Archive for the ‘Child Tax Credit’ Category
New Focus on Tax Reform in the Senate
April 25th, 2013
By Lauren Pescatore
The discussion of tax reform was rejuvenated this week following an announcement from retiring Senate Finance Committee Chairman Max Baucus (D-Mont.) that he will use the time not spent campaigning for re-election to instead focus on an overhaul of the nation’s tax code. While he did not release additional details on his proposed framework for tax reform, he recently wrote a joint op-ed with Rep. Camp, in which they stated that their agreement on tax reform includes three principles, one of which is to “ensure that low-income and middle-income Americans will pay no more taxes than they do under current law.” Whether they can stick to this assurance and still comply with their other principles, which require lowering taxes for businesses, is not clear.
A look back into the chairman’s prior voting history also provides some insight as to how such an overhaul might affect working family tax credits.
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How Tax Credits for Working Families Would Fare Under the President’s Proposed Budget
April 15th, 2013
By Lauren Pescatore
Our analysis of President Barack Obama’s budget for 2014 released last week illustrates how challenging it can be to raise tax revenues substantially while protecting low- to middle-income families from tax increases. While certain tax provisions could negatively affect these families, the $3.78 trillion budget primarily targets the wealthy by closing tax loopholes and limiting deductions, and includes permanent improvements to working family tax credits and an increase in funding for community tax assistance in an attempt to mitigate any additional tax burden on low- to middle-income households.
The President’s offer includes a proposal to move from the current Consumer Price Index (CPI) to a “chained CPI.” We blogged about what this switch would mean for tax credits for working families back in December, when a chained CPI was being considered as part of fiscal cliff negotiations.
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Making the Federal Extensions Permanent
April 9th, 2013
The bill to resolve the “fiscal cliff” that Congress passed at the beginning of the year made the Bush-era tax credit extensions permanent, but only extended the 2009 expansions to the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) for five years. Now legislation is being introduced in the House and Senate to make these provisions permanent as well.
In the House, Rep. Rosa DeLauro (D-CT) has introduced the Child Tax Credit Permanency Act of 2013, H.R. 769, which has 116 cosponsors. This bill would make permanent the lower threshold for receiving the CTC and also make permanent the indexing to inflation.
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A Tale of Two Budgets
March 20th, 2013
Last week, the House and Senate Budget Committees each released budget plans for fiscal year 2014. Both chambers are expected to vote on these plans before next week’s district work period.
These two dramatically different budget proposals are purely political documents, with no chance of being combined into one official budget resolution passed by both houses of Congress that would have any effect on legislation. Still, the political theater does help lay out what might happen in other legislation this year. So here are the implications of the two proposals for tax credits for working families.
The House Budget Committee plan and associated documents include no specific proposals on income tax credits or deductions. However, a number of provisions imply that the budget plan implicitly includes changes to the Earned Income Tax Credit (EITC) and the Child Tax Credit. (It is less clear whether it also contemplates changes to the Child and Dependent Care Tax Credit.)
- The plan would significantly reduce both the top income tax rate and the corporate tax rate, as well as cutting other tax rates, and eliminating the Alternative Minimum Tax, all without contributing to the deficit. In order to offset the lost revenue, it would generate new revenues from eliminating or reducing “tax expenditures,” (income exclusions, preferential rates, deductions and credits.) While the budget doesn’t specify which of these expenditures would be cut, (deferring instead to the tax reform process currently underway in the Ways and Means Committee), it appears likely that the EITC and the Child Tax Credit would be targeted as they are two of the major tax expenditures, according to the Congressional Budget Office. Thus, the Committee’s proposal appears to contemplate changes to the credits. Indeed, according to the Bipartisan Policy Center, nearly every tax expenditure would have to be eliminated in order to pay for the new tax cuts proposed in the budget.
- The budget plan specifically refers to recent research by Gene Steuerle on marginal tax rates, which was presented at a Ways and Means committee hearing last year. That research looks at the combined effect across several programs of the phase-out for eligibility as income rises including the EITC, that together create a very high implicit marginal tax rate (meaning that for every new dollar earned, the worker loses almost as much from various benefit programs and tax provisions.) While Mr. Steuerle suggested that Congress minimize this problem by extending the phase-out period of these programs, the House Budget Committee would instead resolve this high marginal tax rate by both eliminating benefit subsidies under the new health law and reducing access to SNAP (formerly food stamps.) This suggests that the plan’s creators would also favor reducing access to the EITC to help solve this problem.
