The Tax Policy Center (TPC) has estimated that going over the fiscal cliff will raise taxes on average by about $3,500 per household in tax year 2013, compared with extension of 2011 tax law. But tens of millions of Americans have a much more immediate problem. They’ll face a huge tax increase when they file their 2012 tax returns early next year. And many of them don’t even know it.
The trouble: A number of major tax benefits expired earlier this year, including the deductibility of state and local sales taxes as well as many business incentives. But by far the biggest problem comes from the expiration of the temporary increase in exemption levels under the alternative minimum tax (the “AMT patch”).
In 2011, the exempt income levels under the AMT were $48,450 for single taxpayers and $74,450 for married taxpayers. If Congress fails to act, these exemptions will decline to $33,750 for singles and $45,000 for couples. As a result, 28 million more taxpayers will be hit by the AMT, and many of the 4 million who would owe AMT even with a patch will owe even more.
Overall, AMT liability will rise from $34 billion to $120 billion. Of that $86 billion increase, new AMT taxpayers will owe $64 billion—an average of about $2,250–while those currently on the tax will pay another $22 billion—an increase of about $5,500 each over the nearly $8,500 average they would pay with a patch. ( Continue… )
If income tax deductions are capped or limited—an idea that often comes up in the debate over both the fiscal cliff and long-run tax reform—the biggest losers could well be charities. At a time when the government role in providing a safety net may shrink, many of these groups may become increasingly important. Yet deduction limits could discourage contributions to charities, in some cases substantially.
The challenge: Raise revenue without discouraging giving.
That’s not easy. Take, for example, the kind of dollar cap on deductions proposed by Mitt Romney and others.
Most deductible expenses that would be subject to a cap or limit are non-discretionary. For instance, we must pay state and local taxes and many of us must continue to pay mortgage interest. But charitable giving is entirely discretionary. Thus, a taxpayer trying to squeeze all of her deductions into a fixed dollar cap is more likely to reduce her charitable giving– though by how much is a matter of debate.
And that’s where the story gets interesting. And where it suggests there may be ways to increase federal revenues without slashing those gifts. ( Continue… )
If a tax cut is scheduled to expire, but the focus of the debate is elsewhere, will people notice? Will the average family be surprised when their taxes rise by $1,000 or more next year, even if most of the rest of the 2001-2003 tax cuts are extended for all but the wealthiest Americans? That’s precisely what could happen to a family earning $50,000 when the current law reducing payroll taxes by 2 percent expires at the end of the year. This same thing was scheduled to happen at the end of 2011, but politicians assured us then this was a bad idea. This year, they don’t appear as concerned.
According to my colleagues at the Tax Policy Center, the expiration of the payroll tax cut would increase taxes by $115 billion in 2013. This provision affects more households than any other, yet President Obama and others have been strangely silent – arguing instead about the fate of the 2001-2003 tax cuts.
As I noted last month on TaxVox, focusing only on the 2001-2003 tax cuts ignores important changes to the Child Tax Credit for very low-income families that will expire at the end of 2012. But the payroll tax cut affects nearly every worker. No doubt, the 2010 version was expensive and poorly targeted. But it had its roots in a better-designed predecessor – the Making Work Pay (MWP) tax credit– that might offer a palatable step down from current policy, without sending those who remain vulnerable over the cliff.
To refresh your memory, in 2009 and 2010, the MWP provided a credit of 6.2 percent of earnings, up to $400 for singles ($800 for married couples). MWP started to phase out once earnings reached $75,000 ($150,000 for couples), with no credit available once earnings reached $95,000 ($190,000 for couples). ( Continue… )
Congress and President Obama can’t agree on much, but they agree on this: Congress must preserve what they persist in calling middle-class tax cuts. As most TaxVox readers know by now, the red lines in this debate are for singles making about $200,000 or less and couples filing jointly making $250,000 or less.
By this standard (invented by Obama but embraced more or less by Democrats and Republicans) if you make more than these limits, you are rich. Make less, and you are just a regular working stiff trying to hang on ’til your next paycheck.
Except this is fantasy.
My Tax Policy Center colleague Georgia Ivsin ran the numbers, and this is what she found: In 2013, 99.3 percent of single filers will make $200,000 or less—just 0.7 percent will make more. Also next year, 96.4 percent of joint filers will make $250,000 or less—fewer than 4 percent will make more. Overall, 2 percent of households are rich. The other 98 percent are middle-class (or poor) and deserve to have their tax cuts protected. ( Continue… )
As Congress and President Obama continue to spar over how to avoid the looming fiscal cliff, most public attention has been focused on what tumbling over the edge would mean for the federal budget and the national economy. But the tremendous uncertainty over the threat of tax increases and cuts in federal spending could cause big problems for state budgets as well.
