The Center's work on 'Individuals and Families' Issues

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.

House Budget Chair’s Priority: Tax Cuts for Well-to-Do

March 18, 2015 at 12:25 pm

While imposing harsh budget cuts on the most vulnerable Americans, House Budget Committee Chairman Tom Price’s budget plan also appears to reflect a continuing drive to cut taxes for the nation’s highest-income people.

Unlike past years’ House budgets, this plan doesn’t specify a top tax-rate target of 25 percent.  It claims, more generally, that it “substantially lowers tax rates for individuals.”  Still, other details of the plan clearly indicate tax priorities that favor high-income households:

  • Repealing all health reform revenue changes. The Price plan would eliminate all health reform-related taxes and tax credits.  A significant share of the revenues that health reform will raise over the next decade come from its 3.8 percent Medicare surtax on the unearned income of high-income filers and its 0.9 percent Medicare surtax on high wage and salary income.  Repealing these surtaxes would be highly regressive; only filers with incomes over $250,000 for a married couple (and over $200,000 for single filers) pay them.  Moreover, the 3.8 percent surtax applies only to unearned income such as capital gains and dividends, which is highly concentrated at the top.  In 2012, the richest 400 filers received about $1 of every $9 of such income, according to IRS data.
  • Eliminating the Alternative Minimum Tax (AMT). The plan would eliminate the AMT, which is designed to ensure that higher-income people pay at least some base level of tax.

We estimate that repealing health reform and the AMT would likely reduce revenues by more than $1 trillion over ten years, based on Tax Policy Center (TPC) and Congressional Budget Office estimates.  While it’s intended to be revenue neutral compared to current law, Chairman Price’s budget proposes no specific offsets to pay for these provisions (or for the tax-rate cuts it calls for in general terms, which tend to be very costly).

Repealing the AMT and health reform’s high-income provisions would provide a windfall at the top while doing little for middle-class households.  Based on a TPC distributional analysis of the AMT and of health reform’s high-income provisions in 2015, we estimate that repealing these provisions would:

  • Cut taxes by roughly $50,000 on average for people with incomes exceeding $1 million a year, but by less than $10 on average for those making $50,000 to $75,000, and by essentially nothing on average for those earning less than $50,000.
  • Raise after-tax incomes by 2.5 percent on average for households with incomes exceeding $1 million a year, but by less than 0.01 percent for those with incomes between $50,000 and $75,000.

Accounting for eliminating health reform’s premium tax credits and other revenue provisions wouldn’t alter the conclusion: the specific tax proposals identified in the Price plan would direct large tax cuts to high-income earners and little to low- and middle-income filers.

While the tax component of Chairman Price’s plan is less detailed than the tax proposals in past years’ House budgets, the information it provides strongly indicates that the plan would juxtapose deep spending cuts primarily hitting low- and middle-income people with tax changes likely to heavily favor people at the top of the income scale.

Lee-Rubio Tax Plan Heavily Tilted Toward Top, Contrary to Tax Foundation Claims

March 11, 2015 at 4:22 pm

The Tax Foundation (TF) took issue with our post explaining that the new tax plan from Senators Mike Lee (R-CO) and Marco Rubio (R-FL) would give the highest-income people a large windfall while leaving many low-income working families behind.  TF argues that the plan “actually produces the largest increase in after-tax income for the lowest income earners, not the highest.”  Count me as a skeptic.  Let’s take a closer look at the plan’s effects at the bottom and top of the income scale.

First, the bottom.  TF claims the bottom 10 percent of households would see a 44 percent increase in after-tax income under Lee-Rubio (before counting TF’s large and unrealistic estimate of the plan’s impact on economic growth).  But a look at the main provisions potentially affecting low-income families doesn’t support this.