- The plan also calls for caps on mandatory spending, including tax credits, which would almost certainly reduce the amount of money available for working family tax credits.
- Finally, on the process side, the budget proposal calls for setting up a fast track budget process called reconciliation, and includes reconciliation instructions to eight committees (not specified.) If Ways and Means is one of the eight committees to receive instructions, that would make it easier to get controversial tax provisions such as cuts to working family tax credits approved by Congress.
The Senate Budget Committee plan is much more specific. It supports the refundable tax credits, and would make permanent the expansions of the EITC and Child Care Credit that were created in the American Recovery and Reinvestment Act and recently extended until 2017 (see page 53.)
It also calls for nearly a trillion dollars in new revenues, which are intended to come from wealthy taxpayers and corporations. Like the House, the Senate plan authorizes reconciliation, which, if the House and Senate could agree on a single Budget Resolution, would ensure that the tax provisions and other aspects of the budget could pass with only 51 votes in the Senate. Theoretically, if there was a budget resolution, the reconciliation process would require the Ways and Means Committee in the House, and the Finance Committee in the Senate to find a specific dollar amount of new revenues in any way they saw fit, including by limiting these tax credits. The reconciliation process has also been used to expedite tax cut legislation.
While there will undoubtedly be no final budget resolution, and therefore no reconciliation process this year, other major battles could create political forces that might also enable major tax changes to move through Congress. The most likely scenario for another grand fiscal confrontation that could provide an opportunity to force through either the House or Senate approach to tax credits is the need to raise the debt ceiling. (The debt ceiling waiver expires May 18, but apparently for all practical purposes the waiver will operate much as legislation lifting the debt ceiling would have done. That means that Treasury can buy some additional time by moving around necessary payments, and Congress may really have until sometime in July to act.)
Two other possible triggers for a grand fiscal deal are looking less likely. At the moment, it looks like Congress is willing to live with sequestration. As the consequences become more visible, however, this could change, setting up discussions about alternate ways to reach the same level of deficit reduction that could include tax changes. Congress and the Administration have also agreed in principle to complete funding for the rest of this fiscal year (running from April through September), and both the House and Senate are expected to vote on it this week. There remains a possibility, though unlikely, that either the House or Senate could enact amendments that would bog the process down, and tax changes could result from efforts to resolve it.
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Guest Commentary: New State Data Show EITC’s Widespread Anti-Poverty Impact
January 10th, 2013
by Jane Williams and Elizabeth Kneebone of the Metropolitan Policy Program at The Brookings Institution
Packed into the new year’s fiscal cliff deal was some good news for working families, including a provision that extends the 2009 Recovery Act expansions to the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) by five years—targeted expansions that strengthened these credits for working families in response to the Great Recession and weak economic recovery that followed. Together the EITC and refundable portion of the CTC (including the 2009 improvements) lowered the poverty rate by 2.8 percentage points in 2011, according to the Census Bureau’s Supplemental Poverty Measure (SPM). The impact on child poverty was even greater: under the SPM definition, the child poverty rate would have been 6.3 percentage points higher without these credits.
The SPM provides a more nuanced measure of poverty across the country, accounting for things the official poverty measure does not—like after-tax income, regional differences in housing costs, and the impact of government policies like the EITC and CTC. But until recently, data on the effects of particular anti-poverty programs were only available at the national level. Thanks to public-use files recently released by the Census Bureau, we can now estimate the extent to which the EITC and CTC have alleviated poverty in individual states throughout the country.
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The Fiscal Cliff and Working Family Tax Credits
January 2nd, 2013
While the national media covered every twist and turn in the fiscal cliff negotiations, little attention was paid to the provisions of the law affecting tax credits for working families. So here’s the bottom line…
As anticipated, the deal makes permanent the changes to the Earned Income Tax Credit (EITC), Child Tax Credit (CTC) and Child and Dependent Care Tax Credit (CDCTC) that were first implemented in the “Bush tax cuts” of 2001 and 2003 tax bills.
