The Center's work on 'Federal Budget' Issues

The Center informs the debate over federal budget priorities by analyzing the President’s budget and major congressional proposals throughout the annual budget process. We pay particular attention to the adequacy of funding for programs that assist low- and moderate-income families. We also analyze long-term budget challenges and measures to address them. In addition, we promote measures to improve fiscal responsibility.


Tax-Credit Bill Would Help Low-Income Families Facing Higher Rents

April 17, 2014 at 2:48 pm

House Ways and Means Committee member Charles Rangel (D-NY) has introduced legislation to establish a new federal tax credit to help low-income renters afford housing.  As we’ve explained, a renters’ credit along these lines would be a valuable tool to address low-income families’ mounting housing needs.

As the graph shows, the typical or median rent has risen much faster than inflation over the last decade, while renters’ median income has fallen in inflation-adjusted terms.

In fact, in 90 cities around the country, a median-income resident would have to pay more than 30 percent of his or her income to afford the median rent, the New York Times reports.  (The federal government and many private-sector landlords and lenders consider housing unaffordable if it exceeds 30 percent of household income.)

As a result, families with incomes well below the median must pay high and growing shares of their income for rent or live in substandard, overcrowded, or unstable housing arrangements.  In 2011, 8.5 million families with incomes under half of the local median received no rental assistance and either paid more than half of their income for housing or lived in severely substandard conditions, according to the Department of Housing and Urban Development — an increase of more than 40 percent since 2007.

And Department of Education data show that 1.17 million school-age children were homeless during the 2011-2012 school year.

Despite these needs, the federal government provides much more help to higher-income homeowners, through tax subsidies like the mortgage interest deduction, than to low-income renters.  Due to funding limitations, Housing Choice Vouchers and other low-income rental assistance programs reach fewer than one in four eligible families.

The Rangel proposal would help address that imbalance by giving states about $5.8 billion in annual tax credits to distribute among low-income renters based on federal income eligibility rules and state policy priorities.  We estimated last year that a credit similar to the Rangel proposal (but with added provisions to ensure that most of its benefits go to the neediest families), capped at $5 billion, would help 1.2 million households, reducing their rent by an average of $400 a month.

The renters’ credit would complement the Low-Income Housing Tax Credit (LIHTC), which Representative Rangel helped enact in 1986.  LIHTC is an effective subsidy for building and rehabilitating affordable housing but doesn’t typically make housing affordable to the poorest Americans by itself.  A renters’ credit could help these households afford rents in developments subsidized through LIHTC and in other buildings.

If the President and Congress move forward on tax reform, they should use savings from scaling back other tax expenditures to establish a renters’ credit along the lines that Representative Rangel proposes.

The Top 10 (Well, 11) Federal Tax Charts

April 15, 2014 at 11:05 am

To usher in Tax Day, here are our top 11 charts on federal taxes, which provide context for debates on issues like tax reform and deficit reduction.

Our first chart shows the sources of federal tax revenue.

Individual income tax revenues have held steady for many decades at a little under half of federal revenue.  The share of federal revenue from payroll taxes (mostly Social Security and Medicare taxes) grew sharply between the 1950s and 1980s and has since remained relatively stable.  Conversely, the share of federal revenue from corporate taxes fell sharply between the 1950s and 1980s and has remained at this lower level.

Our second graph reminds us what those taxes pay for.

Social Security, major health programs like Medicare and Medicaid, and national defense account for roughly two-thirds of federal spending.  Safety net programs (such as unemployment insurance and nutrition programs) and interest on the debt account for 12 percent and 6 percent of federal spending, respectively.  The remaining 18 percent goes to such other areas as roads, education, and health and science research.

The United States is a relatively low-tax country, as the chart below shows.  When measured as a share of the economy, total government receipts (a broad measure of revenue) are lower in the United States than in any other member of the Organisation for Economic Co-operation and Development (OECD), even after accounting for the modest revenue increases in the 2012 “fiscal cliff” deal and the taxes that fund health reform.

While high-income filers pay a large share of the nation’s taxes, the main reason is that they receive a large share of the nation’s income.  Moreover, focusing solely on the income tax — among the most progressive taxes — gives a distorted picture of the full set of taxes that different income groups pay.