  • Lee-Rubio creates a new $2,500 Child Tax Credit to complement the current child credit. TF says the new credit “cuts taxes for most taxpayers.” But it would exclude many working-poor families.  The new credit is refundable only up to the sum of total income and payroll taxes after applying all other credits, such as the Earned Income Tax Credit (EITC) and existing Child Tax Credit.  After these credits, most low-income working families will have no net federal income and payroll tax liability and consequently won’t qualify for the new CTC.  In other words, its design excludes most low-income working families.
  • Lee-Rubio also replaces the standard deduction and personal exemption with a new tax credit (and eliminates the head of household filing status). TF states that this credit would be “fully refundable,” though the Lee-Rubio document itself doesn’t say one way or the other.  Let’s assume it is; if so, the new credit would benefit many low-income families.  Yet a substantial number of other low-income families would lose from this change, because the new credit would replace other current provisions that are worth more for them.  To return to the example family we used in our previous post, a mother with two children working full time at the minimum wage would lose $25 in 2018 from this change.  Some low-income workers would lose substantially more than this amount, while other low-income workers could get a significant boost from this change, assuming the credit is indeed fully refundable.
  • More importantly, Lee-Rubio would let a key provision of the current Child Tax Credit expire after 2017, causing millions of low-income working families to lose all or part of their credit.  The provision in question — under which the Child Tax Credit begins to phase in as family earnings rise above $3,000, rather than being unavailable until family earnings reach nearly $15,000 — is currently in effect through 2017; it needs to be made permanent. Ron Haskins, who as a senior Republican congressional staffer was a lead architect of the 1996 welfare law and later served as an adviser to President George W. Bush before joining the Brookings Institution, urged in recent congressional testimony that this provision be made permanent.  Haskins called it “an important part of the work-based safety net” and noted that if it’s allowed to expire after 2017, “working families with children will lose billions of dollars and a substantial amount of work incentive.”  He observed that this “is one policy that both encourages work and attacks inequality directly by boosting the income of low-income workers.”  Yet Lee-Rubio lets the provision end after 2017.

    If the provision expires, the full-time minimum-wage mother with two children whom we discussed above would lose her existing $1,725 CTC in 2018.  Many other low-income workers would lose under the plan as well.  Failing to extend the improvements in the CTC and EITC scheduled to expire at the end of 2017 would cast millions of people into or deeper into poverty.

Now let’s turn to the top end of the income scale.

Lee-Rubio cuts the top income tax rate to 35 percent and eliminates the alternative minimum tax, both of which represent large tax cuts that would heavily benefit high-income households.  Lee-Rubio also includes some tax increases on high-income filers by cutting back many deductions.  But both of these sets of changes were part of a tax plan that Senator Lee introduced in 2014 and the Tax Policy Center (TPC) analyzed.  TPC found that while the curtailment of deductions would, by itself, increase high-income households’ tax burdens, the net effect of the proposal overall would be a large tax cut for those at the top of the income scale.

Moreover, Lee-Rubio appears to tilt even more heavily to the top than last year’s Lee plan.  It does so by:  1) eliminating taxes on capital gains and dividends, which are highly concentrated at the top; 2) eliminating the estate tax; and 3) cutting corporate and business taxes.

By eliminating taxes on capital gains and dividends, the plan would make the single largest source of income for the wealthiest people in the country tax free.  By eliminating the estate tax, which now applies only to the estates of the wealthiest 0.15 percent of people who die, the plan would allow vast sums that the wealthiest Americans have amassed to be passed on to their heirs and heiresses tax free as well.

The plan also would cut the tax rate on domestic corporate profits to 25 percent, cut taxes on the partnership income of very high-income households from 39.6 percent to 25 percent, and cut corporate taxes on profits that U.S. companies earn overseas to zero.  The plan does cut back various corporate tax breaks.  But overall, it is likely to reduce corporate and business taxes significantly.  And since ownership of businesses and corporate stock is highly concentrated among high-income individuals, this would add to the tax cuts they receive.

As Howard Gleckman of the Tax Policy Center noted a few days ago, last year’s Lee plan would add $2.4 trillion to the debt over ten years and give almost one-third of its costly tax cuts to the top 1 percent of households.  Gleckman added that the new Lee-Rubio version of the plan “would surely be even more expensive.”

The bottom line is that those at the top would be the big winners even as many low-income working families lost ground.

Building Momentum for Vital Tax Credit Provisions

March 5, 2015 at 10:19 am

Democratic lawmakers announced a series of important bills yesterday that would reward work and reduce poverty for low-income workers.

Senators Sherrod Brown (D-OH), a Finance Committee member, and Richard Durbin (D-IL), the Senate Minority Whip, announced the Working Families Tax Relief Act, which expands the Earned Income Tax Credit (EITC) for “childless workers” — adults without children and non-custodial parents — and makes permanent key provisions of the EITC and Child Tax Credit (CTC) that are set to expire at the end of 2017. Most Democratic senators, including Finance Committee Ranking Member Ron Wyden (D-OR), support the bill.

In the House, Rep. Richard Neal (D-MA), a Ways and Means Committee member, and 51 co-sponsors introduced the Earned Income Tax Credit Improvement and Simplification Act, which also expands the EITC for childless workers and makes permanent the key EITC provisions. Rep. Rosa DeLauro (D-CT) also announced a bill to make the CTC provision permanent.

