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Elaine Maag

Elaine Maag is a Senior Research Associate at the Tax Policy Center. Her studies focus on how tax policy affects low-income families and state taxes.



The Many Moving Parts of Camp’s Tax Reform for Low-Income Families

March 11th, 2014

House Ways & Means Committee Chair Dave Camp’s tax reform plan would make many changes to the two major refundable tax credits aimed at assisting low- and moderate-income working families—the earned income tax credit (EITC) and the Child Tax Credit (CTC).  It isn’t easy to keep track of all the moving parts, but it appears that Camp’s plan would benefit some married couples with young children at the expense of some childless workers, single parents, and families with older kids.

Camp would cut the maximum EITC, make 18 year old children and full-time students ages 19 – 24 ineligible for the credit, and eliminate personal exemptions. At the same time, he’d increase the standard deduction and permit some low-income single parents to take an extra deduction. And he’d make the child credit more generous for many families – increasing the size of the credit and adding a year of eligibility.

Today’s EITC provides a maximum of about $500 for workers without qualifying children; Camp’s proposal would reduce that to $100 ($200 if married). Camp’s plan would also reduce the EITC for workers with one child from $3,250 to $2,400, and from $5,400 to $4,000 for families with at least two children. And the additional boost for families with three children that exists under current policy (a maximum credit of $6,200) would disappear. In order to qualify for today’s EITC, a child must be either under age 19 or under 24 and a full-time student. Camp would lower the age limit to under age 18 and eliminate eligibility for older full-time students.

EITC_Camp2

Once Camp’s plan is fully phased in, people would start to owe federal income tax at about the same income level as today – but subsidies for single parents would drop and their taxes would rise. Married couples with children would receive reduced total credits relative to current policy, until their income reaches about $40,000. Then they’d get a bigger check or owe less tax under Camp’s proposal.

Some workers without qualifying children would also get bigger refunds. But the few who are currently eligible for an EITC greater than $100 ($200 if married) would get a smaller credit.  Low-income families with students aged 19-24 or 18-year-old children would lose the sometimes-substantial support they receive from today’s EITC.

At the same time, Camp would increase the CTC from $1,000 per child to $1,500 and make it available for 17-year olds (today’s CTC applies to children under age 17). Although today’s CTC starts phasing in once earnings exceed $3,000 (a limit currently scheduled to increase to more than $13,000 after 2017), Camp’s proposed CTC would start to phase in at the first dollar of earnings, just as the EITC does under current policy. I’ve discussed this simplification in TaxVox, before.

In addition, the Camp proposal would eliminate the personal exemption ($3,900 per person in 2013) but increase the standard deduction. Singles would be able to deduct $11,000 and couples could deduct $22,000 before calculating their taxes. Under current policy, the standard deduction is $6,100 for a family without children, $8,950 for a single parent, and $12,200 for a married couple.

In the end, many single parents with two children under age 17 would owe about $1,000 more in taxes under the fully-phased-in Camp proposal than under current law (see figure). Single parents with a 17-year-old child would receive the CTC under Camp’s proposal and children older children older than that would lose their EITC.

Single_Camp2

Married couples with two children would receive a smaller EITC under Camp’s proposal, offset partially by the larger CTC. Once their earnings reach about $40,000, those couples would owe less – a product of lower tax rates.

Married_Camp2

Families without children would face a cut in their maximum EITC but they could also deduct more income under Camp’s proposal– $11,000 ($22,000 if married) compared to $10,000 ($20,000 if married) under current policy (which is derived as $6,100 standard deduction plus $3,900 personal exemption – double that for married couples).

Camp’s proposal also highlights some of the issues associated with creating a uniform definition of child. In this case, families with 17-year-old children would receive a CTC that they cannot now receive, but families with 18-year-old children or students ages 19-24 would lose the EITC for those children.