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Would Including a Chained CPI In Fiscal Cliff Negotiations Help Or Harm Working Families?
December 19th, 2012
President Obama made a new offer Monday in an effort to strike a deal with House Speaker John Boehner to resolve the “fiscal cliff.” The broad outlines of this proposal appear to include extending all improvements made to the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and the Child and Dependent Care Credit, including those made under the American Recovery and Reinvestment Act (ARRA) of 2009. Speaker Boehner announced that the House would vote on a counteroffer he called “Plan B” in order to pass an extension of the Bush-era tax cuts for everyone making up to $1 million, in case the fiscal cliff negotiations cannot be completed by the end of the year. The White House and Senate leaders rejected Boehner’s “Plan B” proposal, which would not have extended the EITC and CTC expansions made as part of the ARRA legislation.
The President’s offer also includes a proposal to move from the current Consumer Price Index (CPI) to a “chained CPI.” While much of the press coverage about this part of the proposal focuses on the impact on Social Security, a chained CPI would also impact tax credits for working families.
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Guest Commentary: A New Look at How the Tax Code Works for Working Families
November 19th, 2012
Guest commentary by Elizabeth Kneebone, Fellow, Brookings Institution Metropolitan Policy Program
Today Brookings released the latest version of EITC Interactive, which includes Tax Year 2009 and 2010 data, an updated User Guide, and a data brief explaining recent changes. In addition, users can download 2010 profiles of the EITC-eligible population at the state and metro level based on the Brookings MetroTax model, along with a User Guide explaining the variables available. At our request, Fellow Elizabeth Kneebone has provided this commentary to Tax Credits for Working Families on the lessons to be learned from the new data.
As the clock ticks down to January 1, and lawmakers try to hash out a deal to avoid the fiscal cliff and address the expiration of the Bush tax cuts, new data on taxpayers in the United States—collected from federal tax returns and available down to the ZIP code level through Brookings’ EITC Interactive—provide an important perspective on the impact of the tax code on families and communities across the country.
For instance, the latest EITC Interactive data—which represent tax returns filed in January through June of 2011—show that key provisions in the tax code proved responsive to the Great Recession, helping working families to weather the downturn:
- Roughly one in five tax filers claimed the Earned Income Tax Credit (EITC) in TY2010—a tax break for workers with low incomes—compared to 16 percent of filers in TY2007. In part the increase in EITC receipt reflects rising unemployment and falling incomes that may have led more workers to become eligible for the credit, but it also reflects targeted expansions to the credit made through the American Recovery and Reinvestment Act (ARRA) to help strengthen the safety net and stimulate local economies.
- In TY2010, nine states saw anywhere from one quarter to one third of their taxpayers claim the EITC, led by Mississippi, Louisiana, Alabama, Georgia, and Arkansas. (See the map.) And 10 states experienced an uptick in the rate of EITC receipt of 5 percentage points or more over the course of the recession, led by Mississippi, Georgia, Arizona, Idaho, and Tennessee. No state experienced a decrease in EITC receipt during the downturn.
- More than half (60 percent) of EITC filers also benefitted from the refundable portion of the Child Tax Credit (ACTC) in TY2010—a tax benefit for low- and moderate-income working families with children that was also expanded temporarily through ARRA—compared to 45 percent in TY2007.
- All together, EITC filers claimed an average credit of $2,247 in TY2010, and for those EITC filers who who received it, the ACTC boosted the average refund by $1,234.
The release of the Census Bureau’s Supplemental Poverty Measure (SPM) last week underscores the importance of these tax credits for low-income working families. If it weren’t for the EITC and ACTC, the Census Bureau estimates that the U.S. poverty rate in 2011 would have been 2.8 percentage points higher, at 18.9 percent. The impact on child poverty would have been even greater: without these credits the child poverty rate would have reached 24.4 percent rather than 18.1 percent under the SPM definition.
Though the SPM is not available for smaller, sub-state geographies, through Brookings’ EITC Interactive policymakers and other stakeholders can find estimates of the number of filers benefitting from these credits—and the dollar amounts claimed—for every congressional and state legislative district in the country, and for every ZIP code, municipality, county, metro area, and state.
