Tax Credits for Working Families

What the Debt Ceiling Deal Means for Tax Credits for Working Families

August 2nd, 2011

Everyone who works on anything remotely connected to national budget and tax issues is currently trying to figure out what the debt ceiling deal means for their programs and issues of concern. (Want to try it yourself?) Here’s our understanding of what it means for the Earned Income Tax Credit (EITC), Child Tax Credit, and Child and Dependent Care Tax Credit.

 Essentially, there are four parts of the deal:  

• A ten-year cap on discretionary spending that reduces annual appropriations compared to current levels by a trillion dollars over the next ten years. Since tax credits do not come out of discretionary spending, this provision will not affect them.
• A Joint Committee of twelve members of Congress that will develop a proposal for an additional $1.2 trillion to $1.5 trillion in savings by Thanksgiving. Everything is on the table for their consideration, including tax increases, which could mean that they would reduce or eliminate tax credits. Conversely, it is possible that they could increase tax credits to offset the impact of other tax increases on low- and moderate-income working families. If the Joint Committee is able to come to an agreement on this proposal (by no means a sure thing, since that would require either one Democrat or one Republican to cross party lines), Congress must then vote on it via a fast track process.
• Sequestration—automatic spending cuts. If the Joint Committee fails to construct its proposal, or if Congress doesn’t pass it or an alternative that also results in at least $1.2 trillion in additional savings, then automatic, across the board spending cuts go into effect. Some low income programs are protected from these cuts, including the EITC and Child Tax Credit, and because the automatic cuts are only to appropriations spending, we believe (but are trying to confirm) that the Child and Dependent Care Credit would also be untouched.
• Congress to vote on a Balanced Budget Amendment. If the House passes a balanced budget amendment, which it is likely to pass, the Senate must also vote on it by the end of the year. While right now it appears unlikely to pass in the Senate, if the amendment does pass both the House and Senate by the required two-thirds vote, then it goes to the states (the President cannot veto it.) However, three-fourths of the states must pass it before it becomes part of the Constitution. Should the balanced budget amendment pass, it will require significant cuts in federal spending (since both proposals currently under consideration would cap federal spending at dramatically lower levels than current spending.) Supports for low income people would almost certainly be some of the first to go. However, since both of these proposals would make it harder to raise taxes than under current law, it might also effectively protect working families from cuts to the EITC, Child Tax Credit, and Child and Dependent Care Credit benefits.

So the big question is, what will the Joint Committee include in its proposal, if indeed it is able to create one?

Whatever your position is on the overall deal, it certainly emphasizes one reason why tax credits for working families are so valuable. In today’s political environment, they are much less vulnerable to attack than are programs funded through annual appropriations.

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