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


4 Reasons Why the House Has the Wrong Approach to Tax Extenders

November 20, 2014 at 4:09 pm

Congress is expected during the lame-duck session to address “tax extenders,” a set of tax provisions (mostly for corporations) that policymakers routinely extend for a year or two at a time.  While the Senate has pursued temporary extensions, the House has taken a far different approach that’s flawed on both policy and priorities grounds, as our updated paper explains.

The House has: made a number of extenders permanent; permanently expanded one of the biggest extenders, the research and experimentation credit; and permanently extended some temporary tax breaks that aren’t extenders — such as “bonus depreciation,” which lets businesses take larger upfront tax deductions for purchases like machinery.  (A temporary measure to help revive a weak economy, bonus depreciation is largely ineffective.)   But it hasn’t offset any of the considerable costs.

The House approach would:

  1. Undo a sizeable share of the savings from recent deficit-reduction legislation. At a combined ten-year cost of $312 billion, the nine extenders provisions that the House Ways and Means Committee has passed this year would give back two-fifths of the $770 billion in revenue raised by the 2012 “fiscal cliff” legislation.  (The full House has already approved seven of these, costing $235 billion.)  House Republicans also are pushing to make permanent an expanded version of bonus depreciation in an extenders package; adding this to the nine Ways and Means provisions pushes the total ten-year cost to $588 billion, or roughly three-quarters of the revenue raised in the “fiscal cliff” legislation.
  2. Constitute a fiscal double standard. Failure to pay for making the extenders permanent would contrast sharply with congressional demands to pay for other budget initiatives, from easing the sequestration budget cuts to extending emergency unemployment benefits for long-term unemployed workers.  While demanding that spending measures be paid for, the House is pushing for permanent, unfinanced tax cuts that would cost much more.
  3. Bias tax reform against reducing deficits. If policymakers make the extenders permanent before they enact tax reform, a tax reform plan wouldn’t have to offset their cost to be revenue neutral.  This would free up hundreds of billions of dollars in tax-related offsets over the decade that policymakers could then channel toward lowering the top tax rate.  The resulting package would lock in substantially larger deficits than under revenue-neutral tax reform that paid for the extenders or let them expire.
  4. Place corporate tax provisions ahead of other, more important tax provisions scheduled to expire. Most notably, key elements of the Earned Income Tax Credit and Child Tax Credit will die at the end of 2017 unless policymakers act, pushing more than 16 million people in low-income working families, including 8 million children into — or deeper into — poverty.  When policymakers consider which expiring tax provisions to continue, they should give top priority to making those key low-income provisions permanent.

Letting Tax-Credit Provisions Expire Would Push Millions Into Poverty

November 12, 2014 at 1:55 pm

As Republicans and Democrats look for areas where they can work together, they should be able to agree to make permanent three key provisions of two pro-work tax credits:  the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC).  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 if these three provisions expire as they are currently scheduled to do after 2017, our new paper (with state-by-state data) shows.  Some 50 million Americans, including 31 million children, would lose part or all of their credits.

The EITC and CTC encourage and reward work, and there is growing evidence that income from these credits leads to improved school performance, higher college enrollment, and increased work effort and earnings in adulthood.

Both credits have enjoyed bipartisan support, and their underlying provisions are permanent parts of the tax code.  But several key features of the credits will expire at the end of 2017 unless lawmakers act.

The stakes are high for millions of workers in low-wage jobs, from custodians to health care workers.  If these provisions expire:

  • Not one penny of earnings of a full-time, minimum-wage worker would count toward the CTC. For example, a single mother working full time at the minimum wage and earning $14,500 would thus lose her entire $1,725 CTC.  That’s because 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 (of $1,000 per child) would jump from $16,330 to more than $28,000 for a married couple with two children, so many low-income working families that would still qualify for the CTC would see their credit cut dramatically.
  • Many married couples would face higher tax-related marriage penalties due to a cut in their EITC. To reduce marriage penalties, the income level at which the EITC begins to phase out is now set $5,000 higher for married couples than for single filers.  After 2017, it would be set $3,000 higher, 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 more than $700 to match the maximum for families with two children.

Some 65 percent of the families that would lose part or all of their credits include at least one full-time, year-round worker.  About 450,000 veteran and armed forces families with children would lose all or part of their CTC in 2018; a similar number would lose all or part of their EITC.  Also, 15 percent of the families that would lose all or part of their credits include at least one member with a disability.

For more on the impact on specific types of families if the provisions expire, see this interactive calculator.

New Poverty Figures Show Impact of Working-Family Tax Credits

October 17, 2014 at 2:05 pm

The Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) together lifted 9.4 million people out of poverty in 2013 and made 22.2 million others less poor, our analysis of Census data released yesterday show (see first graph).

Using Census’ Supplemental Poverty Measure (SPM), which includes taxes and non-cash benefits as well as cash income, our analysis shows how critical these tax credits are for low-income families.  It also highlights the impact if policymakers let key provisions of the credits expire, as I explain below.

Each credit plays an important antipoverty role.  The EITC lifted 6.2 million people out of poverty in 2013, including 3.2 million children.  The CTC lifted 3.1 million people out of poverty, including 1.7 million children.  Both credits acting together lifted some additional people out of poverty.

