The Center's work on 'Federal Tax' Issues

The Center analyzes major tax proposals, examining their likely effects on the economy and on the government’s ability to address critical national needs, especially over the long term. We place particular emphasis on the effects of tax proposals on households at different income levels. In addition, we analyze trends in the level of federal revenues, income distribution, and tax burdens.


States Looking to Strengthen Earned Income Tax Credits

March 30, 2015 at 10:56 am

As states continue to turn the corner on the Great Recession, policymakers in a number of states are looking to help low-paid working families by creating or expanding refundable state earned income tax credits (EITCs). These credits build on the federal EITC, which promotes work, helps families make ends meet, lifts them out of poverty, and yields lasting benefits for kids, studies show.

States considering EITC expansions include:

  • Illinois, where lawmakers have proposed doubling the size of the EITC to 20 percent of the federal credit, helping around 1 million working households.
  • Massachusetts, where Governor Charlie Baker has proposed doubling the EITC to 30 percent of the federal credit, helping more than 400,000 working households. Meanwhile, bills proposed in both houses of the state legislature would boost the EITC to 50 percent of the federal credit.
  • Minnesota, where Governor Mark Dayton has proposed a new EITC expansion — on top of the large increase enacted last year — that would make another 30,000 working Minnesotans eligible and boost the credit for more than four in five current recipients.
  • Rhode Island, where Governor Gina Raimondo has proposed building off of last year’s EITC changes (which cut the credit to 10 percent of the federal EITC but made it fully refundable, producing a net gain for most recipients) by increasing the credit to 15 percent of the federal EITC.
  • Washington State, where Governor Jay Inslee has proposed funding the EITC, which the state enacted in 2008 but has never funded due to the recession, helping over 400,000 working households.

States considering new EITCs include:

  • California, which has the nation’s highest poverty rate under a poverty measure that accounts for taxes and non-cash benefits as well as cash income; a recent proposal to create an EITC would benefit around 3 million working households.
  • Montana, where families with poverty-level wages pay some of the nation’s highest state income taxes; a proposed EITC would benefit 80,000 working families.

A number of states improved their credits in 2014, as our updated paper explains.  Most notably, the District of Columbia expanded the EITC for workers without dependent children in the home, an idea with bipartisan support at the federal level.  Twenty-five states plus the District of Columbia have EITCs (see map).

States are smart to use one of our most effective tools to ensure working families recover along with the economy.  State EITCs allow state lawmakers to leverage the power of the federal credit at a relatively low cost.

A Congressional Budget Dictionary

March 27, 2015 at 10:03 am

Congressional Republicans are using complicated — and likely poll-tested — language to make their budget plans’ deep spending cuts and dramatic structural changes in key programs for low- and moderate-income people sound benign and even positive.

As Budget Committee member Sen. Chuck Grassley (R-IA) noted before the plans’ release, “From the standpoint of a budget, the less words of the English language you use, the better off you are.”

While it’s common practice for lawmakers to use language that puts their plans in the best possible light, it’s important to understand exactly what they mean.  Here are three key “translations”:

The House budget summary says:
It will make Pell Grants, which help more than 8 million students from low- and modest-income families afford college, “permanently sustainable.”

This turns out to mean:
The House budget would institute sharp funding cuts in Pell Grants, which in turn would make it harder for millions of students to afford college at a time when those costs are rising quickly.  Over time, this likely would reduce economic opportunity and the readiness of the U.S. workforce.

The House budget summary says:
The budget would convert both the Supplemental Nutrition Assistance Program (SNAP) and Medicaid to “State Flexibility Funds.”  It states that this would give state governments “the power to administer [SNAP] in ways that best fit the needs of their communities with greater incentives to achieve better results,” and also would “empower state policymakers to tailor their Medicaid programs based on the unique challenges they face.”

This means:
The budgets would convert SNAP and much or all of Medicaid to “block grants,” with fixed — and sharply reduced — federal funding.

The programs would no longer respond automatically to increased need due to rising poverty and unemployment during economic downturns.  And the combination of block grants and big funding cuts would leave states having to figure out whose benefits to cut or terminate.  The magnitude of the cuts would leave them without good options.  The SNAP cuts would force states to shrink or eliminate food assistance for millions of low-income families, while the Medicaid cuts would force them to make eligibility and benefit cuts that would likely leave millions of beneficiaries uninsured or underinsured (on top of the loss of coverage that millions of poor Americans would face due to the House and Senate budget plans’ repeal of health reform and its Medicaid expansion).

Finally, sometimes even silence needs a translation.  The House and Senate budgets make no mention of extending crucial provisions of the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) for low- and modest-income working people now slated to expire at the end of 2017.

This means:
The plans would allow these provisions to expire,  thereby pushing more than 16 million people — including almost 8 million children — into or deeper into poverty and squandering the opportunity to help promote work, reduce poverty, and support children’s development.

Once you get beyond the euphemisms and flowery language, a clear agenda stands out in these plans:  shrinking government in substantial part through steep reductions in programs for low- and moderate-income Americans that, in turn, would lead to higher levels of poverty and inequality, less opportunity, and a future workforce that’s less able to compete with its counterparts overseas.

Estate Tax Repeal: A Misguided and Costly Policy

March 25, 2015 at 5:29 pm

Eliminating the federal estate tax on inherited wealth, which the House Ways and Means Committee approved today and which we’ve explained would increase deficits and inequality, is a misguided — and expensive — policy, new data show.  New cost and distributional estimates from the Joint Committee on Taxation (JCT) confirm that repeal would reduce revenues by $269 billion from 2016 through 2025 (adding $320 billion to deficits once the additional interest cost on the national debt is included), with the entire benefit going to the nation’s roughly 5,400 wealthiest estates.