Camp would make many changes for low-income households. The Joint Committee on Taxation estimates that, once phased in, his plan would make very little difference on average for low- and moderate-income households (relative to current law). But relative to current policy, many low-income households will owe more.

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Questions About Expanding the Childless EITC

February 5th, 2014

As the idea of expanding the “childless EITC” gathers steam, it’s time to start thinking about what the next generation of worker credits should look like. Today’s EITC lifts millions of families out of poverty each year by providing a wage subsidy that encourages work. But it largely skips over childless adults. Politicians from President Obama to Senator Marco Rubio (R-FL) are looking at ways to include workers without kids in the EITC or an EITC-like program.

Today, the maximum childless EITC benefit is just $496, less than a tenth of the $5,460 available to families with two children. And what’s more, if you don’t have children, you have to be very low-income to qualify for any benefit at all. Families with two children can receive the EITC until their earnings reach $43,756 ($49,186 if married). But families without children get nothing once they earn $14,590 ($20,020 if married).

There’s no doubt that a significant expansion of the childless EITC could reduce poverty and differences in the tax treatment of families with and without children. (And many workers who do not report children on their tax returns actually do have children, though they may not live with them.)

But before legislators double down on the EITC for childless families, they must get a handle on some yet-to-be answered questions.

First, should we retain the current age limits for the childless EITC? Although a parent at any age who lives with their child can receive the EITC if they meet the other eligibility rules, folks without children must be between the ages of 25 and 64. This excludes most students and all seniors.

Under current law, you cannot receive the childless EITC yourself if you qualify someone else for the credit. Full-time students are often qualifying children, while part-time students are not.  Retaining this rule means full-time students cannot get a childless EITC but getting rid of it means we might be subsidizing a lot of students from upper-middle income families.

One solution would be to lower the age limit to 18 (rather than eliminate it entirely) but keep the qualifying child rule. This could provide a subsidy to part-time student workers as well as young, independent workers without also encouraging them to drop out of high school in favor of work.

At the other end of the age spectrum, should low-income elderly workers benefit from the EITC? Older workers with low enough earnings to qualify for the EITC are at great financial risk during retirement.

The EITC is often criticized for its built-in marriage penalty. Imagine a single mom with three kids who earns $17,500. Prior to marriage, she qualifies for the maximum credit of $6,143. But if she marries someone with identical earnings, the additional income will reduce her EITC to just $3,670.

If the childless EITC were expanded and the husband had his own EITC, he would lose all or part of his benefit when the couple married, magnifying the tax increase this couple would face relative to when they were not married. As long as the EITC phases out at higher incomes and is tied to joint income, this will remain an issue.

Steve Holt and I provide a model for reducing marriage penalties by focusing on individual worker earnings, rather than family earnings. This could equalize incentives between primary and secondary earners to work, a move that could help married couples move into the middle class. We propose limiting the worker credits to families with low and moderate joint income, in order to minimize the chances that a low-income worker in a high-income couple would receive the new credit.

Expanding the childless EITC is the right call for policy makers interested in reducing poverty. But policymakers need to answer some tough questions if they are going to get the new policy right.

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How Rubio’s Anti-Poverty Plan Could Help Improve Aid to Low-Income Workers

January 28th, 2014

Senator Marco Rubio (R-FL) has offered the outlines of an ambitious plan that he says would end poverty. One creative piece: Replace the well-known and highly effective earned income tax credit (EITC) with a monthly “federal wage enhancement” for all individuals with qualifying low-wage jobs.

It is a bold idea. The EITC, along with the refundable child tax credit (CTC) lifted 10.1 million people out of poverty in 2012, including 5.3 million children. But the EITC has some major shortcomings: It does very little to help low-income workers without kids (mostly single men) and most recipients only get much-needed cash when they file their tax returns. Rubio’s plan seems aimed at addressing both issues.

An individual worker credit makes a lot of sense. Policymakers from the Bush tax reform plan to the Bipartisan Policy Center proposed expanding worker credits to include families without children. My colleagues and I at the Tax Policy Center have done a fair amount of work on this idea as well. See this and this.

