Happy Tax Day! While that may be an oxymoron for most, what better day than today to ponder the future of our tax code? (You don’t have to agree, just keep reading.)
Most Americans rightly associate federal tax law with the government’s need to raise revenue to pay for government services. However, it is also true that federal tax law directs resources to certain taxpayers as deemed important by Congress. Income deductions are made by taxpayers who own homes, who make charitable contributions, who buy energy-efficient appliances… and the list goes on. For families with children specifically, there are several provisions that provide significant tax relief and, for some, additional cash support. Two of these key provisions, the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC), are refundable tax credits (and strongly linked to poverty reduction), whereby families whose tax liability has already been reduced to zero are “refunded” the remaining portion of the credit.
The future of these credits was temporarily assured in the December 2010 tax compromise, which extended the credits at their current rates until 2012. But a potential threat to these key provisions has risen again with the release of Chairman Ryan’s budget plan, The Path to Prosperity, and the House of Representatives’ fiscal year 2012 budget resolution.
At first glance, the refundable credits do not appear to have been singled out for reduction, given that much of the proposal focuses on broad spending caps and vague tax changes (a smart move politically to avoid the immediate ire of constituents who support specific programs). However, a closer look at where the programs spending cuts are targeted reveals a disproportionate hit (two-thirds of all the spending cuts) to programs that serve low-income families. And it is within the proposed spending cuts that the biggest threat to child-friendly tax provisions is located.
Chairman Ryan’s proposed spending cuts include reductions to the income security portion of the budget (also known as budget function 600) – a category that includes low-income housing assistance, nutrition assistance, and spending for the refundable portions of the EITC, among other things. Therefore, a sharp reduction in income security spending would present a serious threat to the sustainability of the refundable tax provisions. The potential threat is striking given the proven success of these tax provisions: the EITC lifted 3.3 million children out of poverty in 2009 alone and cutting back the CTC refundability levels to levels prior to the 2001/2003 changes would result in over 18 million children having their credit eliminated or reduced.
But what is even more striking is that these drastic spending cuts, ostensibly proposed in the name of deficit reduction, would not even make a dent in the deficit. Why? Because Chairman Ryan’s proposal couples $4.3 trillion in spending cuts with high-end tax changes that would result in $4.2 trillion in lost government revenue. The Center for Budget and Policy Priorities has found that as a result, only about $155 billion would be put towards deficit reduction over the next 10 years. This is a decidedly meager amount given that it could come at the price of the ability of the EITC and CTC, not to mention numerous other programs, to effectively prevent or alleviate poverty among low-income families with children.
And I daresay $155 billion over 10 years in deficit reduction pales in comparison to $5 trillion over 10 years in costs – which, at $500 billion per year, is the estimated cost of child poverty in terms of economic loss to the U.S. from the combined effects of low education and earning potential, poor health outcomes, and incarceration rates of children who grow up poor.
We may not have much of a choice in paying taxes (as Tax Day reminds us each year), but we do have a choice in how our tax money is spent. Our federal budget reflects our nation’s priorities. America, the choice is ours.
For more information, check out the new First Focus fact sheet: