to the election, prominent Democrats like Rep. Chris Van Hollen, ranking member of the House Budget Committee, were pushing to renew the payroll tax holiday in 2013, an idea that seemed all but dead in Congress just weeks earlier. The renewed push for extending the payroll tax holiday came amidst reports that the Obama Administration is considering replacing it with a new version of the Making Work Pay Credit.
The shift in debate toward renewing or replacing the payroll tax holiday is driven by concerns over ending such economically stimulative measures while the economy is still relatively weak. Compounding these concerns, a recent analysis by JPMorgan concluded that the payroll tax holiday’s expiration would reduce consumer spending by $100 billion and would cut the nation’s overall gross domestic product (GDP) by as much as 0.6 percent.
Most economists agree that a policy putting money in the hands of low- and middle-income people is likely to have a greater stimulative impact for each dollar spent than a policy putting money in the hands of high-income people.
From this perspective, the Obama Administration would be right to favor the Making Work Pay Credit; it is much more progressive than the payroll tax holiday, considering that only 27 percent of the holiday’s benefits goes to the bottom 60 percent, compared to 50 percent of the making work pay credit’s benefits. In addition, replacing the payroll tax holiday would also allay concerns from powerful voices, like AARP, that continuing the holiday will endanger the Social Security Trust Fund over the long term by weakening its dedicated funding source.
It still may be difficult to weigh the benefits of short-term stimulus provided by these tax cuts against their long-term impact on the debt. But it’s important to keep in mind that extending the entirety of the Bush tax cuts would cost $322 billion, which is more than two and half times the projected cost of the payroll tax holiday ($121 billion) and more than five and a half times the projected cost of the Making Work Pay Credit.
Republican Presidential Candidate Mitt Romney was caught on tape explaining to a group of prospective donors that 47 percent of Americans “pay no income tax” and generally fail to contribute their fair share. In identifying these presumed slackers who would never vote for him, Romney betrayed his own myopia about how the tax system works.
Here’s what Romney doesn’t talk about when he talks about taxes.
1. All Americans Pay Taxes
If you look at the tax system as a whole, the share of taxes paid by Americans in each income group is similar to their share of total income.
While Romney is about right that 47 percent of Americans do not specifically pay the federal income tax (according to Tax Policy Center Data), this statement is extremely misleading because it disappears the more than half of this same group that pays payroll taxes. And, every American pays state and local taxes – income, sales, property, etc.
In fact, the bottom 20 percent of taxpayers pays substantially more in state and local taxes as a percentage of their income than any other income group.
Are there people out there who don’t pay any taxes? When we went looking, we couldn’t find any, so we had to make one up.
2. Our Federal Tax System Rewards Work and Combats Poverty, and that’s Good
While every American pays some taxes, it is the case that about 18 percent of Americans pay neither payroll nor federal income taxes. Who are these alleged freeloaders? About 60 percent of them are elderly, meaning that they’re unable to work and are largely living on limited retirement income.
The rest of the households that don’t pay payroll or federal income taxes are low income households bringing in less than $20,000 each year, and who are benefitting from highly effective tax credits like the earned income tax credit (EITC) and child tax credit (CTC). These credits incentivize work while providing much needed support to low and middle income family budgets, and in 2010 they were responsible for lifting 9.2 million people, including 4.9 million children, above the poverty line.
The effectiveness of these credits is so widely recognized across the political spectrum that every single president since Gerald Ford, from Reagan to Obama, has enacted expansions of the EITC or CTC. Ronald Reagan once called the EITC the “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress,” and George W. Bush expanded it as part of his 2001 tax cuts.
3. Also Paying No Federal Income Tax Are High Wealth Individuals and Highly Profitable Corporations
Low income families who pay nothing in federal income taxes are using provisions that were written into the tax code by Congress, just like wealthy corporations and individuals (including Romney himself) do to bring down their tax bills.
On the corporate side, Citizens for Tax Justice found that from 2008-2011, 30 Fortune 500 companies, including the likes of General Electric and Verizon, made $205 billion in profits, yet their overall tax bill was actually negative. The corporate tax system has become so full of loopholes and tax breaks (yes, written by Congress) that what even the most profitable companies actually pay on average is roughly half the statutory corporate tax rate.
As far as the wealthiest Americans, a recent IRS study found that in 2009 a shocking 35,000 Americans making over $200,000 paid not a dime in federal income tax. Similarly, many of the country’s wealthiest Americans, like billionaire investor Warren Buffet, pay lower tax rates than middle class Americans, largely due to the tax break on capital gains income and a plethora of other tax loopholes.
Census data released today shows that while the national poverty rate remained unchanged in 2011, record numbers of Americans are still living in poverty and median income dropped by 1.5 percent, making income supports for the working poor even more important. Also important in this political year when taxes are a major campaign issue are three basic facts: poor people pay taxes, tax credits are vital in mitigating poverty, and it's not just the middle class and the rich who'll be affected by tax policy changes currently under debate.
1) Poor people pay taxes.
Everyone who works pays federal payroll taxes. Everyone who buys gasoline pays federal and state gas taxes. People who shop in stores pay the sales taxes that most state and local governments impose. State and local property taxes affect everyone who owns or rents a home (landlords pass some of the tax on to renters). And of course, most states and many cities levy an income tax.
Among the ways of measuring “how much” taxes any given income group pays, two measures that are often overlooked provide important context: what portion of its income a group spends on all taxes, and whether a group’s share of total taxes paid matches its share of total income. These measures show that the overall U.S. tax system is just barely progressive when you combine all federal, state and local taxes.
Specifically, in combined federal, state and local taxes, the amount each group of American taxpayers spends is as follows (for 2011):
The lowest earning one fifth paid 17.4 percent of their income
The next lowest one fifth paid 21.2 percent of their income
The middle one fifth paid 25.2 percent of their income
The fourth one fifth paid 28.3 percent of their income
The next ten percent paid 29.5 percent of their income
The next five percent paid 30.3 percent of their income
The next four percent paid 30.4 percent of their income
The wealthiest one percent paid 29.0 percent of their income
Total taxes paid by each income group relative to that group’s share of total income is about the same for the very poor and the very rich:
- The share of total taxes paid by the richest one percent in 2011 was 21.6 percent; that group’s share of total income was 21.0 percent.
- The share of total taxes paid by the middle 20 percent in 2011 was 10.3 percent; that group’s share of total income was 11.4 percent.
- The share of total taxes paid by the poorest fifth last year was 2.1 percent; that group’s share of total income was 3.4 percent.
State tax systems are consistently regressive, and the progressive federal income tax plays a mitigating role. Focusing only on federal income taxes paid by different groups distorts and obscures the basic facts of our tax system.
2) As the value of direct government spending on TANF declines, the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) grow in importance.
The EITC was enacted in 1975 to encourage and reward work. It provides a needed earnings boost for growing numbers of under-employed and low wage heads of household. President Ronald Reagan called it “the best antipoverty, the best pro-family, the best job creation measure to come out of Congress.” It has long had near universal, bipartisan support and has been expanded under Presidents Reagan, Clinton, Bush, and Obama. The Child Tax Credit was introduced in 1997 to help working families offset the cost of raising their children and has also been expanded with bipartisan support.
Today, the federal revenue spent on these two tax credits is comparable to, and in some cases greater than, revenue spent on other types of programs that lift families out of poverty or keep them from falling into poverty.
Billions of Federal Dollars Spent on Income Support Programs in 2011:
Unemployment compensation - $117.2
Food and nutrition assistance - $95.7
Earned Income Tax Credit - $55.7
Supplemental Security Income - $49.6
Family & Other Support Assistance (incl.TANF) - $26.4
Child Tax Credit (refundable portion) - $22.7
The EITC is a tax credit equal to a percentage of earnings from work up to a certain limit. The percentage varies based on how many children the family has. In 2012:
- A family with one child receives a credit equal to 34 percent of earnings, up to a maximum credit of $3,169.
- A family with two children receives a credit equal to 40 percent of earnings, up to a maximum credit of $5,236.
- A family with three or more children receives a credit equal to 45 percent of earnings, up to a maximum credit of $5,891.
(For childless workers, the maximum EITC in 2012 is just $475.)
As a family’s income rises, the EITC is phased out. The credit is reduced by a fixed percentage for each dollar exceeding a relatively low level ($22,300 for married families with children and $17,090 for unmarried families with children in 2012).
One of the EITC’s most effective features is that it is refundable. A family can receive the full benefit of the credit in the form of a refund, even if it exceeds their income tax liability, so the EITC can function to offset other kinds of taxes, including those that fall most heavily on low income families, beyond the income tax (particularly consumption taxes).
The Child Tax Credit (CTC) is available to families earning $3,000 a year or more. It is equal to a maximum of $1,000 per child and largely benefits middle-income taxpayers, but the refundable portion of the CTC does benefit low-income families. The refundable portion of the credit equals 15 percent of earnings above a specific threshold, or $1,000 per child, whichever is less.
It is important to note, of course, that while these expenditures help low income households, middle and upper-income households benefit the most from tax expenditures such as the home mortgage interest deduction and the special low rate on capital gains.
3) The EITC and CTC benefits for 13 million families with 26 million children are at stake in current tax cut debates.
The EITC and the CTC were expanded as part of the 2001 Bush tax cuts and again under the American Recovery and Reinvestment Act of 2009; all of these provisions were then extended through 2012, (under the 2010 agreement to extend the Bush tax cuts for two years). The outcome of debates over the fate of the Bush tax cuts, in Congress and among candidates for federal office, affect these anti-poverty credits.