Two new studies, one by The Pew Center on the States and another by the Tax Policy Center, show what falling over the cliff would mean for states. There is a sliver of good news: If all of the last decade’s tax cuts are allowed to expire, states might see a short-term boost in revenues. They might, that is, if the economy isn’t thrown back into recession.
The Pew report, The Impact of the Fiscal Cliff on the States, takes a comprehensive look at how the states will be affected by gridlock. State revenue is dependent on the feds, with $1 in every $3 coming from federal grants in 2010. While Medicaid, one big source of federal dollars, is exempt from the automatic across-the-board spending reduction due to take effect in January, eighteen percent of federal grants to states will be subject to those cuts in FY 2013.
On the tax side, the picture is murkier. Because many states link their tax codes to the federal law, if all of the tax cuts expire and revert to pre-2001 law, states could benefit when some elements are restored. For instance, the old limitation on itemized deductions for high-income taxpayers would increase taxable income and some states could enjoy new income tax revenue.
For example, take the estate tax. I looked at what would happen to that levy in a new TPC paper called Back from the Dead: State Estate Taxes after the Fiscal Cliff.
In 2001, in what Congress hoped would be the first steps on the road to full repeal of the estate tax, lawmakers temporarily phased out a credit for state estate and inheritance taxes, In 2005, the credit was replaced with a less-generous deduction. Some states responded to these changes by simply repealing their estate taxes. Others decoupled from the federal law, either establishing a stand-alone tax or explicitly linking their taxes to the old 2001 law. But many states did nothing, which left their estate tax tied to the repealed federal credit.
Now, if Congress goes over the cliff and the estate tax reverts to the 2001 law, 30 states will once again benefit from the resurrected credit, and their revenues will rise by about $3 billion.
That’s potentially good news, of course, for states still struggling to recover from the recession. But the promise of higher estate tax revenues could easily be swamped by those across-the-board cuts in federal spending or, worse, another recession. On the other hand, if Congress kicks the proverbial can down the road and delays efforts to address its fiscal challenges until next year, states (like businesses) must try to budget in a period of ongoing uncertainty. Both of these new reports highlight the links between states and the federal government and underline the need for clarity and permanence in federal fiscal policy.
You can tell when Congress and the President have tough choices to make. That’s when they trot out the euphemisms—all aimed at making what they are about to do sound as benign as possible. Case in point: the impending fiscal cliff.
Here are just a few:
Closing tax loopholes: This is a favorite of both parties, but these days it is being used mostly by Republicans who are looking for an alternative to raising tax rates on high-income households. The phrase appears regularly in Boehner’s presentations. ( Continue… )
Based on their public words, at least, the parties remain far apart. Yet there are signs that both sides are looking for a deal. Boehner says revenues are on the table as part of a long-term budget agreement, though higher taxrates for high-income households are not. Obama says he willing to compromise on nearly all elements of his own deficit reduction plan, with one exception. He will “not accept” a package that is “not balanced.” And balanced, to the president, means tax increases on the wealthy as well as spending cuts. But note: Tax increases come in many forms, not just higher rates.
First, though, there is the matter of the cliff. Obama has called on House Republicans to pass a bill approved by the Senate last July that would extend for one year most of the 2001-2009 tax cuts, except for high-income households. Waving his pen in a televised speech this afternoon, Obama promised he’d sign that measure right away. ( Continue… )
Barack Obama has pulled off the easy part. He got re-elected. Now, he faces a second term full of painful choices.
You could see it in his campaign, which focused more on Mitt Romney’s flaws than on what the president would do in the next four years. Much of this, I suspect, was the result of the terrible budget constraints under which he operates. In short: Not even a Democrat can do very much new when faced with a trillion dollar deficit.
That and the reality that Republicans still control the House and can block most anything in the Senate, is why Obama is likely to spend most of the next year or two struggling with budget issues even as he consolidates health reform. Bold new initiatives will be off the table until the deficit is addressed. ( Continue… )
Rather than framing what seem to be profoundly different views of government, the candidates chose to double-down on what Bill Clinton memorably called the politics of personal destruction.
Obama’s overarching message: Vote for me because Romney is the reincarnation of Gordon Gekko, a greedy buy-out king who cares only about padding the pockets of the country club set. Romney’s own campaign boiled down to this: Vote for me because the economy is a mess and it is all Obama’s fault. ( Continue… )
With the presidential campaign finally reaching a soggy finish, TaxVox is taking a final pre-election look at the tax policies of Barack Obama and Mitt Romney. Last week, we described Obama’s tax policy platform. Here is a rundown of Mitt Romney’s tax agenda.
The elevator speech: Romney favors multiple tax cuts for individuals and would reduce corporate income tax rates. By themselves, his specified tax cuts would reduce federal revenues by trillions of dollars over the next decade. However, Romney says he would avoid adding to the deficit through faster economic growth and unspecified reductions in current tax preferences. Romney would not use new taxes to help lower the deficit. ( Continue… )