While most of the tax drama these days is focused on the fate of 50+ mostly-business tax breaks that expired nearly a year ago, lawmakers are also debating two provisions that are enormously important to low- and moderate-income households-the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC). Temporary measures increasing those tax benefits for many of these households are set to expire after 2017. Congress should make them permanent now.
The pieces of the CTC and EITC in play are relatively inexpensive ways to promote work and family.The CTC provision is particularly well targeted to low-income households and EITC benefits flow to low- and middle-income households. Combined, the two refundable credits reduced the poverty rate from 19 percent to 16 percent in 2012 (using a supplemental poverty measure that includes taxes and transfers). That’s a big impact – and we should not chip away at it.
Both refundable credits were made more generous—but only temporarily—in the 2009 stimulus law. The 2013 fiscal cliff deal continued the expansion through 2017.
The Child Tax Credit (CTC) provides up to $1,000 per child under age 17. If households qualify for a credit that exceeds their tax bill, they can claim a refund of 15 cents for each dollar of earnings over $3,000. However, that $3,000 threshold is scheduled to jump to about $15,000 in 2018, taking the credit away from about 5 million of the lowest-income CTC beneficiaries.
When President Obama proposed making the $3,000 threshold permanent at the beginning of the year, Treasury estimated the cost at about $11 billion per year. About 65 percent of the benefit would go to the poorest 20 percent of families and another 30 percent to families in the next 20 percent. An analysis by researchers at Stanford finds that even relatively modest increases in income during a child’s early years can improve school performance.
The 2009 act also temporarily increased the EITC for families with at least three children. Previously families that large could get a credit of up to 40 percent of earnings, up to a maximum of $5,548. Now, their subsidy equals 45 percent of earnings, up to a $6,242 maximum. But after 2017, they’ll fall back to the old rules, losing as much as $700 a year.
Married couples will also lose some of today’s EITC benefits, raising marriage penalties for many low-income working families.
Research suggests that the EITC encourages people to work, boosts health by increasing income, and improves school outcomes. The EITC gets criticized for creating marriage penalties, but allowing the credit to phase out at higher income levels for married couples works to reduce those penalties.
Treasury estimates that keeping the more generous credit for larger families would cost about $2 billion annually while the marriage penalty relief would cost another $1.5 billion. These are small potatoes in budget terms: Making all the extenders permanent would add about $80 billion to the deficit each year.
The annual spectacle of Congress temporarily extending tax provisions in the face of a last-minute deadline is a horrible practice. Lawmakers would be better served to weed out provisions that are either too costly or ineffective and make permanent those that have a proven track record. By those standards, extending the more generous CTC and EITC provisions looks like a winner.
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