If only the Bush era provisions of these tax credits are preserved (as per a House bill passed this year):
- The EITC would cease to provide a higher percentage for families with three or more children;
- The EITC would begin to phase out at an income level $2,000 lower for married couples;
- Fewer families would be eligible for the CTC since eligibility would begin at $13,300 rather than $3,000 in annual income.
Preserving the 2009 EITC provisions (as per a Senate bill passed this year):
- Would save 6.5 million working families, with 15.9 million children, a total of $3.4 billion, an average of $530 per family.
Preserving the 2009 changes to the CTC:
- Would save 8.9 million working families, with 16.4 million eligible children a total of $7.6 billion; an average of $854 per family.
In combination, preserving both of these 2009 provisions would save 13.1 million working families, with 25.7 million children, a total of $11.1 billion, an average of $843 per family.*
* The total number of families and children affected by the CTC expansion and the EITC expansion is less than the sum of the number affected by each of them because 18 percent of families that benefit would benefit from both.
Section 1) Citizens for Tax Justice, “Who Pays Taxes in America,” April 4, 2012, http://www.ctj.org/pdf/taxday2012.pdf
Section 2) IRS, Internal Revenue Bulletin 2011-45, November 7, 2011, http://www.irs.gov/irb/2011-45_IRB/ar13.html#d0e1033, and FY 2013 Historical Tables, Budget of the U.S. Government, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf.Section 3) Citizens for Tax Justice, “The Debate over Tax Cuts: It’s Not Just About the Rich,” July 19, 2012, http://ctj.org/pdf/refundablecredits2012.pdfSections 1 and 2 use figures from the Institute on Taxation and Economic Policy’s Microsimulation Tax Model, http://www.itep.org/about/itep_tax_model_simple.php.
Yesterday, Eric Cantor, the Republican House Majority Leader, announced that those taxpayers who pay federal payroll taxes and other types of taxes, but who don’t have enough income to owe federal personal income taxes, should be required to pay the federal personal income tax as well. Cantor made his remarks at an event (subscription required) hosted by Bank of America.
“We also know that over 45 percent of the people in this country don’t pay income taxes at all,” Cantor said, “and we have to question whether that’s fair. And should we broaden the base in a way that we can lower the rates for everybody that pays taxes... Should they even have a dollar in the game on income taxes, which is the notion of broadening the base.”
When asked if this would mean “a tax increase on the 45 percent who right now pay no federal income tax,” Cantor said, “I’m saying that, just in a macro way of looking at it, you’ve got to discuss that issue.”
CTJ’s figures show that Americans in every income group do, in fact, pay taxes and that the tax system as a whole (including all the types of taxes that Americans pay) is just barely progressive.
For example, in 2011 the richest one percent of Americans paid 21.6 percent of the total (federal, state and local) taxes but also received 21 percent of the total income in the U.S. that year. Similarly, the poorest fifth of Americans paid just 2.1 percent of the total taxes in the U.S., but only received 3.4 percent of the total income in the U.S. In other words, the richest one percent are not paying more than their share, and the poorest Americans are not getting much largesse from the tax system.
The term “broadening the base” has often been used to describe a tax reform that would end the various loopholes and tax subsidies that reduce the amount of revenue a given tax at given rates can collect.
Republican House Budget Chairman Paul Ryan recently made it clear that his idea of base-broadening would not involve repealing those tax loopholes and tax subsidies that benefit wealthy investors (the tax preferences for capital gains and stock dividends which mostly benefit the richest one percent). Cantor’s comments suggest that, like Rep. Ryan, he is interested in ending those tax subsidies that benefit the lower-income or middle-income households but not those benefitting the rich.
Several tax expenditures in the federal personal income tax reduce or eliminate the federal personal income tax for many lower-income and middle-income Americans. The refundable Earned Income Tax Credit and the Child Tax Credit are available only to those who work and therefore pay federal payroll taxes. The rules exempting most Social Security income benefits people who paid taxes over the course of their working lives. The standard deduction and personal exemptions ensure that people whose income does not meet a basic threshold are not subject to the personal income tax, similar to how corporations that are not profitable are not expected to pay the corporate tax. (Our complaints about corporations are limited to those that are profitable and still manage to pay no corporate income taxes.)
It’s unclear if Cantor is proposing to repeal the EITC and the Child Tax Credit, or the rule exempting most Social Security benefits from income taxes, or the standard deduction and personal exemptions, or what exactly. Any of these options would take a tax system that is just barely progressive and make it regressive.
Amid Grim Census Data on Poverty, Congress Should Reject Calls to Raise Taxes on Low-Income Families
This week's release of Census data showing that a growing number of families are officially poor prompted CTJ to examine claims that too many Americans are paying "no" taxes and calls to raise taxes on low-income families.
Aside from recipients of Social Security benefits (which are largely untaxed), all but the poorest Americans do pay federal income taxes or federal payroll taxes or both. We estimate that in 2010, only 15 percent of non-Social Security taxpayers paid zero dollars or less in combined federal income and payroll taxes. These families and individuals pay other types of taxes, as this report explains.
Fifty-seven percent of those who paid zero or less in combined federal income and payroll taxes had incomes below $15,000, and 76 percent had incomes below $20,000. This tells us that the vast majority of these taxpayers were quite poor because the average poverty threshold for 2010 was $14,218 for a household of two individuals and $22,314 for a household of four individuals.
Our 3-page report is here.
The Obama administration has proposed to change the way unemployment insurance is financed to avoid tax increases on businesses that will otherwise occur automatically — but Republicans in Congress are resisting the plan because it allows for the possibility that states will collect more taxes overall from employers in the future.
Unemployment insurance benefits are generally financed by state taxes on employers while the administration of the program is financed by federal taxes on employers. The state tax revenue is saved in trust funds from which benefits are paid, but these had run dry in most states at the end of 2010, so states were allowed to borrow from the federal trust fund. States must eventually pay that money back with interest, but the economic recovery act enacted in 2009 gave states a break on the interest payments for almost two years.
The federal UI taxes on employers will increase automatically, under current law, in many states this year or next year to pay for the principal on those loans from the federal trust fund. On top of that, states must start paying the interest, and for this they often levy additional state taxes on employers. All of this is scheduled to occur at a time when economists agree that the recession is far from over.
The Obama administration's plan would respond by delaying the automatic increase in federal UI taxes on employers and the due date for the interest payments from the states for two years. In 2014, the plan would more than double the tax base, from $7,000 of wages for each employee (which has not been adjusted since 1983) to $15,000. The rate of the federal tax would be reduced so that the federal tax would not be increased overall. The state taxes have the same base (at a minimum) as the federal tax, so the states could collect more revenue to shore up their programs if they did not change their tax rates.
The Center on Budget and Policy Priorities and the National Employment Law Project released a report Wednesday that spells out a very similar plan and explains its benefits.
Not for the first time, Republican leaders are putting themselves on record as preferring to allow a tax increase to take place rather than support a tax bill that is not exactly what they want.
A new online resource, Tax Credits for Working Families, was recently launched to highlight the importance of providing affordable and targeted assistance through refundable tax credits to the growing number of people and families living in poverty across the country. Check out the website for links to research and state-level information on state refundable Earned Income Tax Credits, property tax circuit breakers, and child related credits.
(Includes state-by-state figures)
A new report from CTJ finds that the compromise tax plan agreed to by President Obama and congressional Republicans would provide more than a quarter of its tax cuts to the best-off one percent of all Americans. That’s almost double the share of the tax cut that the President proposed to give the highest earners.
At the same time, the new tax plan would reduce taxes, and increase the budget deficit, by $424 billion in 2011 alone. That’s 40 percent more in tax cuts than the $301 billion tax cut the President had earlier proposed.
House Democrats voted in a closed-door caucus meeting on Thursday to not take up the compromise deal, which also includes a 13-month extension of expanded unemployment benefits, until changes are made to the tax provisions. Meanwhile, the Senate is debating the compromise today.
Under the compromise plan:
- The wealthiest one percent would get an average tax cut in 2011 of almost $77,000 compared to current law (under which all of the tax cuts enacted since 2001 are scheduled to expire). That’s almost triple the $29,000 tax cut that President Obama proposed to provide to the top one percent.
- Meanwhile, the lowest-income fifth of all taxpayers, those making less than $20,000 a year, would get a smaller tax cut than the President earlier proposed. This is because the GOP-inspired, 2 percent temporary reduction in the payroll tax in the compromise plan offers low-income workers a considerably smaller payroll tax reduction than the President’s proposal to extend his “Making Work Pay” payroll tax cut. The Making Work Pay payroll tax cut entirely eliminated the 6.2 percent worker payroll tax on the first $6,450 in earnings ($12,900 for couples).
The payroll tax cut agreed to by the President and GOP leaders would also provide considerably less economic stimulus “bang for the buck” than the President’s earlier proposal, because it is largest for high earners, who are less likely to spend their payroll tax savings. The compromise payroll tax cut would cost an estimated $112 billion in 2011, double the $57 billion dollar cost of the President’s earlier proposal. But we estimate that $112 billion in added borrowing would stimulate only an extra $18 billion in consumer spending compared to the President’s earlier payroll tax cut plan.
A minority of Senators made clear on Saturday that if the Bush tax cuts cannot be extended for the very richest taxpayers in America, then they will allow the tax cuts to expire for everyone.
Senate Republicans successfully filibustered a bill based on President Obama's tax plan to permanently extend the Bush tax cuts for the first $250,000 of income for married couples and the first $200,000 of income for unmarried individuals. The two percent of taxpayers with incomes above $250,000/$200,000 would therefore continue to enjoy part of the Bush tax cuts while the other 98 percent would continue to enjoy all of them.
