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


House Republicans’ Wrong-Headed Approach to Tax Extenders

September 17, 2014 at 1:00 pm

House Republicans are putting before the House this week a campaign-oriented bill of wide-ranging measures that have previously passed the House, including repealing portions of the Affordable Care Act and scaling back Dodd-Frank regulations.  The bill, which won’t advance beyond the House due to obvious Senate and White House opposition, also includes business tax provisions that lawmakers will likely consider again during Congress’ post-election lame duck session this fall.  For that reason alone, the legislation warrants some attention.

The House bill would make permanent certain “tax extenders” — so named because Congress routinely extends them for a year or two at a time — as well as bonus depreciation, which lets businesses take larger upfront tax deductions for certain purchases, such as machinery and equipment, and that historically has been a temporary measure to help revive a weak economy.  Congress should reject the House approach to these provisions because it is not fiscally responsible, is poorly designed from an economic standpoint, and is antithetical to tax reform.  Moreover, it reflects seriously misplaced priorities, putting the permanent extension of these business provisions ahead of more pressing provisions for hard-working families.

  • Its $500 billion price tag is fiscally irresponsible.  Policymakers have enacted significant deficit-reduction measures since 2010, with the vast majority coming from spending cuts.  The one revenue contribution stems from the 2012 “fiscal cliff” bill — i.e., the American Taxpayer Relief Act — that raised $770 billion in revenue from high-income taxpayers (from 2015 to 2024).  The tax extenders and bonus depreciation provisions in the House bill would reduce revenue by $500 billion over the decade, effectively giving back two-thirds of the revenue contribution to deficit reduction (see chart).  (The total cost of the House bill is about $575 billion, because of other revenue-losing provisions.)

  • It’s poorly designed from an economic standpoint because it makes bonus depreciation permanent.  Making bonus depreciation permanent accounts for more than half of the $500 billion cost of the business tax provisions.  But bonus depreciation was specifically designed not to be permanent because its temporary nature is what drives its (albeit limited) effectiveness during recessions.  Its modest economic boost comes entirely from inducing firms to accelerate some of their purchases into the period when the tax break is in effect and the economy is weak.  Making it permanent would negate this modest incentive effect.  That’s why the Bush Administration and Congress allowed it to expire after the 2001 recession ended and why this Congress should let it expire now.
  • It moves away from tax reform.  The fundamental nature of tax reform is to “broaden the base” by scaling back tax subsidies and to use the freed-up funds to lower tax rates, reduce budget deficits, or both.  For example, House Ways and Means Chairman Dave Camp (R-MI) earlier this year advanced a comprehensive plan that eliminated tax subsidies for certain business investments, including the repeal of bonus depreciation.  These changes were central to his base-broadening provisions.  But the package that House Republicans are now bringing before the House goes in the opposite direction.  Its provision to make bonus depreciation permanent narrows the tax base and, thereby, moves away from tax reform.

If, during the lame duck session, policymakers consider making any tax extenders permanent, they should focus first on making permanent important provisions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) that are due to expire at the end of 2017.  Failure to make the EITC and CTC provisions permanent would have a significant impact on low- and moderate-income families, pushing 17 million people (including 8 million children) into — or deeper into — poverty.

Ryan Backs Reform to Mortgage Interest Deduction — But Bigger Changes Needed

August 27, 2014 at 1:34 pm

Endorsing House Ways and Means Chairman Dave Camp’s proposal to limit the mortgage interest deduction recently, Budget Chairman Paul Ryan explained that it “ought to be a middle class tax break, not something for higher-income earners.”  He’s right to criticize the deduction for favoring those at the top but, while Camp’s proposal moves in the right direction, policymakers should go further.

The deduction, which Camp would limit to mortgages up to $500,000 (cutting the current $1 million limit in half), is ripe for reform (see graph).  Some 42 percent of its benefits go to households with incomes above $200,000, the Joint Tax Committee estimates, while only 8 percent go to households with incomes below $75,000.  Close to half of homeowners with mortgages don’t benefit at all because they either don’t owe federal income taxes (though they typically pay substantial payroll taxes and/or state and local taxes) or don’t itemize deductions.

Federal housing spending as a whole is poorly matched to need, and policymakers could do more to rebalance it if they not only capped the deduction for the largest mortgages but also converted the deduction to a credit worth a fixed percentage of a household’s mortgage interest.