The JCT distributional estimates show that in 2016:

  • Only the nation’s wealthiest 5,400 estates would benefit — about 2 of every 1,000 estates — because only those estates currently face the estate tax to begin with.
  • The nation’s wealthiest 1,336 estates — those worth $20 million or more — would receive 73 percent of the benefit, with each receiving a tax windfall averaging roughly $10 million.
  • The nation’s wealthiest 318 estates — those worth at least $50 million — would receive tax windfalls averaging more than $20 million each.

Ways and Means approved this windfall for heirs of extremely wealthy estates on the same day the House is considering a Republican budget plan that would shrink programs for people with low- and moderate-incomes by an average 43 percent in 2025.  Such deep cuts would produce a dramatically weaker safety net, driving millions of people into poverty and denying or weakening health coverage for tens of millions more.  They would also reduce opportunity for students from modest backgrounds who are striving for a college education and a better future (see graphic). Proponents of the budget plan contend that such cuts are needed to meet their goal of balancing the budget in ten years.

In backing estate tax repeal, however, the House Ways and Means Committee suggests that the nation can afford $320 billion in higher deficits to deliver a tax cut to the wealthiest estates.

Estate Tax Repeal = More Inequality + Bigger Deficits

March 24, 2015 at 10:20 am

As our new paper explains, the House Ways and Means Committee is scheduled to consider a bill this week to repeal the federal estate tax on inherited wealth, just one week after the House Budget Committee approved a budget plan calling for $5 trillion in program cuts disproportionately affecting low- and moderate-income Americans.

Repealing the estate tax would be highly misguided — especially in the context of the House Budget Committee plan, which would repeal health reform and cut Medicaid deeply, causing tens of millions of Americans to become uninsured or underinsured; cut the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), making it harder for millions of low-income families to put food on the table; and cut Pell Grants, raising the financial hurdle for people of modest means to attend college.  Despite these and hundreds of billions of dollars in additional cuts that were largely unspecified, the budget included no revenue increases.  And while concerns of future deficits supposedly drive the budget plan’s harsh cuts, repealing the estate tax would significantly expand deficits.

Repeal would: 

  • Reduce revenues by more than $250 billion over the next ten years. The legislation before the House would not offset this cost, contrary to Republican calls for a balanced budget.
  • Do nothing for 99.8 percent of Americans. Only the estates of the wealthiest 0.2 percent of Americans — roughly 2 out of every 1,000 people who die — owe any estate tax.  This is because of the tax’s high exemption amount, which has jumped from $650,000 in 2001 to $5.43 million per person (effectively $10.86 million for a couple) in 2015.  Repeal would bestow a tax windfall averaging over $2.5 million apiece — or roughly the same amount that a typical college graduate earns in a lifetime — on the roughly 5,400 wealthy estates that will owe the tax in 2015.

  • Exacerbate wealth inequality, which has grown significantly in recent decades. In 2012, the wealthiest 1 percent of American families held about 42 percent of total wealth, new data show. Large inheritances play a significant role in the concentration of wealth; inheritances account for about 40 percent of all household wealth and are extremely concentrated at the top.  Repealing the estate tax would exacerbate wealth inequality by benefiting only the heirs of the country’s wealthiest estates, who also tend to have very high incomes.

    In addition, despite policymakers’ frequent statements about the importance of work, repeal would reduce the incentive for heirs of large estates to work.

Evidence shows the estate tax is an economically sound tax.  Contrary to claims that the estate tax hurts the economy, it likely has little or no impact on wealthy donors’ savings, and it encourages heirs to work.  The estate tax is an economically efficient way to raise revenue that supports public services and lowers deficits without imposing burdens on low- and middle-income Americans.  The tax plays an important role in our revenue system, particularly given our long-term budget challenges.

Click here for the paper.

Congressional Budget Plans Hurt Low-Income Working Families

March 19, 2015 at 1:49 pm

As we’ve explained, the new budget plans from House and Senate Budget Committee Chairmen Tom Price and Mike Enzi would impose deep cuts in programs for low- and moderate-income Americans, exacerbating poverty and inequality.  One way they would worsen poverty is by allowing crucial provisions of the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) for low- and modest-income working people to expire at the end of 2017.  That would push more than 16 million people, including almost 8 million children, into or deeper into poverty (see chart).

In 2009, policymakers reduced the earnings needed to qualify for a partial CTC, thereby expanding the credit for millions of low-income working families and making other families newly eligible for a partial credit.  They also raised the income level at which the EITC begins to phase down for married couples to reduce the marriage penalty some two-earner families face in the EITC.  And they boosted the EITC for families with more than two children to help them cover their higher living costs.

If Congress allows these provisions to expire, millions of low-income working families would lose all or part of their EITC and CTC. For example:

  • None of the $14,500 in earnings of a full-time, minimum-wage worker would count toward the CTC.  The earnings needed to qualify for even a tiny CTC would jump from $3,000 to $14,700.  The earnings needed to qualify for the fullCTC would rise from $16,330 to more than $28,000 for a married couple with two children.  A single mother with two children who works full time at the minimum wage (and earns $14,500) would lose her entire CTC of $1,725.
  • Many married couples would face higher marriage penalties and cuts to their EITC.  Currently, to reduce marriage penalties, the income level at which the EITC begins to phase out is set $5,000 higher for married couples than for single filers.  After 2017, it would be $3,000 higher than for single parents, which would shrink the EITC for many low-income married filers and increase the marriage penalty for many two-earner families.
  • Larger families would face a cut in their EITC.  After 2017, the maximum EITC for families with more than two children would fall by over $700.

These provisions are too important to ignore.  Making them permanent would promote work, reduce poverty, and support children’s development.