Although the current childless EITC reaches some very low-income workers, the maximum benefit is less than $500, a fraction of the supplement available to families with children. The maximum EITC for families with children varies from $3,305 – $6,143 in 2014, depending on the number of children eligible for the credit. Childless families are the only households that still regularly face federal income taxes when they earn poverty- or near-poverty level wages. A credit aimed at treating individual workers on par with families with children would make the system fairer and be a huge benefit to childless workers who are struggling to make ends meet.  It could even help children because it would encourage noncustodial fathers to enter or remain in the work force, which improves the odds that they make child support payments and remain connected with their kids.

In theory, a frequent wage supplement could make sense. Utilities and rent must be paid monthly, so there are advantages to a cash supplement that arrives at the same time as these recurring bills. Regular payments would also be more responsive to changes in earnings, just like the Supplemental Nutrition Assistance Program (SNAP – formerly Food Stamps) and other traditional anti-poverty programs. However, research shows that low-income families prefer to receive the EITC as a lump sum payment at the end of the year.

In addition, a monthly wage enhancement is a radical departure from current tax treatment, and Rubio’s specific plan is difficult to assess until he fills in gaps.  For instance, what would happen to a worker whose income changes during the year? Would Rubio’s plan provide supplements in some months and not others – even if annual wages ended up being quite high? SNAP and TANF benefits include an asset test, so that wealthy people with no earnings in a particular month don’t qualify. The EITC is also only available to households with little or no capital income.  Would employers have to administer these sorts of tests when calculating the wage enhancement? Would the wage enhancement be large enough and apply to a broad enough population that current EITC recipients wouldn’t lose out?

There is a middle-ground.  A plan such as this could be phased-in. To start, expand the childless EITC so it’s on par with its more generous counterpart for families with children. Senator Rubio could even restore the ability of families to receive advanced payments for the EITC, although he’d need to figure out a way to make them desirable to low-income families.

Through those relatively modest changes, Rubio wouldn’t risk destroying a program that has been truly effective at reducing poverty – yet he could improve the tax treatment of families without children and perhaps end poverty for more people.

It is important to note that replacing the EITC is just one piece of Rubio’s much more comprehensive plan.  The rest includes replacing many anti-poverty spending programs (he hasn’t said which) with a single block grant to states. That idea is enormously controversial. But his wage enhancement proposal could help advance an important conversation about the best way to supplement income for low-wage workers.

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Analyzing Taxes and Transfers Together

December 5th, 2013

Government redistributes income through tax and spending programs. Nearly everyone pays some tax – be it federal or state income taxes, payroll taxes, or sales taxes. The tax system also affects people by delivering a host of benefits through tax expenditures (subsidies like the mortgage interest deduction or the child tax credit).   And broad spending programs such as national defense and Social Security affect nearly everyone over the course of their lifetime.

Yet, we know surprisingly little about the combined effect of taxes and spending on our well-being. Two new studies—one by the Congressional Budget Office (CBO) and another by the Tax Foundation—have begun to close this knowledge gap by analyzing spending and taxes together. Tuesday, I participated in a TPC panel discussion that highlighted these papers (you can hear the program and see the slides and papers here). Two things are clear: First, what CBO and the Tax Foundation are trying to do is very hard. It requires analysts to make assumptions about how taxes and spending affect people. Second, there’s a lot of redistribution—for example, from the nonelderly to the elderly and from higher-income people to lower-income people. (I focus on the CBO report here but the Tax Foundation’s analysis reaches similar conclusions.)

In 2006 (the year the CBO report focuses on), the federal government spent roughly $2.7 trillion and collected $2.4 trillion in taxes and other revenues.