The chart below provides a more complete picture.  It shows the share of all federal, state, and local taxes that each income group pays and what share of the nation’s income it collects.  As the graph shows, incomes in the United States are extremely polarized, and the overall tax system is only modestly progressive.  For example, the top 1 percent of earners received 22 percent of the nation’s income in 2013 and paid 24 percent of all taxes; the bottom 60 percent of people received 21 percent of the income and paid 17 percent of the taxes.

This largely reflects the fact that average tax rates increase modestly as you move up the income scale.  On average, the bottom 20 percent pays 19 percent of their income in taxes; the middle 20 percent pays 27 percent, and the top 20 percent pays 32 percent, according to Citizens for Tax Justice.

Policymakers considering tax policy changes should keep the economic context in mind, including the dramatic increase in inequality in recent decades.  Congressional Budget Office data show that incomes grew at much faster rates for high-income people than for everyone else between 1979 and 2010 (the most recent year available).

As the chart below shows, the average middle-income family had $9,500 less after-tax income in 2010, and the average household in the top 1 percent had $481,800 more, than if all groups’ incomes had grown at the same rate since 1979.

Many low-wage workers struggle to climb the economic ladder, particularly workers who are not raising minor children — the sole group that the federal tax code taxes into (and deeper into) poverty, as the chart below shows.  Often called “childless workers” — though many are non-custodial parents who have financial obligations to their children and play an important role in their lives — they pay substantial payroll taxes and begin paying income taxes while earning less than the poverty line (about $12,000 for a single worker).  The Earned Income Tax Credit (EITC) for these workers is far too small to offset their income and payroll tax liabilities.

The average childless worker who receives the EITC gets just $264, a small fraction of the EITC that other low-wage workers receive, as the chart below shows.  Moreover, childless workers under age 25 are ineligible for the EITC.

There are recent signs of bipartisan momentum to provide a meaningful EITC for childless workers.  President Obama as well as key House and Senate members have advanced proposals that would take a major step forward.  As the chart below shows, the EITC for a childless worker making poverty-level wages would rise from $171 to $841 under the President’s plan.  Moreover, the Treasury Department estimates that the President’s proposal would lift about half a million people out of poverty and reduce the depth of poverty for about another 10 million, under a poverty measure that includes the cash value of tax credits and benefit programs.  The congressional proposals are larger, and so would likely have larger anti-poverty effects.

Recent deficit-reduction measures, including the 2011 Budget Control Act’s funding caps and automatic cuts under sequestration, have been heavily tilted to spending cuts, rather than revenue increases.

If sequestration remains in place, 77 percent of the deficit reduction over 2015-2024 resulting from policy changes will come from spending cuts.  Just 23 percent will come from increased revenues, as the chart below shows. 

Policymakers agreed on a bipartisan basis last December to offset the cost of partially lifting sequestration for 2014 and 2015.

By contrast, however, the Senate Finance Committee has approved a package of “tax extenders” (expiring tax breaks, mostly for corporations) without offsetting the cost.  If continued for the next decade without offsets, the extenders would cost $484 billion.  That’s the equivalent of giving back more than half of the revenue savings from the 2012 “fiscal cliff” deal, which raised tax rates on very high-income taxpayers, as the chart below shows.  And if policymakers also continue the “bonus depreciation” tax for businesses — mistakenly in our view — the ten-year cost rises to $747 billion, wiping out nearly all of the fiscal-cliff savings.

Policymakers can reduce the deficit or finance investments by scaling back costly and inefficient “tax expenditures,” or spending delivered through the tax code in the form of tax credits, deductions and exclusions.

For example, House Ways and Means Chairman Dave Camp’s recent tax reform plan outlined dozens of specific cuts in tax subsidies.

As the chart below shows, tax expenditures cost well more than Social Security and also than Medicare and Medicaid combined.  Harvard economist Martin Feldstein, former chair of President Reagan’s Council of Economic Advisers, has said that “cutting tax expenditures is really the best way to reduce government spending.”

CBO: Health Reform Is Working — and Costing Less

April 14, 2014 at 5:23 pm

In new estimates that it released today, the Congressional Budget Office (CBO) projects that health reform’s coverage expansions will cost less than it previously estimated.  That’s good news for two reasons:

First, the new cost projections come even as CBO also estimates that health reform will dramatically reduce the number of Americans without health coverage.  Second, the lower cost estimate likely means that health reform will reduce budget deficits even more than CBO previously estimated.