Throughout months of debate over President Obama's tax plan, lawmakers and reporters often seemed to think that a person making one dollar over the $250,000/$200,000 threshold would lose all of the Bush tax cuts. CTJ's recent report shows this is entirely untrue. For example, it explains that married couples with incomes between $250,000 and $300,000 would only lose 1 percent of the Bush tax cuts, on average, under the Democratic tax plan.
The bill, introduced by Finance Committee Chairman Max Baucus, would also have allowed the estate tax to come back into effect but only at the levels that existed in 2009, with an adjustment for inflation. The bill would also have made permanent expansions in refundable tax credits for low-income families that were included in the economic recovery act enacted last year. Emergency unemployment insurance (UI) benefits, which recently expired, would have been extended for one year under the bill.
Unlike nearly every democratic institution on Earth, the Senate cannot approve anything without a super-majority of three-fifths of the chamber's votes. Democratic leaders were able to muster 53 votes for the tax bill, seven short of the 60-vote threshold to overcome a filibuster.
Voting with the Republicans were Joe Lieberman (D-CT), Ben Nelson (D-NE), Joe Manchin (D-WV), Jim Webb (D-VA), and Russ Feingold (D-Wisconsin). Unlike the others, Feingold made it clear that he voted against because he believed that this bill to extend tax cuts entirely for the first $250,000/$200,000 of income is simply too expensive.
The Senate held a second vote on a proposal introduced by Senator Chuck Schumer (D-NY) that was the same plan except that the tax cuts would be made permanent for the first $1 million of income. Republicans and Senator Lieberman voted against this bill also, but were joined by some progressive Democrats who believed that the $1 million threshold was too high.
"A minority of Senators are saying that the chamber must extend tax cuts for the extremely rich, or else low-income and middle-income families will lose their tax cuts, and people who are jobless through no fault of their own will receive no more help," said Bob McIntyre, director of Citizens for Tax Justice. "Even a proposal to extend the tax cuts for the first $1 million of income is not enough to satisfy this minority of Senators. Their disregard for working class Americans and their blind loyalty to multi-millionaires would be hard to believe if they were not on full display this weekend."
The tax bill passed by the House yesterday (H.R. 4853) would make permanent two provisions that were included in the economic recovery act and which would otherwise expire at the end of this year. One makes the child tax credit more accessible to low-income working parents. The other reduces the marriage penalty in the EITC.
The bill introduced by Senate Finance Chairman Max Baucus, which Democratic leaders plan to vote on Saturday, would make these changes permanent as well as a third change in the recovery act that expands the EITC for families with three or more children.
For more information, see CTJ's recent state-by-state figures showing how each of these provisions impacts families with children.
A recent survey shows that fewer than one in ten Americans knows that that President Obama cut their taxes in 2009 and 2010, and many believe he actually raised them. CTJ released this report and state-by-state fact sheets before Tax Day showing that the recovery act signed into law by President Obama cut taxes for 98 percent of working Americans.
President Obama wants to sign a jobs bill into law. The majority of members of the House and Senate want the same thing. So do the two million out-of-work Americans who will have lost their unemployment benefits by July because of Congress's inaction. Not to mention the millions of Americans who will see public services like education and public safety slashed because their states have to make up shortfalls in Medicaid funding. And then there are the mainstream economists who conclude that some deficit-spending on measures that pump money immediately into the economy and create jobs are entirely justified when unemployment is hovering around ten percent. In the face of all this, a minority of 42 Senators has managed to block legislative action.
Congress has fought a months-long battle over the bill, H.R. 4213, which includes an extension of emergency unemployment benefits and Medicaid funding to states, two spending measures that economist Mark Zandi has argued are the most effective way to stimulate the economy. These measures result in immediate spending, which leads to a boost in consumer demand, and the retention or creation of jobs to produce the goods and services needed to meet that demand.
The bill also includes a collection of provisions that extend short-term tax breaks for business that Congress enacts every year or so. Members of Congress and Hill staffers often call these the "tax extenders." CTJ has criticized the tax extenders for years. But, we support them this year because they are coupled with provisions that would offset their costs by clamping down on unfair tax loopholes. This is a major step forward for Congress. See CTJ's many reports on these loophole-closing provisions.
To their credit, Democratic leaders have tried every conceivable tactic to win over the so-called "moderates" who are blocking the bill.
For example, the House passed legislation three times to completely eliminate the infamous "carried interest" loophole that allows certain wealthy investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate. This time, the House scaled back its provision to close this loophole, and Democratic leaders in the Senate scaled the provision back multiple times in their versions of the bill. Eliminating this loophole, which was proposed by the Obama administration, was estimated to raise about $24 billion over a decade. Democratic leaders in the Senate whittled that down to $13.6 billion. The provision is not so much a loophole-closer any more as a loophole-reducer.
Other compromises made to secure votes were even more alarming. The most recent proposal would have taken over $9 billion of unspent funds from the recovery act that are supposed to be used for food stamps to help offset the costs of this bill. This is preposterous. Food stamps are one of the most effective types of stimulus, along with unemployment insurance benefits and fiscal aid to states, according to Mark Zandi.
The country needs the Senate to pass, some way or another, a jobs bill. Sadly, Democrat Ben Nelson and the 41 Republican Senators have the ability, under the Senate's bizarre rules, to stop that from happening.
Federal benefits for the long-term unemployed have been expired for over a week and the Senate still has not approved a bill (H.R. 4213) that would extend these and other vital measures. The bill also includes badly needed Medicaid funding for states and other provisions that would stimulate the economy. (See CTJ's recent reports on this legislation).
Call your Senators and urge them to vote for H.R. 4213.
Use this toll-free number provided by AFSCME to make your call: 888-340-6521
Part of the consternation among some Senators is that the spending provisions in the bill would add (modestly) to the deficit. Economists have explained that short-term deficit-financed spending measures can be used to effectively boost consumer demand, and thus job creation, during a recession, without adding to the long-term budget crisis.
Many of the Senators who have supported tax cuts that created long-term deficits (the kind of deficits that actually do lead away from fiscal sustainability) now oppose this bill out of their concern about "fiscal responsibility." Other Senators are more genuine in their concern about deficits but have wildly misplaced fears about a bill that has little, if anything, to do with our long-term budget situation.
A number of Senators are still concerned about the tax provisions in the bill. It includes an assortment of small tax cuts (mostly for business), which are often called the "tax extenders" by members of Congress and their staffs. While these tax breaks probably accomplish very little, the good news is that their cost would be offset with provisions that close unfair tax loopholes.
It's the Senators' devotion to maintaining these loopholes that is another factor slowing down progress on this bill.
Battle Continues Over "Carried Interest" Loophole for Investment Fund Managers
The most controversial tax provision would clamp down on the "carried interest" loophole, which allows investment fund managers to treat their earned income as capital gains and thus benefit from a much lower income tax rate. Over the past few weeks, some honest investment fund managers have spoken up to tell Congress that their loophole really is unjustified, and it was also reported that two Republican Senators favor closing the loophole.
The draft of the bill proposed by Senate Majority Leader Reid already watered down this reform a great deal (compared to the version that passed the House) by allowing the lower capital gains rate to continue to apply to a larger portion of carried interest. As a new report from the Center on Budget and Policy Priorities explains, the last thing Congress should do is weaken this provision any further.
Senators Defend the "John Edwards" Loophole
Another controversial reform would close the "John Edwards" loophole for "S corporations." Payroll taxes apply to wage income, but not other types of income. So, some people want to disguise their wage income as non-wage investment income to avoid payroll taxes. People who own S corporations have to determine (and tell the IRS) how much of their income is wage income and how much of it is other income, and of course there is a huge incentive to underestimate the amount that is wage income.
John Edwards famously played this trick by saying that his name was an asset and this asset, rather than his work, was generating most of the income of his S corporation.
Some Senators have expressed concern about the effect this reform would have on small businesses. But none have explained coherently why we should allow this type of scheme to continue.
A new report from Citizens for Tax Justice explains that the new jobs and "extenders" bill released by the chairmen of the House and Senate tax-writing committees on Thursday contains several long-overdue provisions to close tax loopholes. The bill (H.R. 4213) takes aims at corporations that shift profits offshore, investment fund managers who use the "carried interest" loophole to pay lower tax rates than their secretaries, and business people who use the "John Edwards" loophole to avoid their Social Security and Medicare taxes.
Many people are more familiar with the important spending provisions in the bill geared to speed up the economic recovery, including an extension of unemployment insurance and COBRA health care benefits for the unemployed, Medicaid funding for states, TANF jobs and emergency funding for states and other measures that will help boost the economy.
The tax loophole-closing provisions are used to offset the costs of extending several small tax breaks. The spending portion is mostly considered emergency spending that does not have to be paid for under Congress's budget procedures because it is temporary and necessary to prevent the economy from drifting back towards recession. (The Center on Budget and Policy Priorities explains why the spending portions of the bill are economically necessary and fiscally sound.)
Call your lawmakers now and urge them to vote in favor of H.R. 4213. Visit the website for Jobs for America Now, which makes it extremely easy for you to make a toll-free call to your lawmakers to support this bill.
The Coalition on Human Needs is circulating a sign-on letter for organizations in support President Obama's proposals to make permanent some of provisions in the recovery act that expand refundable tax credits to help working families.
If you are authorized to sign on behalf of an organization, please sign your group onto this letter to preserve and build upon tax credits for low-income children, working families, and students. The deadline is Friday, April 30.
Read the letter.
Sign the letter.
CHN is seeking local, state, and national organizations to sign this letter, which will be sent to every Representative and Senator in Congress. Congregations, service providers, labor, civil rights, social action, policy, and advocacy groups are all asked to join the letter. PLEASE SHARE THIS INFORMATION WITH OTHERS IN YOUR STATE.
