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


Working-Family Tax Credit Essentials, Part 5: The Impact in Your State

January 27, 2015 at 4:08 pm

Previous posts in this series on our new chart book have explained that the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC):

Our chart book also includes fact sheets with by-state data on how the EITC and CTC reduce poverty, who benefits, and how state EITCs can supplement the federal credit.  The fact sheets also give state-specific data on the impact of making the key EITC and CTC provisions permanent and of strengthening the EITC for childless adults.  Click on a state below for its fact sheet.

Working-Family Tax Credit Essentials, Part 4: Bipartisan Support for Helping Childless Workers

January 23, 2015 at 2:05 pm

Today’s post on our chart book on the pro-work Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) focuses on the most glaring hole in the EITC: it largely excludes childless adults and non-custodial parents.  President Obama and House Ways and Means Chairman Paul Ryan (R-WI) have advanced important proposals to address this problem, and, as Chairman Ryan said this week, his proposal “basically mirrors the president’s proposal.”  Senators Sherrod Brown (D-OH), Richard Durbin (D-IL), Patty Murray (D-WA), and Jack Reed (D-RI) and Reps. Danny Davis (D-IL), Richard Neal (D-MA), and Charles Rangel (D-NY) also have introduced key proposals.

The EITC misses many low-income childless workers entirely and provides only minimal help to many others.  All childless workers under age 25 are ineligible for the credit and the average credit for eligible workers between ages 25 and 64 is only about $270, or less than one-tenth the average $2,900 credit for filers with children.  A childless adult working full time at the minimum wage is ineligible.

As a result, childless adults are the only group that the federal tax code taxes into — or deeper into — poverty (see first chart).

Providing a more adequate EITC to low-income childless workers and lowering the eligibility age would raise these workers’ incomes and help offset their federal taxes.  Also, some leading experts believe that an expanded credit would begin to address some of the challenges that less-educated young people face, including low and falling labor-force participation rates, low marriage rates, and high incarceration rates.

The Obama and Ryan proposals would lower the age floor from 25 to 21 and expand the EITC for childless workers by doubling its phase-in rate, from 7.65 cents per added dollar of income to 15.3 cents (to fully offset workers’ payroll taxes on this income).  And they would raise the income levels at which the credit starts phasing out and phases out completely, as our paper explains.  These changes would make a big difference for childless workers (see second graph).

Obama’s Education Tax Proposals Would Help Middle-Class Families, Not Hurt Them as Opponents Inaccurately Claim

January 22, 2015 at 5:29 pm

Some critics claim that President Obama’s proposal to streamline and better target tax credits for higher education represents an attack on middle-class families, particularly because of the limits it would impose on so-called “529” accounts.  That’s backward:  the plan overall would do more to help both middle-class and lower-income families afford college.

The President’s plan would scale back tax benefits that disproportionately benefit high-income filers and redirect them toward low- and middle-income students — the people who most need help affording college.  By likely enabling more people to attend college, it would help them and the economy as a whole by contributing to a better-educated workforce.

Like many current tax breaks (such as those for retirement saving and mortgage interest), tax benefits for higher education give the biggest benefits to high- and upper-middle-income families since they’re in the highest tax brackets.  This means that the tax subsidies are less effective than they could be in boosting college enrollment because they largely go to people who likely would attend college anyway, while doing too little for many people from low- and middle-income families who simply can’t afford college without help.

Further, the tax subsidies are delivered through a maze of overlapping provisions, so many eligible families aren’t aware of them.

That’s why many education policy groups (see here, here, and here) have called for streamlining and better targeting education tax breaks.  Representatives Danny Davis (D-IL) and Diane Black (R-TN) introduced a bipartisan bill in 2013 based on these principles, and former House Ways and Means Committee Chairman Dave Camp’s tax reform plan included a similar proposal.

The President’s plan also uses this framework.  It would shrink some of the education tax subsidies most heavily focused on high-income families and use the savings to strengthen and make permanent the education tax incentive best targeted on low- and middle-income families:  the American Opportunity Tax Credit (AOTC).

The AOTC is partially refundable, which means families with incomes too low to owe federal income tax can receive a partial credit.  But under current law, the AOTC will expire at the end of 2017 and be replaced by a smaller, non-refundable education tax credit called the Hope Credit.  The President’s proposal would improve the AOTC for both low-income and middle-class families by making it permanent and raising the amount of the AOTC that is refundable.

At the same time, the President’s plan would limit a number of inefficient tax benefits that are heavily tilted toward upper-income families, including those for 529 plans.  Currently, filers don’t owe taxes on the earnings from 529 plans either as they accrue or when those earnings are withdrawn to pay for higher education.