Contrary to Mitt Romney’s narrative about the 47 percent “takers” and giveaways to the Democratic base, these data show that the impact of these credits is far-reaching and broadly shared (as the list of “red” states above suggests)—crossing party and geographic lines to reach struggling working families at tax time. And that phrase bears repeating: these are taxpayers who are working.
Part of welfare reform in the late 1990s was an explicit decision to do less via traditional cash assistance and do more through the tax code to encourage work. Years’ worth of research illustrates the success of the EITC as a policy to promote work and better economic outcomes for low-income families. Updated profiles of the EITC-eligible population in TY2010 give greater insight into who these taxpayers are. More than three-quarters of these taxpayers live in family units; more than 54 percent are white; and almost half (46 percent) have some level of higher education. The typical EITC-eligible taxpayer has an Adjusted Gross Income of just $13,905, and is most likely to have earned that income working in the retail, health care, accommodation and food service, construction, and manufacturing industries. These are workers filling the increasing number of low-wage service sector jobs the economy has been churning out in recent years, and in industries that bore the brunt of the latest downturn.
Discussions over the fiscal cliff and longer-term tax reform will inevitably include calls for more taxpayers to have “skin in the game.” But that’s not only a distraction from the real issues, it’s a distortion of reality. We made a choice in the 1980s and the 1990s to support work and alleviate poverty through the federal income tax. And all the evidence—federal, state, and local—shows that it’s working, for a broad base of Americans. Taxing hard-working families deeper into poverty is no fix for our short- or long-run budget problems.
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New Evidence that Refundable Credits Lift People Out of Poverty
November 14th, 2012
A report released today by the Census Bureau on the 2011 Supplemental Poverty Measure shows what a significant difference the refundable portions of the federal Earned Income Tax Credit (EITC) and Child Tax Credit make for the working families who receive them, particularly their children.
As calculated by the 2011 Supplemental Poverty Measure, if these credits were not refundable, the percentage of all people in poverty would rise to 18.9 percent from 16.1 percent; the percentage of children in poverty would rise to 24.4 percent from 18.1 percent; and the percentage of non-elderly adults in poverty would rise to 17.7 from 15.5. (Note that these calculations are based on Table 5a, page 14; the Poverty Statistics Branch of the Census Bureau has confirmed that these numbers only include the refundable portion of these two federal tax credits. Despite the somewhat misleading description, the table offers percentages, not actual numbers of people affected.)
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Weekly Round-Up: September 21, 2012
September 21st, 2012
Here are some highlights from this week’s news on family tax credit issues. Remember – you can also track news coverage throughout the week by visiting our RSS feed, where you can filter news by a specific credit and/or state.
- Mitt Romney’s remarks about the 47 percent of American households that “pay no income tax” gained a lot of media attention this week, shedding light on not only who these “47 percent” are but also how this figure is often misused or misunderstood to mean that nearly half of Americans don’t pay any taxes. While it is true that these “47 percent” may not have owed any federal individual income taxes in 2011, virtually everyone living in the U.S. pays taxes, including the “47 percent” who pay a considerable amount in other types of federal taxes – such as payroll taxes to fund Medicare and Social Security, and federal excise taxes on gasoline and other items – as well as state and local taxes like property and sales tax. The largest group excluded from paying federal income taxes are people who earn too little to owe income tax because of the personal exemptions and standard deduction. Of the remaining, nearly half –16.7 million – are seniors who receive an an elderly tax credit and an extra standard deduction, as well as non-taxable Social Security benefits. By comparison, the Earned Income Tax Credit (EITC), Child Tax Credit, and Child and Dependent Care Credit, taken all together, kept only 11.5 million households with kids – or between 6 and 7 percent of all families in the U.S. – from paying income tax in 2011. Therefore, these three family tax credits account for a significantly smaller fraction than most assume when they call for cutting these credits. (NPR, Forbes, The Tax Policy Center, New York Magazine, Tax Credits for Working Families)
- Accompanying reporting on the “47 percent”, this week some media outlets noted that in the past, the biggest champions of working family tax credits were Republicans, but now the party has moved away from its support for these credits. For instance, eleven years ago, conservatives not only endorsed tax credits for working families, but the idea of eliminating all income taxes for low-income Americans was actually an applause line for a Republican president. (National Journal, The Washington Post, Business Week, The Seattle Times, The Dallas Morning News)
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