The CBO study focuses on three groups – the elderly, the nonelderly with children, and the nonelderly without children. Given the size of Social Security and Medicare, it’s no surprise that CBO found that in 2006 the elderly received more in benefits than they paid in taxes.  But, as my Urban Institute colleague Melissa Favreault pointed out, it isn’t that simple. What if you look at this picture not as a one-year snapshot but over a lifetime? Today’s elderly paid taxes when they were younger—in many cases, more than they will receive in benefits.  And the story gets even more complicated because some nonelderly people benefit indirectly from Social Security and Medicare. Retirees’ children benefit because they do not have to provide as much support for their elderly parents as they would without the programs.

Younger households present other issues.  CBO found that government spent more on low-income households in 2006 than on high-income households. But people’s incomes change during their lives as they move from low-income to higher-income or vice versa. An annual estimate may not reflect how a person will fare over a lifetime.

Other kinds of government spending create different challenges, especially programs such as defense. Unlike transfers that go to individuals, defense is a public good—we all benefit in some way. But how should we value those benefits for individuals?  Do we all benefit equally? Do rich people benefit more? There’s no clear answer.

Ultimately, this sort of analysis could also provide information on how pre- tax-and-transfer income differs from after-tax-and-transfer income – information likely to be in high demand in any serious budget negotiations. We know from the CBO report the net effect of taxes and transfers on broad swaths of the population, but not on individual families or households within income classes. This can mask big winners and losers within income groups.

Notwithstanding these reservations, the CBO and Tax Foundation reports help us start to think about taxes and transfers together – and give a more accurate view of government than we get by focusing on only one side of the budget.

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Senator Lee’s New Reform Plan Focuses on Young Children

September 19th, 2013

At an AEI panel discussion earlier this week, Senator Mike Lee (R-Utah) unveiled the Family Fairness and Opportunity Tax Reform Act. The centerpiece is an additional $2,500 tax credit for all children under age 17. The plan retains the $1,000 child tax credit under current law. Unlike the current credit, the new credit would not phase out at higher income levels.

Lee’s idea is straightforward—cut taxes for families with children and raise them for households with high itemized deductions.

He’d eliminate the standard deduction and personal exemption (except for dependents under 17) and replace them with a nonrefundable $2,000 per person credit. He’d also repeal the Alternative Minimum Tax and end the taxes associated with the 2010 Affordable Care Act (ACA).

He would also eliminate all but two itemized deductions, including those for state and local taxes. He’d keep the mortgage interest deduction (capped at $300,000 of debt) and the deduction for charitable giving—and make those available to all taxpayers.

The plan would have just two rates, 15 percent on the first $87,850 for single people (twice that for couples) and 35 percent—higher than the 25 percent top rate in other GOP plans.  (The plan would eliminate most marriage penalties for higher-income households and provide marriage bonuses for many. High-income households with one earner and many children would get a huge tax cut.)

While Lee says he’d like to aim for even lower rates, his current design seems to recognize  that you can’t slash tax rates for all without losing billions (or even trillions) of dollars in tax revenue.  However, the 35 percent rate is significantly lower than the 39.6 percent top rate—plus surtaxes associated with the ACA—that applies to top incomes under current law. We don’t know yet whether the plan is revenue neutral because important details haven’t been specified.

Lee would remove many households from the federal income tax rolls. But he sees no special reason why the key feature of his plan—the added $2,500 per-child tax credit—needs to be a tax credit. He’d be willing to use a direct spending program instead (something my colleague Austin Nichols might think was a better idea).

If the new child credit were instead a transfer payment, the plan wouldn’t increase the number of people who don’t pay federal income tax, but it would still provide substantial assistance to families with children, albeit with higher administrative costs. By acknowledging that such a child credit is effectively spending, Lee challenges critics to assess the merits of the plan.

We ought to be talking about whom the federal government should assist and how much aid they ought to get, without turning policy inside out by making every benefit program a tax preference when direct spending might make more sense. I agree with Senator Lee. Spending programs and tax policy can often accomplish the same thing. We should evaluate benefits for families with children and see what form of subsidy makes the most sense. Maybe in the process we could stop obsessing about who does—and does not—pay federal income tax.