Let’s take these one at a time.

Health reform will cut the rate of uninsurance nearly in half.  CBO estimates that health reform will reduce the share of the non-elderly population without insurance from 20 percent in the law’s absence to about 16 percent in 2014 and about 11 percent in 2016 and beyond.  That’s 26 million more people with health coverage.

This coverage expansion also will cost less than the original estimates.  In March 2010, CBO projected that the coverage expansions would have a net cost of $172 billion in 2019.  In February of this year, the projected cost had fallen to $151 billion.  The latest estimate is $144 billion — a drop of 5 percent since February and 16 percent since 2010.  Major reasons for this decline are a 15-percent reduction in projected premiums in the health insurance marketplaces and a somewhat smaller decline in the cost of covering additional Medicaid beneficiaries.

On the deficit front, CBO estimated in March 2010 and again in July 2012 that, considering all of its provisions, health reform will reduce the deficits.  CBO cannot update that estimate because it is not possible to isolate the incremental effects of many of the provisions of health reform that cut federal health spending or increased revenues.  But since the estimated cost of the legislation has fallen, there is every reason to believe that health reform will reduce the deficit by as much or more than the earlier estimates.

Tax Day Roundup, 2014

April 14, 2014 at 4:56 pm

Obama Plan to Raise Rents on Rural Poor is the Wrong Way to Save Money

April 11, 2014 at 12:30 pm

About 42,000 extremely poor families — 15 percent of those assisted through the Agriculture Department’s (USDA) rural rental assistance program — could face rent increases of up to $600 a year under a proposal in President Obama’s 2015 budget.

Today, families with rural rental assistance must pay 30 percent of their income for rent and utilities.  The President’s proposal would require property owners to charge families a minimum of $50 a month — even if this exceeds 30 percent of their income.  Many of those who would be affected are especially vulnerable to hardship:  64 percent of households with USDA rental assistance have a head (or the head’s spouse) who is elderly or has a disability, and 135,000 children live in low-income families receiving such assistance.

USDA budget documents say that one goal of the proposal is to “encourage financial responsibility in tenants, increasing their opportunity for success on the path to homeownership.”  But there is no evidence that requiring destitute families to pay $50 a month helps them get back on their feet.  To the contrary, a growing body of research shows that extreme poverty — which the USDA proposal would exacerbate — does long-term damage to children’s neural development and education and employment prospects.

A second goal is to save money.  USDA estimates that the policy will reduce program costs by $5 million in 2015 and $20 million annually in later years.  But policymakers could surely find better ways to save $20 million a year than raising rents on some of the most vulnerable people in rural America.

USDA points out that some households with rental assistance through the Department of Housing and Urban Development (HUD) must pay $50 minimum rents.  But no major HUD program imposes a program-wide $50 minimum rent like USDA has proposed.  HUD’s supportive housing programs for the elderly and people with disabilities do not charge a minimum, while the Section 8 Project-Based Rental Assistance program has a $25 minimum rent and state and local agencies administering Housing Choice Vouchers and Public Housing can set the minimum below $50 or have no minimum at all.

USDA has also claimed that a proposed exemption for families who would face hardship from minimum rents — modeled on similar exemptions in HUD programs — would minimize any adverse consequences.  Tony Hernandez, the Administrator of USDA’s Rural Housing Service, told a House Appropriations subcommittee that households with incomes of $2,000 a year “probably would not have to pay because they would be exempted because of the hardship clause.”

But experience in the HUD programs indicates that very few would likely be exempted.  As we’ve noted, the HUD hardship policies have had little impact, partly because they require tenants — many of whom have physical or mental disabilities or very low education levels — to seek out exemptions.  A 2010 HUD study found that 82 percent of state and local housing agencies that chose to impose minimum rents exempted less than 1 percent of affected households.  (Moreover, the minimum rent proposed by USDA would fall almost exclusively on families with incomes close to or below $2,000, so if most of those families were exempted, the policy’s savings would largely disappear.)

Families facing hardship might have an even harder time obtaining exemptions in the USDA rental assistance program, where small rural property owners with limited administrative capacity would be responsible for implementing the hardship policy.  The best way to protect these families would be to reject the President’s proposal.