Several bipartisan plans — including those from President George W. Bush’s tax reform panel and the chairs of President Obama’s fiscal commission, Erskine Bowles and Alan Simpson — have backed this approach, which would trim benefits for higher-income households while expanding them for many middle- and lower-income households.

Policymakers should redirect part of the savings from reforming the mortgage interest deduction (after deficit-reduction goals are met) to help low-income renters, for example by creating a renters’ tax credit.  Low-income renters — including elderly people, people with disabilities, and working-poor families with children — are more likely than other groups to struggle to keep a roof over their heads, but federal housing policy provides far more help to homeowners and higher-income households.

IRS Commissioner Confirms House-Passed Cuts to IRS Budget Could Be “Catastrophic”

August 25, 2014 at 3:48 pm

IRS Commissioner John Koskinen said, according to Tax Notes, that the effects of House-passed IRS budget cuts would be “very serious if not catastrophic” to the agency’s ability to collect revenue and provide taxpayer services, adding: “I no longer want people to think that if we get less money it doesn’t make any difference.  It makes a big difference on taxpayers, on tax preparers, on tax compliance, on tax enforcement.”

As we have written, the House bill would cut IRS funding by $1.5 billion in 2015, including a $1.2 billion reduction in the agency’s enforcement budget, relative to 2014 funding.  The enforcement budget is crucial to the IRS’ ability to collect revenue and pursue tax cheats.  As Commissioner Koskinen affirms, reducing the IRS enforcement budget actually increases the deficit because it prevents the agency from thwarting tax fraud, evasion, and other illegal behavior, thus reducing federal revenue:

Congress is starving our revenue-generating operation. If voluntary compliance with the tax code drops by 1 percent, it costs the U.S. government $30 billion per year.  The IRS annual budget is only $11 billion per year.

And the House cuts would come on top of years of IRS budget cuts that have already weakened enforcement and harmed taxpayer services.  Funding for the IRS fell by 14 percent (after accounting for inflation) between 2010 and 2014 (see chart).  These cuts forced the agency to reduce its workforce by over 10,000 employees and have led directly to a significant decline in the quality of taxpayer services.

For example, millions of taxpayers depend on IRS assistance over the telephone, yet in 2013, a typical caller to the IRS waited on hold for about 18 minutes for an IRS representative, and about 40 percent of calls were never answered.  This is a sharp decline from 2010, when the IRS answered three-quarters of calls and had an average wait time of just under 11 minutes.

Commissioner Koskinen was frank about the impact of continued cuts:

You cannot continue to reduce our resources and ask us to do more things.  The blind belief in Congress that they can continue to cut funding and we will just become more efficient is not the case.  We are becoming more efficient but there is a limit.  Eventually the effects will show up.  We are no longer going to pretend that cutting funding makes no difference.

Policymakers must give the IRS the resources it needs to fulfill its tax-collecting mission and provide the services taxpayers depend on.  The first step is for the Senate and the President to reject the reckless House cuts.

Ryan Roundup: What You Need to Know About Chairman Ryan’s Poverty Proposal

July 25, 2014 at 4:42 pm

We’ve compiled CBPP’s analyses and blog posts on House Budget Committee Chairman Paul Ryan’s new poverty proposal.  We’ll update this roundup as we issue additional analyses.