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Simplifying Child Care Tax Benefits

April 15th, 2013

Every year at tax time I am reminded of two tax benefits that subsidize my children’s child care – the employer-provided child care exclusion and the Child and Dependent Care Tax Credit (CDCTC). Families with sufficient expenses can benefit from both provisions. Congress could simplify these child care benefits by harmonizing the maximum allowable expenses for both benefits, or eliminating one of the benefits altogether.

Here’s how the child care exclusion and CDCTC work. The exclusion allows me to set aside up to $5,000 from my salary to pay for child care expenses (regardless of the number of children I have) and exclude that from taxable income. However, I can only take the exclusion if my employer offers this benefit.

The credit applies to as much as $3,000 of child care expenses per child, to a maximum of $6,000. Unlike the Child Tax Credit (CTC) – which is refundable, the CDCTC is nonrefundable. It only benefits families with child care expenses who owe federal income taxes. The actual amount of the CDCTC depends on my adjusted gross income (AGI), and ranges from 35 percent of expenses for parents with AGI up to $15,000 down to 20 percent for those with AGI over $43,000.

Higher income parents tend to benefit more from the exclusion while middle-income parents are the primary beneficiaries of the credit. Because the credit only goes to families who owe taxes, very low-income families benefit more from the exclusion (because they don’t owe payroll taxes on the excluded income). However, relatively few of these workers  have access to the exclusion because their employers are less likely to let them put aside pre-tax child care dollars.

I can receive benefits from both provisions. However, I must count different expenses for both s and when I calculate my child care credit, I must subtract the expenses already excluded from my income from my maximum allowable child care credit expenses. In my case, I exclude the maximum $5,000 of child care expenses from my taxable wages and claim the credit on $1,000 of expenses.

Sound confusing? It is. But it doesn’t have to be. Congress could set the same maximum allowable expenses for both benefits and limit parents to using only one. Congress could simplify more by eliminating the exclusion that provided $1.5 billion in tax benefits in FY2012 and keep the credit that provided $3.4 billion in tax benefits in FY2012. People currently using the exclusion would likely shift to the credit. .

On one hand, the exclusion makes sense if one considers child care a cost of earning income. But in practice, the credit is more popular, the plans allowing the exclusion are offered to less than one-third of employees, and eliminating the exclusion would simplify child care tax benefits for both parents and employee benefits’ offices. My own tax liability would increase.

Making expense limits uniform or getting rid of at least one provision It would be a good way to declutter the tax code, even if we can’t get broad tax reform.

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Education Tax Credits Rival Pell Grant Program in Size: Reforms Proposed

February 25th, 2013

Tax-based aid for higher education quadrupled between 2000 and 2010 and will continue to be a large part of the financial aid story – at least through 2017 when the American Opportunity Tax Credit is scheduled to expire. As part of a series of reports on federal financial aid, the Center for Law and Social Policy is urging a full review of who receives tax benefits for education, how those benefits compare with the better-known Pell grants, and whether Congress should reform higher education benefits. It proposes some important ideas for better targeting those subsidies to students who need them the most.

Since the enactment of the Hope and Lifetime Learning Credits in 1997, education tax benefits have grown from less than $1 billion  to over $34 billion in FY2012. Most of that growth comes from the AOTC, which replaced the Hope credit in 2009 (figure 1).

CLASP_Figure 1

In 2012, the $34.2 billion in tax-based aid represented nearly half of all non-loan federal assistance and rivaled the $35.6 billion in Pell grants. But unlike Pell grants that assist low-income students, tax subsidies often benefit students who are already likely to attend college. The Tax Policy Center estimates that in 2013, a quarter of the aid from the AOTC and half of the aid from the tuition and fees deduction will go to students in families with incomes between $100,000 and $200,000 (figure 2). According to the National Center for Education Statistics, in 2010 barely half of students from low-income families enrolled in two- or four-year colleges immediately after completing high school. In contrast, two-thirds of kids from middle-income families and 82 percent of kids from households making $100,000 or more went straight to college.