Poverty and hardship are rising across the nation. Tax credits can help families buy what they need, protecting children and boosting the economy too. The Child Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit (for low-income college students) can make a real difference in providing income to millions of families. But if Congress does not act, these tax credits will expire.
Why it matters: A family with two children with a parent working full-time at the minimum wage now receives about $1,750 from the Child Tax Credit. If the current tax credit law expires, this low-income family will lose $1,500 — and receive only $250. If the law expires, families with 3 or more children will lose up to $629 in their Earned Income Tax Credit. And, if the law expires, low-income students will lose up to $1,000 to help with their college expenses.
At a time when unemployment is high, and near depression levels among people with little education, in communities of color, and in some urban and rural areas, this is no time to drastically reduce the help low-income tax credits provide.
The voices of local, state, and national organizations are needed to show Congress very strong support for preserving and improving these tax credits. Please add your voice by signing this letter — and forward this request to other organizations.
Congress will act on extending tax cuts for the middle class, and must also decide about tax cuts for the rich and for business interests. Please make sure they remember the millions of low-income families who need help the most — and whose help provides the biggest economic boost.
The 2009 federal income taxes that come due on April 15 have been cut for nearly all working Americans, including Americans at all income levels, by the Recovery Act signed by President
Obama last year. But no one seems to be aware of this. Recent polls indicate that the vast majority of Americans think that the President either raised taxes or left them the same for 2009.
CTJ has new state-specific reports that aim to clear up this widespread misunderstanding. They show that the President cut taxes for working people at all income levels for 2009 and they show who was helped by each individual tax break.
Read the fact sheet and report for your state.
New CTJ Report on President Obama's FY2011 Budget Proposal: The Federal Government Should Collect at Least as Much Revenue as Obama Proposes
A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.
But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.
His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.
The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.
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.
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.
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.
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.
Democratic leaders in the Senate want to pass the tax extenders retroactively early in 2010. One problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. As we've explained before, this is an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes.
On November 6, President Obama signed H.R. 3548, the Worker, Homeownership, and Business Assistance Act of 2009, which provides a much-needed extension of unemployment benefits. Around 400,000 workers exhausted their unemployment benefits at the end of September and far more would have exhausted them by the end of this year without this extension. As a report from CTJ explains, it is still unfortunate that the price of providing this necessary help is tax breaks to corporations and to the housing industry.
Sadly, Congress did not think that helping the unemployed during the worst recession in decades was worthy enough to do without larding the bill up a bit with tax cuts. One is a tax cut that will benefit people who buy a residence and who would have done so whether or not a tax cut was offered to them. The second will essentially give unprofitable companies cash with no strings attached.
Read the report.
Environmentalists have their eyes on the Senate, where Majority Leader Harry Reid has given several committees a September 28 deadline to mark up climate change legislation. The legislation is expected to include a "cap-and-trade" program, in which companies would need to have allowances to emit greenhouse gases, and the amount of allowances would be capped at a level that would decline for several years.
The House of Representatives passed its version (H.R. 2454, the American Clean Energy and Security Act of 2009) in June. It's clear that America needs to act to reduce the greenhouse gases that contribute to climate change. But it's equally clear that the Senate could do better than the House did in addressing this problem.
President Obama proposed in his first budget that Congress create a cap-and-trade system in which all of the emissions allowances are auctioned off to companies rather than given away for free. The overall amount of allowances would be capped and reduced each year. The revenue raised could be largely used, the President reasoned, for a refundable tax credit that would offset the impact of the resulting higher energy costs for low- and middle-income families.
The House cap-and-trade bill only auctions off 15 percent of the allowances, and the revenue raised would help offset the costs for the poorest fifth of families. So 85 percent of the allowances would not be auctioned off, but neither would they be doled out for free to corporations (not all of them anyway). There would be strings attached for some. For example, local utility companies would initially get almost half of the allowances, but in return they would be required to pass savings onto consumers. Unfortunately, there are many reasons why this is an inefficient way to protect consumers.
The Senate might repeat the House's mistakes. One of the Senate committees with partial jurisdiction over the legislation will be the Finance Committee, whose chairman (Max Baucus of Montana) recently told Congressional Quarterly that the Senate would probably not allocate the emissions allowances all that differently than the House bill does.
The increased costs that middle-income families would see if the House bill becomes law are not gigantic ($235 a year according to the Congressional Budget Office). But Congress needs to decide whether the increased prices paid for energy should go largely towards corporate profits (which seems to be the likely result of the House-passed bill) or be redirected back to consumers.
The Senate could accomplish the latter by auctioning off more than 15 percent of the allowances and using the revenue to offset the increased energy costs more effectively for both low- and middle-income families. The Center on Budget and Policy Priorities points out that refundable tax credits, combined with more use of EBT cards, would be an effective way to deliver the necessary energy refund to the vast majority of low- and middle-income families.
The Senate might not just repeat the House's mistakes. They might even add a few of their own. Baucus told the Daily Tax Report that “Congress could use the money from auctioning allowances to cut taxes: by cutting marginal rates, by cutting capital gains rates, by cutting payroll taxes. Or we could do all of the above.”
To take just one of these ridiculous ideas, the preferential rates that already exist for capital gains and dividends already cost us around $100 billion a year and the vast majority of the benefits go to the richest one percent of taxpayers. Let's hope Senator Baucus sees that relief for consumers is more important than showering more special breaks on wealthy investors.
The House Energy and Commerce Committee plans to mark up legislation next week that would create a "cap and trade" program to reduce the emission of gases that cause global warming ("greenhouse" gases). While President Obama favors auctioning off permits to pollute and then using the proceeds largely to offset the resulting costs for consumers, the Energy and Commerce Committee seems ready to give a large portion of those permits away to utility companies for free.
Why "Cap and Trade"?
The idea behind a cap and trade program is that the federal government could cap the overall amount of greenhouse gases that can be emitted into the atmosphere (and reduce that cap each year) and allow market forces to determine how the reduction in emissions can be made most efficiently.
For example, if a manufacturer finds that it can eliminate greenhouse gas emissions at its facilities very cheaply, it can then sell permits it doesn't need to another company that finds emissions reductions to be prohibitively expensive. The overall reduction in emissions would probably come with less costs to the overall economy than would be the case if the federal government simply mandated every company to reduce emissions by a set amount.
Impact on Consumers
Greenhouse gases are produced by the burning of fossil fuels like coal to provide electricity, and also by burning fossil fuels like petroleum to transport nearly every product we buy. This means that limiting the overall amount of greenhouse gases that can be emitted into the atmosphere could increase the costs of just about all consumer goods. If implemented properly, this would, in turn, provide new incentives for manufacturers, consumers, and energy companies to become much more energy efficient.
The overall added costs to consumers could be offset through refundable tax credits (an approach favored by President Obama and the House Ways and Means Committee). The result would be that energy and energy-intensive services and products would be more expensive relative to other things, but the overall buying power of consumers would not be diminished. As the Congressional Budget Office has pointed out, this is particularly important for low-income people, because they are forced to spend a larger portion of their income (or all of their income) on consumption and will therefore feel a larger impact.
The CBO has also explained that the cost increases for consumers are likely to occur whether the emissions permits are auctioned off to companies or simply given to the companies for free. Greenhouse gas emitting companies would be able to charge higher prices either way as a result of the cap. President Obama proposed in his budget outline that all of the emissions permits be auctioned to companies so that the resulting revenue can be used largely for a tax rebate (an extension of his Making Work Pay Credit) that would offset the increased costs for consumers.
The Center on Budget and Policy Priorities has analyzed the sorts of steps that can be taken to offset these regressive impacts, which would involve tax rebates for most people but would also require boosting other existing programs for people who would not be reached by tax rebates.
Energy and Commerce Committee Moving in the Wrong Direction
Henry Waxman (D-CA), chairman of the Energy and Commerce Committee, and Edward Markey (D-MA), chairman of the subcommittee handling the issue, have put forth legislative language that currently does not address whether all the permits would be auctioned or not. But media reports indicate that they are currently negotiating language that would give away as much as 40 percent of the permits to utility companies, which would be required to pass on savings to their customers.
There are many, many problems with this approach. To take just a couple: Less than half of the increased costs that consumers would face as a result of cap and trade would come from higher utility bills. Blunting the effects of cap and trade for electricity would force larger greenhouse gas reductions in other energy-intensive parts of the economy, which might raise the total costs of reducing emissions.
The President was right to propose that 100 percent of greenhouse gas emission permits should be auctioned off rather than given away for free. Hopefully, the cap and trade program that emerges will be much closer to what the President outlined.
New Data from Citizens for Tax Justice Shows that Many Survey Respondents Saying Income Taxes Are Too High Will Pay No Income Taxes for 2008
A recent Gallup poll found that 61 percent of respondents felt that the federal income tax they will have to pay this year is "fair." When asked about the specific amount of federal income taxes they pay, just over half felt they pay the right amount or too little.
Fewer than half of those polled said they thought their federal income taxes are "too high." It appears, however, that some of these respondents are basing their answers on the right-wing, anti-tax propaganda they've heard rather than their own income tax liability. A new report from Citizens for Tax Justice finds that many of the respondents who say they pay too much are likely to owe no federal income taxes at all, suggesting that education about the tax system could change their views.
New Data from Citizens for Tax Justice Shows that the U.S. Tax System Is Not as Progressive as You Think
Many politicians, pundits and media outlets have recently claimed that the richest one percent of American taxpayers are providing a hugely disproportionate share of the tax revenue we need to fund public services. New data from Citizens for Tax Justice show that this simply is not true. CTJ estimates that the share of total taxes (federal state and local taxes) paid by taxpayers in each income group is quite similar to the share of total income received by each income group in 2008.