  • Blog Post: Why the Ryan Plan Should Worry Those Concerned About the Affordable Housing Crisis, Part 2
    August 5, 2014
    House Budget Committee Chairman Paul Ryan’s proposal to consolidate 11 safety net and related programs, including the four largest federal rental assistance programs, into a single block grant to states risks significant funding cuts to housing assistance that helps 4.7 million low-income families.  The combination of those cuts, and the possible elimination under Ryan’s plan of program rules that ensure housing stability and affordable rents, could undercut rental assistance programs’ effectiveness and put substantial numbers of vulnerable families at risk for homelessness.
  • Blog Post: Why the Ryan Plan Should Worry Those Who Are Concerned About the Affordable Housing Crisis, Part 1
    July 31, 2014
    A centerpiece of House Budget Committee Chairman Paul Ryan’s poverty plan is the proposal to consolidate 11 safety net programs — including four housing assistance programs — into a single, flexible block grant to states.  Among its downsides, this proposal threatens to lead to reductions in funding that provides housing assistance to millions of low-income families and individuals.
  • Blog Post: What Difference Would Ryan’s EITC Expansion Make for Childless Workers?
    July 29, 2014
    We’ve explained that House Budget Committee Chairman Paul Ryan’s proposed expansion of the Earned Income Tax Credit (EITC) for childless adults, including non-custodial parents, would encourage work and reduce poverty.  Our interactive chart allows you to compare the EITC that childless workers at different income levels would earn under current law and under the Ryan expansion, which mirrors a proposal from President Obama.
  • Blog Post: Ryan’s “Opportunity Grant” Would Likely Force Cuts in Food and Housing Assistance
    July 29, 2014
    House Budget Committee Chairman Paul Ryan maintains that consolidating 11 safety-net and related programs into a single “Opportunity Grant” would give states the flexibility to provide specialized services to low-income people.  But providing these additional services would require cutting assistance funded through the Opportunity Grant to other needy people.  And because SNAP (formerly food stamps) and housing assistance together make up more than 80 percent of the Opportunity Grant, the cuts would almost certainly reduce families’ access to these programs, which are effective at reducing poverty — particularly deep poverty.
  • Blog Post: History Suggests Ryan Block Grant Would Be Susceptible to Cuts
    July 28, 2014
    Ryan says that the block grant would maintain the same overall funding as the current programs.  But even if one thought that current-law funding levels were adequate, they likely wouldn’t be sustained over time under the Ryan proposal:  history shows that block grants that consolidate a number of programs or may be used for a wide array of purposes typically shrink — often very substantially — over time.
  • Blog Post:  Why Ryan’s Proposed Work Requirements Are Cause for Concern
    July 25, 2014
    House Budget Committee Chairman Paul Ryan’s new poverty plan predictably showcases the 1996 welfare law, which replaced Aid to Families with Dependent Children (AFDC) with Temporary Assistance for Needy Families (TANF), as a model for reforming other safety net programs.  For example, states would have to impose work requirements on all recipients of assistance funded through the “Opportunity Grant” — the block grant that would replace 11 safety net and related programs — who are not classified as unable to work.  We have four key concerns about this proposal.
  • Blog Post:  Dean: SNAP Is a Successful, Influential Component of the Safety Net
    July 25, 2014
    SNAP is not only one of the most efficient and effective safety net programs, but it’s also helping improve other programs, CBPP’s Stacy Dean told a House Agriculture subcommittee.
  • Commentary:  Ryan “Opportunity Grant” Proposal Would Likely Increase Poverty and Shrink Resources for Poverty Programs Over Time
    July 24, 2014
    A centerpiece of House Budget Committee Chairman Paul Ryan’s new poverty plan would consolidate 11 safety-net and related programs — from food stamps to housing vouchers, child care, and the Community Development Block Grant (CDBG) — into a single block grant to states.  This new “Opportunity Grant” would operate initially in an unspecified number of states.  While some other elements of the Ryan poverty plan deserve serious consideration, such as those relating to the Earned Income Tax Credit and criminal justice reform, his “Opportunity Grant” would likely increase poverty and hardship, and is therefore ill-advised, for several reasons.
  • Blog Post:  Ryan Adds Momentum to Expanding EITC for Childless Workers
    July 24, 2014
    House Budget Committee Chairman Paul Ryan highlighted the Earned Income Tax Credit as one of the most effective anti-poverty programs and joined growing bipartisan calls to expand it for childless adults (including non-custodial parents), the lone group that the federal tax system taxes into poverty.  We applaud this step, though we encourage him to reconsider some of his proposals to offset the cost — which would hit vulnerable families — and his opposition to a much-needed increase in the minimum wage.
  • Blog Post:  Ryan’s Rhetoric Doesn’t Match His Proposal’s Reality
    July 24, 2014
    House Budget Committee Chairman Paul Ryan left the impression that his proposed Opportunity Grant will allow low-income individuals to get income assistance as well as help they may need to go to school, get off drugs, and succeed in the workplace.  That picture, however, doesn’t reflect the reality of his proposal.

We also issued several pieces ahead of Chairman Ryan’s announcement of his proposal:

  • Analysis:  Deep Poverty Among Children Worsened in Welfare Law’s First Decade
    July 23, 2014
    Since the mid-1990s, when policymakers made major changes in the public assistance system, the proportion of children living in poverty has declined, but the harshest extremes of child poverty have increased.  After correcting for the well-known underreporting of safety net benefits in the Census data, we estimate that the share of children in deep poverty — with family income below half of the poverty line — rose from 2.1 percent to 3.0 percent between 1995 and 2005.  The number of children in deep poverty climbed from 1.5 million to 2.2 million.Blog Post:  Fewer Poor Children Under Welfare Law, But More Very Poor Children
  • Blog Post: CLASP: State Experiences Show Safety Net Programs Don’t Need Massive Overhaul to Work Better
    July 23, 2014
    Olivia Golden of the Center for Law and Social Policy (CLASP) took a closer look at the experiences of six states to debunk common myths about the delivery of safety net programs. . . . Golden explained that the experiences of the six states involved in the Work Support Strategies (WSS) initiative — a project coordinated by CBPP, CLASP, and the Urban Institute that is designing, testing, and implementing more effective, streamlined, and integrated approaches to delivering key supports for low-income working families — offer lessons for how to improve safety net programs.
  • Blog Post:  Why the 1996 Welfare Law Is Not a Model for Other Safety Net Programs
    July 22, 2014
    House Budget Committee Chairman Paul Ryan’s upcoming poverty plan will likely showcase the 1996 welfare law, which replaced Aid to Families with Dependent Children (AFDC) with Temporary Assistance for Needy Families (TANF) — a block grant with fixed federal funding but broad state flexibility — as a model for reforming other safety net programs.  A careful examination of the record, however, indicates that the 1996 law’s results were mixed and that if the goal is to reduce poverty, especially among the most disadvantaged families and children, there are serious downsides to embracing the 1996 law as a model.
  • Commentary:  Policymakers Often Overstate Marginal Tax Rates — and Understate Trade-Offs In Reducing Them
    July 22, 2014
    Some Washington policymakers are increasingly focused on whether government benefits for low- and moderate-income people create disincentives to work — in particular, when these benefits phase down as the earnings of beneficiaries rise.That phase-down rate is often called the “marginal tax rate” because it resembles a tax — benefits fall as earnings rise.  The relationship between marginal tax rates and disincentives to work is an important issue, one worthy of serious debate.  Some policymakers, however, often overstate the size of marginal tax rates and their impacts on work, and understate the trade-offs in trying to lower these rates.Blog Post:  Understanding Marginal Tax Rates and Government Benefits

House GOP Follows Ryan Anti-Poverty Plan With Pro-Poverty Legislation

July 25, 2014 at 11:12 am

House Budget Committee Chairman Paul Ryan (R-WI) extolled the anti-poverty effects of the Earned Income Tax Credit (EITC) and, in his new poverty proposal, wisely proposed expanding it for childless adults (including non-custodial parents).  The praise that Chairman Ryan correctly gave the EITC also applies to the refundable portion of the Child Tax Credit (CTC).  Both of these essential tax credits encourage work, expand opportunity, and reduce poverty.

Today, however, House Republicans are considering on the House floor permanent CTC legislation — a bill for which Rep. Ryan voted as a Ways and Means Committee member — that would lead to more poverty, not less.  The bill permanently alters the CTC by extending it higher up the income scale so that more families with six-figure incomes can benefit from it, while failing to make permanent a key CTC improvement from 2009 for working-poor and near-poor families that’s slated to expire at the end of 2017.  Census data show that letting the CTC improvement for low-income working families expire after 2017 would push 12 million people — including 6 million children — into or deeper into poverty (see chart).

As we have explained, the House bill raises the income levels at which the CTC begins to phase out and indexes those thresholds to inflation.  Couples with two children making between $150,000 and $205,000 would become newly eligible for the credit; a family making $160,000, for example, would receive a new tax cut of $2,200 in 2018.  But because the bill fails to make permanent the 2009 reduction in the CTC’s earnings threshold after 2017, a single mother with two children who works full time throughout the year at the minimum wage and earns $14,500 would lose her entire CTC of $1,725 in 2018.

The bill also indexes the current maximum credit of $1,000 per child to inflation, but that would not help most working families with low or moderate incomes because it benefits only those with incomes high enough to receive the maximum credit.  If the credit’s $3,000 earnings threshold (the level of family earnings at which the credit starts to phase in) is allowed to expire at the end of 2017, the threshold will nearly quintuple — and families making less than about $14,500 will lose their CTC altogether.  In addition, many working families with incomes somewhat above $14,500 will have their CTC cut substantially and no longer receive the maximum credit, making the inflation adjustment meaningless for them.  Under the House bill, indexing would not benefit a family with two children in 2018 until the family has earnings of at least $28,050 — nearly double full-time work at the minimum wage.

Chairman Ryan’s colleagues should consider the poverty-fighting effects of tax credits such as the CTC for low-income working families.  Then they should reverse course and put these families’ needs first, rather than last.