By making permanent the key provisions of the EITC and CTC and boosting the EITC for childless workers, these bills advance crucial priorities for this Congress.

The EITC and CTC encourage work, reduce poverty, and support children’s development, research finds. Unless policymakers act, key features of the EITC and CTC will expire at the end of 2017, causing millions of low-income working families to lose all or part of their credits. More than 16 million people in low- and modest-income working families, including 8 million children, would fall into — or deeper into — poverty in 2018. 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, for example. The bills announced yesterday would ensure that working families continue to receive the EITC’s and CTC’s far-reaching benefits.

The bills also would strengthen the EITC by expanding it for low-income childless workers, who currently receive little or nothing from the EITC and are the lone group the federal government taxes into (or deeper into) poverty. The proposals would significantly increase the maximum credit for childless workers from around $500 to roughly $1,400 and double (from 7.65 percent to 15.3 percent) the rate at which the credit phases in with rising earnings. The proposals also would allow childless adults ages 21 to 25 to qualify for the EITC. The congressional proposals are part of a growing bipartisan consensus to expand the EITC for childless workers. House Ways and Means Committee Chairman Paul Ryan (R-WI) and President Obama have both proposed similar — though somewhat less generous — expansions (see figure).

For more on these vital tax credits, see our recently updated resources:

Lee-Rubio Tax Plan: Huge New Windfall at the Top, Lost Child Credits at the Bottom

March 4, 2015 at 5:06 pm

The new tax plan from Senators Mike Lee (R-UT) and Marco Rubio (R-FL) builds on Senator Lee’s 2014 plan and creates something that’s even more tilted — outrageously so — in favor of the country’s highest-income people and likely much more fiscally irresponsible.  And, like last year’s plan, it not only excludes most working-poor families from its new child tax credit but allows much of their existing child credit to disappear after 2017.

Last year’s plan lost $2.4 trillion of revenue over the first decade and gave its largest tax cuts, both in dollars and as a share of after-tax income, to people making more than $1 million a year, the Urban-Brookings Tax Policy Center found.

The new plan essentially takes the old plan (which set tax rates of 15 and 35 percent and eliminated many deductions as well as the individual and corporate alternative minimum taxes) and adds more tax cuts for those at the top.  To understand their impact, it’s helpful to grab a copy of the IRS’s tax information on the country’s richest 400 filers:

  • Eliminating taxes on capital gains and dividends. The plan would do away with taxes on capital gains and dividends, even though they are already taxed at lower rates than wages and salaries.  And the benefit would flow overwhelmingly to those with the highest incomes.  In 2012, more than 10 percent of capital gains went to the top 400 filers, who collected an average of $230 million apiece (or $92 billion total).  This tax cut would also encourage wealthy people to use tax schemes to convert ordinary income into this newly tax-free income.
  • Cutting taxes on “pass-through” businesses. The plan would tax all partnerships and S corporations, whose earnings are “passed through” to owners and taxed at the individual rather than corporate level, at a special 25 percent rate.  Like capital gains and dividends, pass-through income is heavily concentrated at the top:  the top 400 filers had $18 billion of it in 2012, an average of $84 million apiece.  With this tax cut, the tax rate on pass-through income would be ten percentage points lower than a family with taxable income of $160,000 would pay on its salary.

As the IRS document shows, capitals gains/dividends and pass-through income are the two largest sources of income for the top 400 filers, as well as for the rest of the top 0.1 percent.  The Lee-Rubio plan targets these income sources for breathtaking windfalls.

At the same time, it targets working-poor families very differently.  Right now, many working-poor families receive some or all of the $1,000 Child Tax Credit thanks to a key provision created in 2009.  But this provision will expire at the end of 2017 unless policymakers extend it, causing millions of low-income working families to lose all or part of their credit.  The Lee-Rubio plan would allow this critical provision to expire.

Consider a mother with two children who works full time, year round at the minimum wage in a nursing home and receives a Child Tax Credit of $1,750.  The Lee-Rubio plan would let her credit disappear in 2018.  It also would exclude her — and millions of other working-poor people — from its new child credit, which wouldn’t be fully refundable.

The big losers under the Lee-Rubio plan, therefore, would be the working-poor people who feed and bathe the elderly, care for preschoolers, clean offices, and perform other essential tasks.  The big winners would be the country’s highest-income 400 filers, at a cost of much higher deficits.