- The total federal, state and local effective tax rate for the richest one percent of Americans (30.9 percent) is only slightly higher than the average effective tax rate for the remaining 99 percent of Americans (29.4 percent).
- From the middle-income ranges upward, total effective tax rates are virtually flat across income groups.
A new report from Citizens for Tax Justice answers many of the questions that are frequently asked about taxes during this time of year and clears up the old myths that are still accepted by many as fact. Here is just a sample of some of the questions that are answered:
Question: Does President Obama plan on raising our taxes?
Question: There might be cyclical downturns and upturns in the economy that no one can control, but don't tax cuts help us climb out of downturns a little faster?
Question: What are "tax havens" and why are some people in an uproar over them?
Question: What does it matter to me if someone else is hiding their income from the IRS?
Earlier this week, the National Women's Law Center released the April 2009 update to its report, "Making Care Less Taxing," which describes available state and federal child tax credits and dependent care tax credits, analyzes how these credits help families, and discusses how they can be best designed.
The Center has been instrumental in providing information to help federal and state lawmakers find ways to support families and devotes this annual report to the often forgotten role that tax policy plays.
The report includes information on changes made to state and federal child and dependent care credits in 2008, including:
- Previously legislated changes to existing child and dependent care tax provisions in Oklahoma, Georgia and Louisiana that took effect for tax year 2008;
- Changes to the definition of "qualifying child" that affect the federal child and dependent care credit; and
- Highlights of new IRS regulations on the definition of "custodial parent" as it relates to separated or divorced parents who claim the federal child and dependent tax credit.
The National Women's Law Center also has resources for parents, advocates and service providers about the tax credits available for families at the federal level and in every state.
The U.S. House of Representatives and the U.S. Senate both approved budget resolutions on Thursday that move Congress a step closer to enacting President Obama's agenda, without being quite as bold or explicit as the budget outline released by the President in late February. Both resolutions would spend about $3.5 trillion in 2010 and include non-binding, but important, provisions affecting spending and revenues in years after that. As lawmakers from both chambers leave Washington for their spring recess, behind-the-scenes negotiations will likely pave the way for a House-Senate conference to take place upon their return to iron out the differences between the two resolutions. On some key issues like estate tax and health care, the House has made wiser choices that will hopefully be maintained in the final budget resolution.
The basic thrust of many of the tax policies embodied in the budget resolutions mirror the President's proposals. Both assume the extension of the Bush income tax cuts for everyone except taxpayers with incomes above $200,000 (or $250,000 for married couples). Taxpayers above these thresholds are affected by the top two income tax rates, which would revert to 36 and 39.6 percent. Both resolutions would extend the "AMT patch," a measure that increases the exemptions from the Alternative Minimum Tax to ensure that most taxpayers are not affected by it. (The chambers differ on the extent to which the costs of the AMT patch will have to be offset with revenue-raising measures in the future.)
The resolutions do not follow the President's proposals on certain issues. For example, President Obama proposed that the income tax cuts aimed at working families and included in the recently-enacted stimulus bill be made permanent. The resolutions would make some of these permanent, like the expansion in the child tax credit and the American Opportunity Tax Credit for higher education.
But they would not make permanent the Making Work Pay Credit, one of Obama's signature tax policies. Neither do they include any specific language to create a "cap and trade" program to reduce greenhouse gas emissions, which, in the President's proposal, would produce the revenue needed to offset the costs of the Making Work Pay Credit and other energy initiatives.
Similarly, the resolutions do not include language laying out how Congress will pay for health care reform. (The President's budget outline included a reduction in the benefits of itemized deductions for the rich to partially fund health care reform.)
None of this means that Congress will not act on these proposals of the President's. The resolution includes language allowing for deficit-neutral legislation in these areas without specifying how money will be spent or how it will be raised.
Congress's next important test involves settling the differences between the House and Senate resolutions. When it comes to revenues raised to pay for health care or revenues raised from the estate tax, hopefully the choices made by the House will be maintained in the final budget resolution. See the following Digest articles for more.
Estate Tax: Senate Approves a Break for Millionaires that Leader Reid Calls "So Stunning, So Outrageous"
Reconciliation for Health Care Reform: House Moves to Stop Senators' Obstruction of Measures with Majority Support
House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks
House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks
House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks
When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?
This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.
The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.
A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:
- Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
- The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
- The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.
Yesterday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate right now. His proposal is apparently an update on the plan that House GOP leaders introduced last week and is different in some key respects.
A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:
- Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
- The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
- The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.
New Report from CTJ: Poor Pay More and Rich Pay Less Under House GOP Plan that Costs $300 Billion More Annually than the President's Plan
Yesterday, the Republican leadership in the U.S. House of Representatives released the outlines of a tax and spending plan that they argue is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate.
A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the President's plan and finds that:
- Over a fourth of taxpayers, mostly low-income families, would pay more in taxes under the House GOP plan than they would under the President's plan.
- The richest one percent of taxpayers would pay $100,000 less, on average, under the House GOP plan than they would under the President's plan.
- The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the President's plan, would cost over $300 billion more than the Obama income tax cuts in 2011 alone.
This week, Citizens for Tax Justice updated its recent report on the tax proposals in the President's budget outline to include estimates of the proposals' impacts on different income groups in every state. The new state figures examine the proposed cuts compared to current law and also compared to the baseline that the Obama administration uses in presenting its budget figures. The figures show that, whichever baseline is used, the vast majority of families in every state will get a significant tax break.
Read the report. (State-by-state figures are in the final appendix.
On February 26, President Obama sent to Congress the blueprint for what could be one of the most progressive federal budgets in generations. The budget calls for national health care reform, expanded education funding, a program to reduce global warming, and several improvements in human needs programs. As a new report from Citizens for Tax Justice explains, it would make the tax code considerably more progressive, and close a number of egregious tax loopholes.
There is, however, a flaw in the budget proposal: It does not raise enough revenue to pay for public services. Instead, its net effect is to cut taxes dramatically.
Opponents of the President have attempted to argue that the budget proposal calls for tax increases that could sink the economy, but this complaint is plainly unfounded. President Bush and his allies in Congress were adamant that lower taxes would lead to an explosion of prosperity, and they enacted tax cuts in 2001, 2002, 2003, 2004 and 2006. Some allies of the former President argue that Congress is now insufficiently focused on tax cuts, but this view seems bizarre and incredible given the sad economic facts all around us.
Indeed, one might reasonably conclude that we could safely allow most of the Bush tax cuts to expire at the end of 2010, as they are scheduled to under current law, without any concern about how this will impact the economy. But President Obama actually proposes to keep most of the Bush tax cuts. Obama's largest proposed tax cut is to re-enact 80 percent of the Bush tax cuts that are scheduled to expire at the end of 2010. Most of this reflects re-enacting the Bush income tax cuts for married couples with incomes below $250,000 and others with incomes below $200,000 (or put another way, for about 98 percent of taxpayers), and permanently reducing the Alternative Minimum Tax (AMT). In addition, Obama proposes to re-enact close to half of the Bush estate tax cut.
On top of re-enacting most of the Bush tax cuts, the Obama budget includes a number of additional tax cuts for families and individuals. (These would be extensions of temporary tax cuts included in the recently passed stimulus law.) It also proposes some questionable business tax cuts.
Partially offsetting its tax-cut proposals, the Obama budget proposes some significant revenue-raising provisions. These include a cap-and-trade program to reduce carbon emissions, a limit on the benefits of itemized deductions for high-bracket taxpayers, and a number of corporate and high-income loophole-closing measures.
CTJ has long argued that some tax cuts could have a chance of effectively stimulating the economy -- if they are extremely targeted to poor and working class families. Several tax credits meeting this criterion were included in the House and Senate stimulus bills, although the details differed. CTJ released state-by-state fact sheets showing how families with children would be impacted by these tax cuts, and in many states families would gain between $800 and $1,000 in 2009 alone. The conference agreement does include these provisions, although some of them are scaled back somewhat.
1. Making Work Pay Credit (MWPC)
This was originally proposed by Barack Obama during his presidential campaign as a refundable tax credit of $500 for working people, or $1,000 for couples. Technically, the credit would be capped at 6.2% of earnings up to $8,100 (or twice that for married couples), meaning this credit would be the equivalent of a refund on Social Security taxes paid on that amount of earnings. The House and Senate bills both included this and only differed on the income limits and some other details. The conference agreement, however, limits the MWPC to $400 for singles and $800 for married couples. The credit will also be dribbled out over time through a reduction in withholdings, since some policymakers have decided that simply issuing checks (as was done with the rebate checks sent to households last year) results in families saving the money, which will not stimulate the economy immediately.
2. Expansion in the Earned Income Tax Credit (EITC)
Currently, low-income workers with no children can sometimes receive a very small EITC equal to a maximum of 7.65 percent of eligible earnings, while the maximum EITC for families with children is 34 percent for those with one child and 40 percent for those with two or more children. Under the House and Senate bills, families with three or more children could receive a benefit equal to a maximum of 45 percent of eligible earnings. The maximum benefit under current law is phased out at an income level that is higher for married couples than for singles. The bills would increase that difference, further reducing the "marriage penalty" in the EITC. These changes are included in the conference agreement. The total cost of these changes to the EITC is about $4.7 billion, which is much less than the cost of other provisions and this probably accounts for their survival in the final agreement.
3. Making the Refundable Portion of the Child Tax Credit (CTC) More Readily Available for Poor Families
Currently a parent who earns less than $12,550 in 2009 is too poor to benefit from the $1,000 per-child credit. People who pay federal payroll taxes but earn too little to pay federal income taxes do not benefit from a tax credit unless it is refundable. Currently the refundable portion of the CTC is limited to 15 percent of earnings above $12,550 in 2009 (this threshold is indexed for inflation). The House-passed bill would have removed this earnings threshold so that the refundable portion of the CTC would be equal to 15 percent of any earnings (the maximum credit would remain unchanged at $1,000 per child). The Senate-passed bill settled on a less generous provision retaining the earnings threshold but lowering it to $8,100.
Citizens for Tax Justice released a one-page fact sheet on Tuesday night showing how families in each state would be affected by the House and Senate provisions and how many more children would be helped by the House version compared to the Senate version. The conference agreement steers a little closer to the House version, setting the earnings threshold at $3,000.
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
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.
New State Fact Sheets from Citizens for Tax Justice Show that Families with Children in Most States Would Gain Around $900 to $1,000 in Tax Cuts from the Stimulus Bills
Senators Who Vote Against the Stimulus Are Opposing Significant Tax Cuts for Families with Children
New state facts sheets from Citizens for Tax Justice show that the economic stimulus proposals being considered by Congress include several tax cuts that could significantly benefit working class families with children in every state. The stimulus bill approved by the House of Representatives last week costs a little over $800 billion and about $275 billion of that would go towards tax cuts.
About half of the tax cut portion of the bill consists of a refundable "Making Work Pay Credit" (MWPC) worth up to $500 for most working people (or $1,000 for married couples). The House bill also includes an expansion in the Earned Income Tax Credit (EITC) and a provision making the Child Tax Credit (CTC) more accessible to low-income families. All three of these provisions would create or expand refundable income tax credits, which are the only type of income tax cut that can benefit parents who work and pay federal payroll taxes but do not earn enough to owe federal income taxes.
Refundable credits can allow a family of modest means to have negative income tax liability, meaning the IRS actually sends them a check instead of taking a tax payment from them. This check can be thought of as a way to offset the federal payroll taxes and other types of taxes that working families pay.
The stimulus bill that the Senate is considering this week also includes the MWPC and EITC provisions. It also includes a provision that will make the CTC more accessible to low-income families, but which will not reach as many families as the CTC change in the House bill.
In many states, families with children would receive about $900 to $1,000 in tax cuts from the stimulus proposals.
Senators should support the stimulus bill they are considering this week because, overall, it would provide the boost that the economy needs right now. If the Senate does pass its bill, then a House-Senate conference will likely spend next week working out the differences between the House and Senate versions, and there will hopefully be opportunities to ask conferees to make wise choices. For example, if the Senate version of the bill still includes the less generous expansion of the Child Tax Credit, hopefully conferees will choose to include in the final bill the more generous CTC change approved by the House.
Progressive organizations are distributing the following information to help constituents contact their Senators and urge them to support the stimulus bill being considered in the Senate this week.
The following toll-free number can be used right now to reach the U.S. Capitol, where an operator will connect you to your Senators:
Progressive organizations have suggested the following message to Senators: Please vote for the economic recovery bill and oppose delaying tactics. Our state needs the jobs that will be saved; our people need its protections against hunger, sickness and unemployment. We need to rebuild our schools and roads. Vote for the American Recovery and Reinvestment Act of 2009!
New CTJ Report Compares Most Recent House GOP Stimulus Proposal to House Democratic Stimulus Bill Up for Vote Today -- Includes Updated State-by-State Estimates
On Friday, January 23, House Republican Leader John Boehner (OH) and Republican Whip Eric Cantor (VA) presented their "Economic Recovery Plan" to President Obama. The Republican plan is based on income tax cuts for relatively well-off families and business tax cuts. As a brand new report from Citizens for Tax Justice explains, it is unlikely to provide the needed boost to consumption that economists believe can come from either direct government spending or putting money in the hands of working class people who are likely to spend it quickly.
Less Than a Quarter of the House GOP's Tax Rate Reduction Proposal Would Go to the Poorest 60 Percent of Taxpayers
The House GOP plan proposes to reduce the two lowest individual income tax rates from 15% to 10% and from 10% to 5%. To get the maximum tax cut of about $3,400 from this rate reduction, taxpayers would have to have enough taxable income to reach the start of the third income tax bracket. For example, a married couple with two children would typically need to earn more than $100,000. That's considerably more than most people earn. In fact, only one in five of all taxpayers has enough income to reach the third income tax bracket and receive the full benefit of the proposed tax rate reduction.
On the other hand, the plan proposed by Democrats in the House of Representatives (which is scheduled to come to a floor vote today), delivers tax cuts to working families who don't pay federal income tax but pay a lot in payroll taxes. For example, the "Making Work Pay Credit" would give married couples with $8,100 or more in wages the full $1,000 credit provided in the bill. In order to have an equivalent benefit from the Republican rate reduction, a married couple (with two children) would have to have $46,000 of gross income. The House Democrats' plan would also expand the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) which are smaller tax breaks in terms of revenue but are even more targeted to working families.
Deadline Extended for Organizations to Join Sign-On Letter to Congress Urging Expansion of Child Tax Credit for Low-Income Families
The deadline for organizations to join the letter being distributed by the Coalition on Human Needs urging Congress to make the Child Tax Credit (CTC) fully accessible to low-income working families has been extended to Monday, February 2. If you are authorized to sign on behalf of an organization, click here. If you are not authorized to sign on behalf on an organization but you still want to support this change, click here to send an email to your members of Congress asking for their support.
The House stimulus bill would make the existing $1,000 Child Tax Credit (CTC) more accessible to low-income families by making the refundable portion of the credit equal to 15 percent of a family's earnings (up to the existing maximum credit of $1,000 per child). Under current law, the refundable portion is limited to 15 percent of earnings above $12,550 in 2009 (this threshold is indexed for inflation). That means someone with income below $12,550 is actually too poor to benefit from the CTC. The Senate version would improve the CTC, but not nearly as much because it would lower the earnings threshold to $6,000.
Families who work and pay federal payroll taxes but do not earn enough to owe federal income taxes usually do not benefit from an income tax cut unless it takes the form of a refundable credit. The limitation on refundability of the CTC has resulted in many of the poorest families being excluded from its benefits. Equally important is the fact that expanding refundable tax credits is more likely to be effective economic stimulus than many other tax cuts that are being proposed according to Mark Zandi of Moody's Economy.com and other economists. This is because it puts money in the hands of people who are likely to spend it quickly, giving our economy the boost in demand for goods and services that economists believe will mitigate the recession.
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.
House Democrats' Tax Proposal Makes Some Improvements on Obama Plan While Retaining Some Ill-Advised Tax Cuts for Business
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.
When the Earned Income Tax Credit was expanded in the Tax Reform Act of 1986, President Reagan, who signed the bill into law, called the EITC "the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress."
The EITC provides a tax credit to very low-income working families. The credit can exceed federal income tax liability, meaning that some very low-income families actually receive a check from the IRS. Since pretty much all working people pay federal payroll taxes (and also some federal excise taxes like the gasoline tax) even if they don't owe income taxes, the EITC seemed like a justifiable break for struggling families.
Leaders of both parties agreed, as did President Reagan. That's as close to a consensus as anyone finds in Washington. It seemed this was one sort of tax cut that everyone supported.
Until now. Presidential candidate John McCain, who often claims to emulate Ronald Reagan, has lately argued that tax breaks exceeding income tax liability are "welfare," and has even suggested that they are socialism. While McCain's views are not entirely clear (since his own health care plan includes a refundable tax credit that would also benefit people without income tax liability) it's difficult to square his hostility towards Obama's proposed refundable tax credits with his tributes to the president who supported similar policies. As a short paper from CTJ explains, under McCain's new logic, even George W. Bush is a socialist.
Pinning down where Senator McCain stands on taxes has never been easy. He originally opposed the Bush tax cuts, saying. "I don't believe the wealthiest 10% of Americans should get 60% of the tax breaks. I think the lowest 10% should get the breaks."
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).
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.
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."
Senate Prepares to Dig the Budget Deficit Deeper with AMT Relief, Special Interest Tax Cuts, and Few Revenue-Raising Provisions
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."
Members of Congress have left the Capitol for the August recess and some important tax bills await them when they return in the fall.
House Passes Tax Extenders Bill, Republicans Block Senate Action
In May, the House passed a bill (H.R. 6049) that includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well as renewable energy tax incentives and a few new tax cuts. Unlike similar bills passed during the Bush years, this bill includes revenue-raising provisions to replace the $54 billion that would otherwise be lost.
The one-year "extenders" cost a total of $27 billion and include extensions of several tax breaks targeting businesses and generally well-off individuals. The renewable energy tax incentives in this bill cost a total of $17 billion and the largest is the 3-year extension of the "section 45 tax credit" for the production of energy from renewable resources.
The new tax cuts in the bill, which cost an additional $10 billion, include a change in the AMT related to the treatment of stock options and an expansion in eligibility for the Child Tax Credit (CTC) for low-income families.
The Bush administration opposes this bill because it opposes any and all tax increases, even if they are included in a bill with tax cuts to make the legislation deficit-neutral. CTJ released a report in May that was critical of the administration's position and that explained the provisions in the bill. Democratic leaders in the Senate tried three times to invoke cloture on this House-passed bill, but the Republican minority blocked the effort each time.
House Passes Bill to Patch AMT and Close the Carried Interest Loophole, Republicans Defend Private Equity Fat Cats
In June, the House passed a bill (H.R. 6275) that would provide relief from the Alternative Minimum Tax (AMT) for one year.