Some 80 percent of the benefits of 529 plans go to households with incomes above $150,000, Survey of Consumer Finances data show; about 70 percent go to households with incomes above $200,000.  That’s because higher-income households can most afford to save substantial amounts for college, and because tax exemptions are worth the most to them, saving them up to 40 cents (for people in the top income tax bracket) per dollar earned in these plans that’s used for higher education expenses.  Since there are no income limits on using the plans, families with multi-million-dollar incomes can amass huge 529 accounts and benefit very handsomely from this tax break.

Under the President’s plan, earnings in 529 accounts would remain tax-free as they accrue, but filers would pay tax on the gains when they withdraw the funds, so filers would still benefit from deferring taxes on those gains. And the proposal would only apply to new deposits in 529 accounts; the billions of dollars already in those accounts would be entirely exempt.

The University of Michigan’s Professor Susan Dynarski, a top expert on education tax policy, has praised the President’s 529 proposal as “smart,” commenting that the current treatment of 529s is “Incredibly expensive, poorly targeted, [and] ineffective.”

Scaling back the 529 tax subsidy for high-income filers and redirecting the funds towards low- and middle-income filers who most need support to afford higher education is sound policy that would make higher education more affordable for more low- and middle-income families.

In fact, overall, the President’s proposal would increase the total amount of resources provided in higher education tax subsidies, benefiting middle- and low-income families, and pay for that increase by reducing inefficient tax subsidies that overwhelmingly benefit people at the top of the income scale.  Since aid for families who don’t have high incomes would increase, opponents’ claims that the plan would increase student debt levels are hard to fathom. The effect is likely to be just the opposite.

Working-Family Tax Credit Essentials, Part 3: Making Key Provisions Permanent

January 21, 2015 at 1:14 pm

Our last post on our new chart book highlighted ground-breaking research suggesting that the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) help families at virtually every stage of life.  Today, we’ll explain why making several key CTC and EITC provisions permanent should be a top priority for Congress.

In 2009, policymakers lowered 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.

But unless policymakers act, these provisions will expire at the end of 2017, causing millions of low-income working families to lose all or part of their CTC and EITC.  More than 16 million people, including almost 8 million children, would be pushed into — or deeper into — poverty.

The affected families work in a diverse range of jobs, from nurses to custodians, as this table shows.

If the provisions expire:

  • Not one penny 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 full CTC would rise from $16,330 to more than $28,000 for a married couple with two children.  A family with two children earning $20,000 would see its CTC cut from $2,000 to $795.
  • 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 only 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, to the level of the maximum EITC for families with two children. 

The next post in this series will highlight the need to strengthen the EITC for the only group the federal tax system taxes into poverty: childless workers.

Examining the President’s New Tax Proposals

January 20, 2015 at 3:09 pm

We’ve issued two pieces on the President’s new proposals, which he’ll discuss in tonight’s State of the Union address, to reduce the tax code’s tilt toward capital gains and use the new revenues to support work and help working families build skills and savings.

  • Robert Greenstein’s statement:

    In recent decades, economic growth has powerfully benefitted Wall Street, while leaving much of Main Street behind.  The plan that President Obama unveiled today would take large, important steps to help redress part of the imbalance and make prosperity more broadly shared.  The President’s new tax proposals will surely elicit howls of protest from various special interests and on ideological grounds; adversaries will make predictable claims that the proposals would harm the economy and jobs.  Yet while the proposals do present a major challenge to the status quo, they should benefit economic growth, not hinder it, while substantially helping tens of millions of middle- and lower-income working families and individuals. . . .

    Click here for the full statement.
  • Our analysis of the capital gains proposals:

    The tax code strongly favors income from capital gains — increases in the value of assets, such as stocks — over income from wages and salaries. These preferences are economically inefficient:  they promote tax schemes that convert ordinary income into capital gains and encourage people to hold assets just to escape tax, even if they have better investment opportunities.  They are also highly regressive, since capital gains are heavily concentrated at the top of the income scale.  The President has proposed to make the tax code more efficient and equitable by reducing one of the biggest subsidies for capital gains (a preferential rate compared to wage and salary income) and largely eliminating another (the ability to avoid capital gains tax completely by holding on to an asset until death).

    These changes would allow investments to flow to where they are most productive and reduce investment in creating tax avoidance schemes instead of in real economic activity, among other economic benefits.  And, because the benefits of the current preferences for capital gains flow overwhelmingly to the top, fully 99 percent of the revenue from the President’s capital gains proposals would come from the top 1 percent of filers, the Treasury Department estimates [see graph]. . . .

    Click here for the full analysis.

We’ll be live-tweeting the State of the Union this evening.  Follow along with @centeronbudget and at #cbppsotu.