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

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.

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.

What Tax Preparers Need to Know About Health Reform

February 12, 2015 at 2:07 pm

Our new Tax Preparer’s Guide to the Affordable Care Act explains the ACA’s coverage requirements, how they affect tax returns, and the new forms that taxpayers will need to complete.  It includes examples and practical tips on how to approach the ACA-related sections of the tax return.

Beginning this tax season, all taxpayers need to report on their health insurance coverage to the IRS.  Some will have to complete additional tax forms or worksheets to claim an exemption from the requirement that they have coverage (or to calculate the penalty for not having coverage).

Also, recipients of advance payments of the premium tax credit to purchase marketplace coverage will need to reconcile the payments they received with their final premium tax credit, which is calculated on the tax return.

Knowing more about the ACA requirements will help tax preparers better serve their clients, especially those who are unfamiliar with filing taxes, experienced periods without coverage in 2014, or have complicated coverage situations.

House Republicans Pushing More Expensive Tax Cuts

February 12, 2015 at 11:48 am

Update, February 12: We’ve updated this post (including the graph) to reflect action by the House Ways and Means Committee.

We’ve warned that the bill before the House today to make permanent various tax breaks related to charities would be the start of a costly, fiscally irresponsible series of permanent tax cuts. Proving our point, the Ways and Means Committee approved bills today making permanent two other “tax extenders” (several dozen mostly corporate tax breaks that policymakers routinely extend a year at a time) and significantly expanding one of them — all without offsetting their substantial cost.

As our paper explains, making the extenders permanent without paying for them is costly, biases tax reform against reducing deficits, and prioritizes corporate tax breaks over tax credits that help millions of low- and moderate-income working families. This is why policymakers should reject today’s package of charitable provisions, regardless of whether they support it on policy grounds.

The President, whose budget modifies and expands some charitable tax provisions but offsets the cost, has threatened to veto today’s House package.

The two new extenders bills that Ways and Means approved are far costlier than the charitable provisions. One bill expands and makes permanent one of the biggest tax extenders related to businesses, the research and experimentation credit (costing $177 billion over 2016-2025); the other makes permanent one of the biggest individual extenders, the tax deduction for state and local sales taxes (costing $42 billion).

The total price tag of the bill before the House, the two new Ways and Means bills, and business provisions that the full House will consider tomorrow is $304 billion (see chart).