CLASP_Figure 2

In addition, under current rules, tax aid often comes too late to be useful for low-income students. Unlike Pell grants which provide benefits at enrollment, tax benefits typically come when a person files their tax return – something that can happen more than a year after a student needs to pay tuition.

Experts have long noted the need to reform tax-based aid, and the CLASP report offers up some solutions. CLASP suggests three ways to better target tax subsidies to those students most in need and least likely to attend college. They focus on increasing the value of the AOTC for low-income families, simplifying the tax-based aid system by eliminating credits and deductions for those likely to go to college absent the tax benefits, and piloting real-time payment of the AOTC.

The CLASP proposal would improve both the efficiency and effectiveness of the tax incentives. However, even with these reforms, tax benefits may never help poor students as well as direct assistance like Pell grants.

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The Immigration Debate: Another Reason We Ought to Separate Work and Family Credits

February 6th, 2013

In the realm of needless complexity, the work and family tax credits for low-income households rank near the top. The problem is especially challenging for immigrant families whose children’s legal status and residency determine eligibility for these credits.

A few weeks ago, the National Taxpayer Advocate in her Annual Report to Congress joined many others in calling for separating the work and family incentives in the tax code. This approach could make tax filing simpler and more efficient for low-income families.

Currently, the three largest child related provisions – the dependent exemption, the Child Tax Credit (CTC), and the Earned Income Tax Credit (EITC) – have three sets of rules governing eligibility. These inconsistencies in the law create confusion and prevent people from claiming deductions or credits for which they are eligible. Here are a few examples of how the rules differ:

  • Children who are U.S. citizens or nationals qualify for all three benefits, if they live in the United States.
  • Other children who reside in the U.S., Canada, or Mexico may be eligible for the dependency exemption.
  • The CTC requires that the child reside in the U.S.
  • The child must reside in the U.S. and have a Social Security number to be eligible for the EITC.
  • Depending on whom you ask, a child may or may not need a Social Security number to get the Additional Child Tax Credit (ACTC)—the refundable portion of the CTC. The Treasury Inspector General for Tax Administration claims that children must meet the stricter EITC qualifications to get the ACTC. But the IRS maintains this interpretation is incorrect and says children need only reside in the U.S. as they would for the non-refundable portion of the CTC. Legislation to change the criteria for the ACTC to explicitly require SSNs did not pass in the last Congress.

The National Taxpayer Advocate’s recommendation to separate the dependent exemption, CTC, and EITC into a worker credit and a family credit follows that of many others (and this is not the first time the National Taxpayer Advocate has made the recommendation). In 2011, I suggested we separate work and family credits to clarify and strengthen incentives in the tax code. Similarly, the Bipartisan Policy Center, the George W. Bush Tax Reform Panel, and advocates for low-wage workers without children living at home all support separate work and child incentives in the tax code. The worker credit would not be affected by the presence of children so whatever rules were adopted for the child credit (and the current ones applying to the dependent exemption make sense to me) would be the only rules parents would need to know. I support refundability of both credits for simplicity.

This is a good idea for a whole host of reasons. Immigration reform is only one. Many policy analysts agree on the solution, but Congress has yet to seriously consider the notion. Maybe the Taxpayer Advocate’s recent report and the newly energized immigration debate will encourage lawmakers to finally separate work and child credits. It is about time.

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Earned Income Tax Awareness Day

January 25th, 2013

As tax filing season approaches, the IRS is reminding  low-income families about the Earned Income Tax Credit (EITC). The EITC provides a wage subsidy for low- and moderate-income families and is an important income support for many.