The EITC and CTC combined lift more children out of poverty than any other antipoverty program.

Unfortunately, critical provisions of the EITC and CTC are set to expire at the end of 2017.  If that happens, 16.4 million people — including 7.7 million children — will fall into or deeper into poverty, we estimate based on the Census data.  (See second graph.)  Our interactive calculator lets you explore what’s at stake for low-income families if policymakers don’t act.

What Would Congress’s Inaction Cost Working Families? Find Out.

October 8, 2014 at 2:05 pm

Unless Congress acts, key Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) provisions will expire at the end of 2017, pushing 17 million people — including 8 million children — into or deeper into poverty.  As we’ve noted here and here, making these provisions permanent should be a key priority for Congress.

Our new interactive calculator, below, allows you to explore what’s at stake for low- and moderate-income families if three important provisions expire at the end of 2017:

CTC refundability threshold

Current provision:  The CTC is worth up to $1,000 per child, and families have to work to qualify for it.  A family needs to earn at least $3,000 before beginning to earn the portion of the CTC that can be received as a tax refund.  The refundable CTC gradually phases in as earnings rise above that level. A family with two children cannot qualify for the full CTC unless their earnings reach $16,330.

In 2018, without action:  The $3,000 earnings threshold will more than quadruple to $14,700, so families with earnings between $3,000 and $14,700 will lose their entire CTC.  As the interactive below shows, a single mother who works full time at the minimum wage (earning $14,500) would see her CTC fall by $1,725, to $0 — a real hit to her ability to afford the basics.  To qualify for the full CTC, a married couple with two children will need earnings of at least $28,030, so many families that will still qualify will see their credits cut substantially.  About 3.7 million families, including 5.8 million children, will lose their entire CTC, and an additional 5.2 million families, including 10.6 million children, will lose part of their CTC, Citizens for Tax Justice (CTJ) estimates.

EITC marriage penalty relief

Current provision:  The EITC now begins to phase down at an income level that’s $5,000 higher for married couples than for single filers.

In 2018, without action:  The EITC for married couples will begin to phase out only $3,000 above single filers’ phase-out level, cutting the EITC for many low-income married filers and increasing the EITC’s marriage penalty for two-earner families.

EITC boost for larger families

Current provision:  Families with three or more children can qualify for a maximum EITC that’s about $650 larger than for families with two children.

In 2018, without action:  The maximum EITC for families with three or more children will be cut to the same maximum EITC as families with two children.

With the loss of these two key EITC provisions, 6.5 million families, including 15.9 million children, would lose some or all of their EITC, CTJ estimates.

This calculator does not show the impact of the American Opportunity Tax Credit, a credit to defray the costs of college, which is also set to expire at the end of 2017 under current law.  Its expiration would mean the loss of tax credits for college for about 11 million families with students.

4 Questions About Lee-Rubio Tax Plan

October 6, 2014 at 4:18 pm

With tax reform potentially on Congress’ agenda next year, the tax plan that Senators Mike Lee (R-UT) and Marco Rubio (R-FL) sketched out recently will merit a close look.  Its marquee proposal would supplement the current Child Tax Credit (CTC) with an additional credit of $2,500 per child.  We can’t evaluate the plan, which the senators say “won’t only help revive the American dream, but also make it more attainable for more Americans than ever before,” until they provide the details.  Here are four things we’d like to know about its changes to the CTC and the other major tax credit for working families, the Earned Income Tax Credit (EITC).

  1. Would “stock clerks” with children receive the new child tax credit?  Lee and Rubio write that Americans “see an economy that benefits stockholders but not stock clerks.”  But another tax plan that Senator Lee released in the spring, which also featured an additional child tax credit, denied the new credit to many working-poor families even though high-income families with children would have benefitted.
  1. Would low-income families keep their current Child Tax Credit?  Under the prior Lee plan, a single mother who works for the minimum wage and has two kids would have lost $1,725 in existing CTC benefits because the plan let key improvements to the existing CTC (as well as the EITC) expire in 2018.  But a millionaire with two children would qualify for a new child credit worth more than $5,000.
  1. Would the plan’s “retooling” of the EITC reduce poverty?  Lee and Rubio promise to “retool” the EITC in combination with means-tested programs (like SNAP, formerly food stamps), saying that the phasedown of these benefits in response to higher earnings creates high “marginal tax rates.” As we’ve explained, though, changes to reduce these marginal tax rates can also shrink needed assistance to poorer families — or increase program costs.  The EITC and CTC together lift more children out of poverty than any other program; “reform” can mean a lot of things, so when the details are available, we’ll be looking at whether the plan cuts assistance to the neediest families, thereby worsening poverty, or is structured to reduce poverty.
  1. Will the plan expand the EITC for childless workers, as leading members of both parties favor?  Working adults who aren’t living with and raising children are the only group that the federal tax system taxes into (or deeper into) poverty.  President Obama and House Budget Committee Chair Paul Ryan (R-WI) have both proposed expanding the EITC for this largely left-out group.

Several months before releasing his tax plan this spring, Senator Lee called for tackling the “opportunity crisis” of “immobility among the poor,” “insecurity in the middle class,” and “cronyist privilege at the top” and promised that his tax plan would address these problems.  But when the details finally appeared, they didn’t live up to his speech.  Let’s hope this time’s different.