The Center's work on 'President’s Budget' Issues


A Double Standard on Tax Compliance

February 13, 2015 at 1:23 pm

House Ways and Means Committee Chairman Paul Ryan suggested recently that Congress should expand the Earned Income Tax Credit (EITC) for childless adults and non-custodial parents and fully offset the cost by reducing EITC overpayments.  But he and other House Republicans voted today to permanently extend an expensive small-business tax break without offsetting the cost, such as by requiring any improved compliance in that part of the tax code — where the rates of error and loss to the Treasury far outstrip those for the EITC.  The IRS estimates that a stunning 56 percent of business income that individual returns should have reported went unreported in 2006, the latest year for which these data are available.

These developments highlight an egregious double standard in how lawmakers view tax compliance, depending on whether low-income working families or small businesses are at issue.

During a Ways and Means Committee hearing, Ryan praised the EITC’s proven effectiveness in promoting work and reducing poverty and alluded to his proposal to expand the tiny EITC for childless workers — the lone group that the federal tax code actually taxes into (or deeper into) poverty and a group that needs the EITC’s pro-work income boost and incentives.  Ryan’s proposal to expand the childless workers’ EITC is nearly identical to one from the President, which would seem to make it ripe for bipartisan legislative action.

But Chairman Ryan seemed to suggest the need to generate offsetting savings within the EITC to pay, on a dollar-for-dollar basis, for the EITC change.  To be sure, Congress can and should take important steps to reduce EITC errors, including:  1) providing the IRS more adequate funding for enforcement; 2) giving the IRS the authority to regulate paid tax preparers to ensure they meet basic competency standards (a majority of EITC errors occur on commercially prepared returns); and 3) enacting a battery of measures the Treasury has proposed to reduce EITC errors.  Yet Congress has cut IRS enforcement funding heavily since 2010.  It also has failed to approve the Administration’s request to empower the IRS to take steps to significantly reduce errors by commercial tax preparers.

Further, the Joint Tax Committee is understandably cautious about “scoring” various measures to reduce errors on tax returns, whether they concern the EITC or other parts of the tax code.  The combined scored savings from all known legislative proposals to lower EITC errors fall well short of the costs of expanding the EITC for childless workers.  This raises a concern that lawmakers could propose measures to cut the EITC for honest low-income working families and misleadingly promote them as cutting “fraud, waste and abuse” when that’s not what they would do.  Sadly, some members of Congress have done just that in the past.

The small-business legislation that the House approved today would make permanent a generous tax break (known as “Section 179” expensing) for certain small-business investments.  Business income on individual tax returns is, by far, the largest source of tax non-compliance with, as noted above, an estimated 56 percent of this income unreported in 2006.  This resulted in an estimated tax gap of $122 billion, more than four times the gap due to all individual income tax credits (including the EITC).

A dollar is a dollar, whether it’s spent subsidizing small businesses or supplementing the wages of a low-wage worker striving to get a toehold in the economy.  Policymakers should work to improve compliance throughout the tax code.  And they should stop applying double standards to the effort.

Three Takeaways from HUD’s 2016 Budget Request

February 12, 2015 at 4:30 pm

My latest post for the National Housing Institute’s Rooflines blog lists three key facts about the President’s 2016 budget request for the Department of Housing and Urban Development (HUD).  The full post has the details, but here are the main points:

  1. The proposed funding increase is much more modest than it may appear. Some $2.3 billion of the $6.2 billion increase reflects the expected decline in income from HUD’s mortgage insurance programs, which help fund other HUD programs. And even with the increase, total funding for HUD’s core housing assistance and community development programs would remain 6.1 percent below the 2010 level, adjusted for inflation (see graph).

  2. The lion’s share of added resources would go to sustaining rental assistance for the 4.6 million low-income families that now receive it, fully restoring Housing Choice Vouchers lost due to the sequestration budget cuts, and doing more to reduce homelessness.

    After sequestration forced state and local housing agencies to reduce by some 100,000 the number of families using Housing Choice Vouchers, Congress provided sufficient funds in 2014 and 2015 to enable agencies to restore roughly a third of those vouchers. The President’s funding request for voucher renewals should be sufficient to continue all vouchers in use this year.  The budget also includes funding to restore an additional 67,000 vouchers, which —together with the requested renewal funding — would fully reverse the sequestration-related cuts in 2016.

    Building on a strategy that has sharply reduced homelessness among veterans, the budget targets 30,000 of the restored vouchers to families, veterans, and tribal families who are homeless, victims of domestic and dating violence, and families with children who are engaged with child welfare agencies.

    And, the President requests an increase for McKinney homeless assistance grants, most of which would support the creation of 25,500 new units of permanent supportive housing for chronically homeless people.

    Overall, the budget proposals would support rental assistance for an additional 100,000 families in 2016, with most of the assistance targeted to address homelessness.

  3. The President’s budget isn’t necessarily “dead on arrival” in the Republican Congress.  The President’s budget assumes that Congress will eliminate the sequestration-level spending caps enacted under the 2011 Budget Control Act for the 2016 budget cycle, freeing up $37 billion in additional spending for non-defense discretionary programs (including those at HUD). Clearly, the House and Senate will reject this plan in drafting a budget resolution this spring.

    But while Republicans may initially reject the President’s overall spending proposal, the House and Senate Appropriations Committees will certainly consider the individual spending requests spelled out in his budget. In addition, the President and Congress will likely engage in budget negotiations at some point this year, in which case the President is expected to argue forcefully for raising the sequestration-level spending cap in 2016.

More Households Facing Unaffordable Housing Costs Than Before Recession

February 9, 2015 at 3:59 pm

The number of low-income households paying more than half of their income for rent or living in severely substandard housing remains 30 percent above pre-recession levels despite the improving economy, a new Department of Housing and Urban Development (HUD) report shows.  Policymakers should keep that in mind during this year’s budget process, when they’ll be allocating federal resources.

In 2013, 7.7 million households had “worst-case housing needs” (HUD’s measure of the most serious housing problems), the report shows — up from 5.9 million in 2007.  Most of them include a child, elderly individual, or person with disabilities.  These data don’t include many of the more than 1 million households that were in shelters or on the streets in 2013.

Nearly all (97 percent) of the 7.7 million households paid more than half of their income for rent and utilities.  Families that pay such a large share of their income for housing have great difficulty meeting other basic needs like food or medication, and they risk losing their homes if they can’t keep up with rent payments.  Recent research also has found that unaffordable housing costs can affect children’s cognitive development.

By covering the gap between what families can afford to pay for housing (30 percent of their income) and the cost of modest housing, federal rental assistance programs play a major role in reducing homelessness, housing instability, and unsafe living conditions.  But the number of families receiving HUD rental assistance rose by only 5 percent from 2007-2013, while the number with worst-case needs rose by 30 percent (see graph).  Fewer than one in four families eligible for federal rental assistance receive it due to limited funding.

Wages aren’t likely to rise enough to significantly close the gap between earnings and rental costs any time soon, so the need for rental assistance among working families, as well as elderly and disabled individuals on fixed incomes, will remain high.  The President’s budget boosts funding for HUD rental assistance by $3.8 billion in 2016 in order to provide affordable housing for about 100,000 more low-income households while maintaining assistance to more than 4.7 million families.  Most of this increase would go to restoring 67,000 Housing Choice Vouchers cut by the sequestration budget cuts.

Obama Budget Would Restore Much-Needed IRS Funding

February 3, 2015 at 1:22 pm

The President’s fiscal year 2016 budget would reverse a large share of the Internal Revenue Service (IRS) funding cuts of recent years, which have shrunk overall IRS funding as well as funding to enforce the nation’s tax laws by nearly one-fifth.  While the boost would still leave IRS funding 5 percent below 2010 levels, after adjusting for inflation, it would restore cuts to taxpayer services and bolster efforts to go after tax cheats.

The IRS performs a vital function — collecting the revenue that pays soldiers’ salaries, provides medical care for the elderly, and meets the many other financial commitments Congress has made.  Repeated funding cuts undermine its ability to do its job.

The early signs of how funding cuts have weakened the agency this filing season are disturbing.  To cite just one example:  over half of taxpayer calls to the IRS this year will go unanswered, National Taxpayer Advocate Nina Olson estimates, and those who get through will wait an average of 30 minutes.

Also, reports from the Treasury Department Inspector General for Tax Administration and Government Accountability Office have made it clear that underfunding the IRS hurts honest taxpayers.

Because the U.S tax system relies on taxpayers to report their income and pay the appropriate tax, it depends on a high degree of trust between taxpayers and government that has lasted many, many decades.  The declines in taxpayer services and enforcement resulting from budget cuts weaken that trust and could corrode compliance over time.  An example of how the cuts are beginning to seep into mainstream culture is a recent Bloomberg story headlined “2015 Is the Best Year Yet to Cheat on Your Taxes:  Budget cuts at the IRS mean longer phone waits — and fewer audits.”

The President’s budget recognizes the serious stakes at hand and restores a significant share of those cuts.

Obama Budget Restores Lost Housing Vouchers

February 2, 2015 at 4:25 pm

The President’s budget includes a much-needed funding boost for Housing Choice Vouchers, a program that has faced deep cuts in recent years, to help more low-income families afford housing.  Restoring the cuts is particularly important given that the number of renter households paying unaffordable housing costs is at historic highs, according to Harvard’s Joint Center for Housing Studies.

The added funding would restore 67,000 vouchers cut due to sequestration since March 2013.  Combined with the budget’s voucher renewal funds for 2016 and the vouchers that state and local housing agencies will be able to restore this year, we estimate that the requested funds would fully restore the 100,000 vouchers lost due to sequestration.

Building on a successful strategy that has sharply reduced homelessness among veterans, the President’s proposal targets 30,000 of the 67,000 vouchers on homeless families, homeless veterans, survivors of domestic and dating violence, and families that need rental assistance to reunite with children in the foster care system.  Targeted vouchers have helped reduce homelessness among veterans by one-third since 2010.

In contrast, homelessness among families with children remains stubbornly high and has grown alarmingly in some areas, the Department of Housing and Urban Development (HUD) finds.  In Massachusetts and Washington, D.C., for example, the number of people in homeless families has more than doubled since 2007.

Nationally, more than 1.2 million children attending public schools lack a home of their own, according to school districts’ latest reports.  When you include homeless children not enrolled in school, the total approaches 2.5 million, the National Center on Family Homelessness estimates.

Targeting vouchers on the most vulnerable people both reduces homelessness and provides safety and stability to families — particularly to children, which can improve their health, school performance, and chances of long-term success in life.  A recent Washington Post story illustrates how a home can transform the lives of people who had been homeless for years, while cutting costs for emergency services.

We’ll discuss other important proposals in the HUD budget later this week.