 In 2012, a family with two children could receive an income boost of 40 cents for every dollar earned, until they reached the maximum credit of $5,236 (which happens once earnings reach $13,090). The credit begins to phase down when income exceeds $17,090 ($22,300 if married) and disappears entirely for families with two children when income hits $41,952 ($47,162 if married).  A smaller credit is available for smaller families and a larger credit is available for families with at least three children (see chart), but that larger credit is scheduled to expire after 2017.

 eitc

The Tax Policy Center estimates that almost 36 percent of all EITC benefits for 2012 will go to families in the lowest fifth of all incomes, and an additional 51 percent will go to families in the second income quintile. Almost no benefits flow to families in the top 40 percent of the income distribution. Because incomes at the bottom end of the distribution are highly volatile, EITC receipt status is often  temporary with families typically receiving the credit for only one or two years.

Research consistently finds that the EITC encourages work, especially among single moms. One study found that the EITC lifted over 6 million people out of poverty in 2009. The credit  also improves infant health. In 2012, 24 states and the District of Columbia have an EITC which supplements the federal EITC by as much as 45 percent.

It is not known how many people are eligible for the EITC and fail to claim it, though widely accepted estimates based on the 1990 tax year suggest between 16 and 20 percent of eligible families fail to claim the credit. Given the value of the credit, it is important to remind low-income families that it is a big reason why they should file a tax return. Kudos to the IRS for today’s  EITC Awareness Day, which serves as an important reminder.

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Toppling Over the Fiscal Cliff Could Cost Low-Income Families $1,000 in Reduced Tax Credits

December 19th, 2012

The 2001-10 tax cuts placed substantial emphasis on “pro-family” tax reform. The more prominent features favoring families with children included a doubling of the Child Tax Credit (CTC) to $1,000 per child and making it broadly refundable, increasing the Earned Income Tax Credit (EITC) for families with at least 3 children, increasing the point at which the EITC starts to phase out for married couples, increasing the credit rate of the Child and Dependent Care Tax Credit (CDCTC) for some families, and increasing the expenses eligible for a CDCTC for all families.

If left in place, in 2013 families with children would see over $43 billion in benefits from these provisions. But  absent Congressional action, these expanded benefits will disappear over the cliff. Should the EITC, CTC, and CDCTC revert to their pre-2001 form, the Tax Policy Center estimates nearly three-quarters of all families with children will see their taxes rise or net rebates decline by an average of almost $1,200, compared with what they would pay if the provisions were extended. Keep in mind  those changes would be in addition to  the broad tax hikes that would  affect nearly all working families such as  the expiration of the payroll tax cut  and any increase in marginal tax rates for all families with income above the tax entry thresholds.

Most low income and middle income families with children will see their taxes rise (almost 72 percent of families in the lowest 20 percent of incomes  and 89 percent of families in the second income quintile), in many cases by a substantial share of their income. Among families whose taxes go up, the average increase will exceed $1,400 for families in the lowest quintile and $1,600 for families in the second quintile (see chart). Most of this increase comes from the reduction in the CTC to pre-2001 levels. Although the child credit phases out and the EIC is unavailable at higher incomes, even families in the top quintile are not immune to tax increases stemming from these three provisions. Just over one-third of families with children in the highest income quintile will see their taxes rise in 2013 by an average of about $600.

If Congress and  President Obama can reach a deal (either before or after January 1), it’s likely to include an extension of the doubled CTC, higher income cut-offs for married couples claiming the EITC, and the increases to the CDCTC.  This would preserve these benefits for most families.  But  the fate of other provisions, such as the reduced refundability thresholds for the CTC and the increased EITC for families with at least 3 children, are much less clear. For instance, neither is included in the  House Republican Budget Plan. Those provisions deliver the lion’s share of benefits to those in the lowest income households.

Today, we still don’t know how the ongoing budget debate will end.  But the debate thus far leaves the most vulnerable families quite close to the edge.

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