Low-Income Tax Credits: May 2008 Archives
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 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.
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.
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
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.