The AMT was first created in 1969 to ensure that wealthy taxpayers would pay some minimum level of income tax no matter how proficient they are at using loopholes. It has been adjusted several times since then but the Bush tax cuts caused more people to be affected by the AMT and did not include any permanent adjustment for it. Congress, in recent years, has frequently enacted a "patch" which adjusts the exemptions that keep most of us from paying the AMT, but has not provided a permanent fix.
The one-year AMT "patch" would cost over $60 billion, and the House bill would replace the revenue, partly by closing the loophole for "carried interest" paid to private equity fund managers. A report from CTJ explains that since AMT relief will mostly help families that are relatively well-off, it should not be deficit-financed because that could eventually lead to higher taxes or cuts in services for middle-income people.
The Senate has not acted on the House-passed AMT bill. One sticking point is the provision to close the "carried interest" loophole. Carried interest is a form of compensation paid to fund managers in return for investing other people's money. Most of us who earn an income from work are subject to federal income taxes at progressive rates, starting at 10 percent and going up to 35 percent for the very wealthiest. Private equity fund managers are at the top of this wealthy group, but nevertheless pay only 15 percent -- the special low capital gains tax rate -- on their carried interest.
Presidential candidate Barack Obama favors closing the carried interest loophole, while John McCain does not. In fact, McCain's opposition to closing loopholes enjoyed by the private equity industry inspired an SEIU protest involving the performance of an ABBA song with new lyrics, retitled "Loophole King."
Senate Democrats Ready to Cave on Paying for AMT Relief But Insist on Paying for Extenders
Senator Max Baucus introduced a bill (S. 3335) that includes both the extenders, energy provisions and a one-year AMT "patch." The legislation includes enough revenue-raising provisions to pay for the extenders but not for the AMT patch. The biggest revenue-raising provisions are the same ones that are in the House-passed extenders bill. One would clamp down on the use of schemes by private equity fund managers to move deferred compensation offshore to avoid taxes. Another would delay a 2004-enacted law that has not even gone into effect yet. The soon-to-take-effect law 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.
The Republican minority in the Senate blocked efforts to invoke cloture on this bill before the recess because they object to the revenue-raising provisions.
Needed Improvement in the Child Tax Credit
Both the House-passed extenders bill and Senator Baucus's extenders/AMT bill have a provision that would make the Child Tax Credit (CTC) more widely available for low-income families.
First enacted during the Clinton administration, the CTC was significantly expanded as part of the Bush tax cuts. It is now worth up to $1,000 for each child under age 17. But many low-income families do not benefit at all from the child credit, and many others get only partial credits. That's because the credit is unavailable to families with earnings below $12,050 (indexed for inflation), and the credit is limited to 15 percent of earnings above that amount. In other words, a working family making less than $12,050 this year is too poor to get any child credit.
The House extenders bill would lower the child credit's earnings threshold from the current $12,050 to $8,500. The Center on Budget and Policy Priorities points out that 13 million children would be helped by this provision.
Last week, Congress left for its Memorial Day recess having completed some important work but leaving a lot more for the summer weeks ahead. Among the issues we've been following:
- The tax "extenders" bill which includes extensions of tax cuts for business and energy and a few new tax cuts like an improvement in the Child Tax Credit for poor families.
Status: Passed by House.
The House passed its version of this bill (H.R. 6049) last week. As explained in a CTJ report, the President has threatened to veto the bill mainly because the House had the audacity to include revenue-raising provisions to offset the costs and prevent an increase in the budget deficit. This bill contains some provisions, like the extension of the Research and Experimentation Credit and a tax break for offshore financial services, that are not good policy, but the White House supports all of those.
One of the revenue-raising provisions would delay a 2004-enacted law that has not even gone into effect yet. The soon-to-take-effect law 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. Under the House bill, implementation of this tax break (the new "worldwide interest allocation" rules) would be delayed until 2019, raising about $30 billion over ten years.The second revenue-raising provision would crack down on the use of offshore schemes that private equity fund managers use to avoid taxes on deferred compensation, raising about $24 billion over ten years.
Democratic leaders in the Senate would like to pass an extenders bill that does not increase the budget deficit, so they are considering whether to have the Finance Committee consider a bill or simply bring the House-passed bill right to the floor of the Senate.
- The farm bill.
Status: House and Senate voted to override President's veto. Provisions targeting the tax gap were not included in final version.
There was hope that this long-fought-over legislation would include provisions that target the "tax gap" (the difference between taxes owed and taxes actually paid). None of these provisions were included in the final bill (H.R. 2419), which instead raises some revenue by reducing the ethanol tax credit and making other changes related to agriculture.
The White House had opposed a revenue-raising provision that the House attached to its version of the farm bill passed back in July of last year. Initially proposed by Rep. Lloyd Doggett (D-TX) and endorsed by Citizens for Tax Justice, this provision would raise $7.5 billion over ten years by stopping foreign corporations with subsidiaries in the U.S. from manipulating international tax treaties to avoid taxes. The Senate passed a farm bill in December that had its own revenue-raising provisions. The largest was a provision that would reduce tax avoidance schemes by codifying what is known as the "economic substance doctrine," which basically means taxpayers will not obtain tax benefits from transactions that were entered into mainly to avoid taxes. Citizens for Tax Justice advocated for this measure (although calling for a stronger version of it).
The House Ways and Means Committee chairman Charles Rangel (D-NY) had proposed a different revenue-raising provision that would require credit card issuers to report payments made by cardholders to merchants. The Senate wanted to raise revenue by requiring brokers of publicly traded securities to report the basis of a security in a transaction to ensure that capital gains taxes are paid fully. Another version of the bill included the two revenue-raisers that are now part of the House extenders bill.
- Emergency supplemental spending bill.
Status: The House approved a version with a surcharge for the very rich while the Senate approved a version without the surcharge.
On May 15, the U.S. House of Representatives took votes on amendments to an emergency supplemental spending bill to fund military operations in Iraq and Afghanistan, to improve veterans' education benefits and to extend unemployment insurance benefits to get jobless Americans through difficult times.
The House actually voted down the war funding. One amendment that was approved would improve the educational benefits available to veterans by increasing them to match the highest public university tuition in a given recipient's state and providing a monthly housing stipend.
This improvement in veterans' education benefits would cost about $52 billion over ten years. To offset this cost, the legislation includes a small surtax on those who have most enjoyed the benefits of living in and doing business in America. The surtax of 0.47 percent (just under half a percent) would apply to adjusted gross income (AGI) over a million dollars for married couples and over half a million dollars for other taxpayers.
Figures from Citizens for Tax Justice show that in 2007 only 0.3 percent of taxpayers were rich enough to be affected by such a tax. Moreover, the sacrifice asked of them is tiny, equal to about 7 percent of their Bush tax cuts.
The Senate then passed a version that included the war funding, the improved veterans' educational benefits and extended unemployment insurance benefits, but no surcharge on the very rich. Democratic leaders in the House could try to pass the Senate version or pass a different version and send it back to the Senate. Meanwhile, the White House wants a "clean" supplemental without any increased domestic spending or tax increase.
- Military tax benefits bill.
Status: Approved unanimously by House and by voice vote by the Senate.
This bill, H.R. 6081, spends a relatively small amount of revenue on tax breaks for military personnel and veterans. Of particular note are two of the revenue-raising provisions in the bill. One would close the loophole used by Kellogg Brown & Root (KBR), the former subsidiary of Halliburton, to avoid paying Social Security and Medicare taxes for the Americans it employs to work in Iraq. This provision, which is a victory for tax fairness, was earlier proposed as legislation offered by Senator John Kerry (D-MA) as reported in the Digest. Another revenue-raising provision in this bill would make it harder for wealthy Americans to escape federal taxes by leaving the country and giving up U.S. citizenship.
- Congressional Budget Resolution (S Con Res 70).
Status: The House and Senate passed different versions. The conference agreement is expected to come up for a vote sometime after the recess.
As explained in a CTJ report, the resolution approved by the House offered more responsible tax provisions in a number of areas.
Most importantly, the House budget plan used "reconciliation instructions" that would make it easier to pass a bill to provide relief from the Alternative Minimum Tax (AMT) without increasing the deficit. Any further increase in the national debt is likely to be borne, in the long-run, by the middle-class, so it would be unfair to take on debt to provide AMT relief, which mostly benefits families that are relatively wealthy. The Senate plan, unfortunately, did not use this approach because the Senate assumed that an AMT patch will be deficit-financed.
The conference agreement that has been worked out would create a point of order in the Senate against legislation that increases the deficit by over $10 billion during any year covered by the budget resolution. As with the pay-as-you-go (PAYGO) rule, this point of order can be waived by 60 votes. The conference agreement also assumes that Congress will extend several of the Bush tax cuts for the middle-class, but it unfortunately includes in this category a cut in the estate tax that can only help families owning estates worth several million dollars. Of course, the budget resolution does not raise taxes or cut taxes and is not legislation, but a blueprint for Democratic leaders in the House and Senate. Most spending and tax decisions are likely to be put off until a new president takes office.
New Report from CTJ: Bush Administration Demands that Congress Increase the Deficit with Tax Breaks for Business
A new report from Citizens for Tax Justice examines the $54 billion tax cut bill that the President is threatening to veto because it includes revenue-raising provisions to offset the costs. The President's stance threatens a needed improvement in the Child Tax Credit for poor families with children, as well as several other tax changes sought by lawmakers.
The bill, (H.R. 6049) was approved by the House of Representatives on Wednesday and includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well as renewable energy tax incentives and a few new tax cuts. Similar bills passed during the Bush years resulted in increases in the federal budget deficit because they did not include revenue-raising provisions.
The Office of Management and Budget (OMB) issued a statement asserting that it would advise the President to veto the extenders bill if approved by both chambers in its current form. The main reason is that the legislation includes revenue-raising provisions to prevent it from increasing the federal budget deficit.
Equally alarming is the fact that the White House actually supports all of the most poorly targeted and unjustified tax breaks in the extenders bill, even while opposing any effort to pay for them.
But at least one of the tax cuts in the bill is a good idea. It would expand eligibility for the Child Tax Credit for one year, at a cost of $3.1 billion.
The report concludes that the President should champion provisions like this, which actually do make the tax code more progressive, as well as the responsible and fair revenue offsets that would raise enough money to pay for this and other tax breaks in the bill.
The report: http://www.ctj.org/pdf/extenders20080523.pdf
House Tax-Writing Committee Passes Bill to Extend Business and Energy Tax Breaks, Improve Child Tax Credit
The House Ways and Means Committee approved a bill (H.R. 6049) on Thursday that includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well renewable energy tax incentives and a few new tax cuts. Unlike similar bills passed during the Bush years, this extenders package includes revenue-raising provisions to offset the costs.
Republicans Demand Increase in the Budget Deficit
Ranking member Jim McCrery (R-LA) and other Republicans on the committee argued that Congress should not have to offset the costs of extending tax cuts because these extensions amount to a continuation of current policy. But the tax cuts in question were never enacted as permanent tax cuts, so Congress never budgeted for the costs that they would present in future years if they were permanent (meaning the revenue "baseline" used by the Congressional Budget Office assumes that these tax breaks will expire). McCrery's logic implies that Congress should be able to enact any tax cut for a single year and then at the end of that year make it permanent without offsetting the costs.
The Tax Cuts in the Bill
The renewable energy tax incentives cost a total of $17 billion and the largest is the 3-year extension of the "section 45 tax credit" for the production of energy from renewable resources, at a cost of $7 billion.
The new tax cuts cost a total of $10 billion, and include a change in the AMT related to the treatment of stock options, a deduction for property taxes for non-itemizers which was also included in the housing legislation the House passed last week, and an expansion in eligibility for the Child Tax Credit for low-income people. The change in the credit is the biggest of this group, with a cost of about $3 billion.
First enacted during the Clinton administration, the Child Tax Credit was significantly expanded as part of the Bush tax cuts. It is now worth up to $1,000 for each child under age 17. But many low-income families do not benefit at all from the child credit, and many others get only partial credits. That's because the credit is unavailable to families with earnings below $12,050 (indexed for inflation), and the credit is limited to 15 percent of earnings above that amount. In other words, a working family making less than $12,050 this year is too poor to get any child credit. The bill would lower the child credit's earnings threshold from the current $11,750 to $8,500 and would no longer increase the threshold every year for inflation. The Center on Budget and Policy Priorities points out that 13 million children would be helped by this provision and describes some of the characteristics of the families likely to be affected.
The one-year "extenders" cost a total of $27 billion and include extensions of several tax breaks that have been criticized in the past by Citizens for Tax Justice, like the research and development credit, the deduction for state and local sales taxes, and the above-the-line deduction for tuition.
Despite these provisions, this bill is an important step forward because it improves the Child Tax Credit and maintains lawmakers' commitment to the pay-as-you-go (PAYGO) rules that require new tax cuts and entitlement spending to be paid for.
Revenue-Raising Provisions to Comply with PAYGO
The revenue-raising provisions are borrowed from a bill that the House approved last year. One would delay a law that has not even gone into effect yet and which will make it easier for multinational corporations to take deductions for interest payments that should really be considered expenses of foreign operations and therefore not deductible. Implementation of the new "worldwide allocation" rules would be delayed until 2019, raising about $30 billion over ten years.
The second revenue-raising provision would crack down on the use of offshore schemes that private equity fund managers use to avoid taxes on deferred compensation.
The tax code allows employees to defer paying taxes on money that they or their employers put into "qualified" retirement savings plans, such as 401(k)'s, until they take money out during retirement. But contributions to such "qualified" plans are limited, to no more than $30,000 a year depending on the type of plan. That's the sort of plan most Americans can get... if they're lucky.
Highly-paid corporate executives, however, often get to go a giant step farther. They can set up "non-qualified" deferred compensation plans, which are not taxable to the executives until they take the money out, but which are not deductible by companies until then either. Currently, there is no limit on how much money executives can defer taxes on through these plans. But the corporations who pay them also have to defer the deduction they take for whatever they pay into the deferred compensation plan, so in theory there is only a small loss to the Treasury (and to the rest of the taxpayers).
But private equity fund managers have managed to create an approach to deferred compensation that goes even farther, and does impose a substantial cost on the rest of the taxpayers. Private equity fund managers often have an "unqualified" plan into which is paid an unlimited amount of deferred compensation. But they arrange the payments to be technically made by an offshore corporation in a tax haven country that has no corporate tax, or a very low one, so the loss of the deduction is not an issue. Of course, this is done with paper transactions. No one is actually working in the tax haven country, so this is really just a scheme to increase the amount of deferred compensation that can be paid to these already highly-compensated fund managers without being taxed right away.
The bill approved by the Ways and Means Committee Thursday would close this loophole, raising about $24 billion over ten years.
These provisions are good policy based on fairness grounds alone. The need to raise revenue to prevent an increase in the budget deficit only makes them more important.
It is unclear whether these offsets will be included in the Senate version of the bill, which the Senate Finance Committee will likely mark up after the Memorial Day recess.
In November, the Treasury Department came out with an intriguing study which looked at income mobility from 1996 to 2005. The study found that income mobility rates (the ability of taxpayers to move between income quintiles) were similar over this ten-year period to those of the previous decade. Interestingly, only about half of those in the bottom income group in 1996 moved up the income ladder by 2005. Clearly there is no guarantee that low-income Americans would see their income grow substantially over this ten-year period.
The St. Louis Post Dispatch published an editorial based on the study which found what many anecdotally already knew. "In America, you can start poor, work hard and end up rich. But winding up rich is easier if you're born to wealthy parents." The Post Dispatch calls for policies that level the playing field for those Americans who aren't lucky enough to be born with a silver (or even copper) spoon in their mouths: "If America truly wants to truly improve the odds of achieving the American Dream, it would work to counter the effects of poverty on children. A larger earned-income tax credit for low-income parents would help. We also should improve school systems and make public colleges and universities more affordable by expanding scholarships and holding down tuition."
The immigration reform bill that the Senate is expected to return to after the Memorial Day recess may become a vehicle for tax provisions that would deny immigrants who are working and paying taxes the rights that other workers have. The bill, which aims to create a process by which undocumented immigrants can obtain legal status and eventually become citizens, already includes some provisions geared to placate conservative members of the Senate. Many advocates for immigrants' rights are nonetheless hoping that negotiations lead to a bill that improves life for foreign-born workers and their families.
Legislation Would Take Social Security from Legalized Immigrants Who Paid into It
The legislation being negotiated is Senate Amendment 1150 (which is expected to be adopted as a substitute for the placeholder bill S. 1348). It includes language that would reduce or deny Social Security benefits to immigrants who paid Social Security taxes before becoming documented. In a departure from current law, an immigrant who is working and paying Social Security taxes and then becomes documented (and even becomes a citizen) would not get credit for Social Security taxes paid while she was undocumented. This would mean the person could, upon reaching retirement age or becoming disabled, either have drastically reduced benefits or no benefits at all... even if she has become a citizen. Since older immigrants are likely to depend on Social Security benefits during old age, this could increase poverty and increase the sense that they are actually second class citizens.
Also, a bedrock principle of Social Security - and a reason people continue to support the program - is that paying into the system earns the guarantee of a benefit. Taking benefits away from people who actually paid for them would obviously call into question how serious that guarantee really is. A report from the National Immigration Law Center explains the various negative effects that could result from this provision.
Amendments to Take Tax Credits from Immigrant Taxpayers
There is no rational reason to fear that immigrants are going to somehow take federal benefits that they did not pay for. Undocumented immigrants are barred from using federal benefits programs. Also, the Senate adopted an amendment last week that requires that undocumented immigrants who owe back taxes must pay them or enter into an agreement to pay them before they can change their status. But this has not deterred some Senators from trying to deny immigrant workers and their families the rights that workers typically have in America. Next week, Jeff Sessions (R-AL) is expected to introduce amendments related to the Earned Income Tax Credit, one of which would prevent immigrants who are working and paying taxes (paying federal payroll taxes and possibly also federal income taxes) from receiving the EITC until they have had a green card for five years.
Report Shows the Immigration Reform Would Actually Increase Revenues
There is also no rational reason to fear that immigrants will drain the federal government's resources. A preliminary report issued by the Congressional Budget Office and the Congressional Joint Committee on Taxation explains that the net fiscal impact of the immigration reform bill would be positive. The figures released show that the legislation, if enacted, would cause the deficit to actually decrease by $2 billion over five years and by $37 over 10 years, compared to current law.
Uncertain Future in the House
Even if the Senate does pass an immigration bill, it's not clear how it would fare in the House of Representatives, where several Democrats have voiced concerns that it moves away from unifying families and towards having immigrants come to America to work only on a temporary basis. One proposal introduced by Republican Representative Dan Lungren (CA) would designate some immigrants as seasonal workers who must pay payroll taxes into a trust fund and then return to their country of origin to recoup that money at a U.S. consulate. Advocates for immigrants' rights and tax experts would probably agree that the tax system was not designed to be used as a tool to extract labor from immigrants while preventing them from settling in America.