Earned Income Tax Credit Shorts Childless Workers

August 1, 2013

Seems we’ve got a comprehensive tax reform effort underway in both the House and the Senate. It’s a genuine effort and, to some extent, bipartisan.

Nothing may come of it — in this Congress at least. But we could have a better tax code, even without a total overhaul.

Everybody agrees that the tax code is way too complicated. But, as I’ve written before, there’s a big divide on what should be done with revenues gained by closing loopholes, eliminating exclusions and the like.

And every single tax break got into the code because some interested parties wanted it there. Probably still do, as the Washington Post‘s report on the lobbying blitz indicates.

That said, there just might be an opportunity to make some changes that would help grow the economy, make the tax code fairer and promote other important policy objectives — the three criteria for “special provisions” laid out by the Senate Finance Committee Chairman and top-ranking Republican member.

One good candidate is the refundable Earned Income Tax Credit. This is a tax break that’s already got a lot going for it.

The EITC puts — or at least, leaves — more money in the pockets of low and moderate-income families. This is more money they can spend. And those who get refunds generally do. Some boost to the economy here.

The EITC is also a powerful anti-poverty measure. It lifted about 6.1 million people out of poverty in 2011.

Whether it also reduces poverty by encouraging work is a more complex issue. It certainly seems to have done so among mothers in the Temporary Assistance for Needy Families program, who got a bonus of sorts by moving from welfare to work.

Yet the EITC could use some retooling.

Much has been written about the marriage penalty built into the rules, i.e., the fact that some single parents wind up with greater tax burdens when they marry.

We see much less discussion of another sort of penalty that reforms could address — specifically, the disadvantageous treatment of childless workers.

A new report from the Center on Budget and Policy Priorities provides details.

Briefly, childless workers under 25 aren’t eligible for the EITC at all — even if they’re wholly dependent on what they earn. Perhaps also supporting someone else as well.

I mention this in part because “childless,” for the purposes of the EITC, means no child living with you for more than half the year. So parents paying child support will often be ineligible.

For childless workers so-defined, the full credit is very small — 7.65% of earned income. This is less than a fourth of the rate for workers with just one child.

The income basis for the credit hits the maximum at $6,370 and stays there only until the worker earns $7,970. Within this narrow window, the credit itself is a piddling $497, as compared to $3,250 for a worker with one child.

The credit then begins to phase out. For childless workers who aren’t filing jointly, there’s no credit left when earnings hit $14,340, i.e., when they’re earning less than a full-time minimum wage.

The so-called break even, i.e., zero credit, point is $37,870 for single filers with a child and even higher for married couples filing jointly.

The CBPP analysis assumes that a full-time minimum wage worker earns $14,500 a year.* Because this is higher than the break even point, the worker will have a federal tax burden of at least $1,109.

It’s more than double that if you count the employer’s share of payroll taxes, as CBPP apparently prefers.

Counting that share, a worker with wages at the projected 2013 official poverty level will owe $1,186. Thus, says CBPP, “childless workers are the lone group that the federal tax system taxes into, or deeper into, poverty.”

It cites diverse experts to argue for the virtues of a less stingy EITC for childless workers.

We’d perhaps see more young men in the formal labor market because low-wage work would be more rewarding for them. More older men with less than a high school education there too — and for the same reason.

This, says Ron Haskins at the Brookings Institution, would make them better marriage prospects — obviously assuming that they’re not just in the labor market, but gainfully employed.

We’d then have fewer of those single-mother households that many find so worrisome, he suggests. Less crime and other anti-social behaviors too. Healthier, higher-achieving kids, CBPP adds.

All this seems to me a lot to claim, even tentatively, for some fairly modest changes in a federal tax credit like the EITC reforms in the pending House and Senate bills that CBPP endorses.

And I don’t think we need to go so far.

The proposed drop in the EITC eligibility age for childless workers, plus the quicker phase-in and higher maximum credit for them would clearly make the tax code fairer and promote other important policy objectives.

CBPP estimates that these changes would lift more than 300,000 childless workers out of poverty and reduce the severity of poverty for 3.8 million more.

That’s good enough for me.

* This is $580 lower than the commonly-cited figure for what a full-time, year round worker at the federal minimum wage level earns. CBPP clearly assumes fewer hours, but I don’t know why.


Two Ideas for Harnessing Tax Reform to Affordable Housing Expansion

December 10, 2012

The Presidential campaigns primed us (again) for comprehensive tax reform. And now it’s reportedly on the table as negotiators try to forge a “grand bargain” that will pull us back from the so-called fiscal cliff.

Some key differences between Republicans and Democrats, as you undoubtedly know. But cross-party agreement on broadening the base — an oblique term for getting rid of tax breaks.

As I’ve mentioned before, the second largest tax break for individual filers is the home mortgage interest deduction. It cost the federal government an estimated $140.5 billion last year alone.

Chances Congress will get rid of this homeownership preference altogether are somewhere close to zero, I think.

But two organizations have ideas for changing it to address the affordable housing needs of low and moderate-income people.

Creating a Revenue Stream for the National Housing Trust Fund

The National Low-Income Housing Coalition would convert the mortgage interest deduction to a tax credit — thus making it available to all homeowners instead of only those who itemize.

The Coalition would also drop the cap on the mortgage value subject to the benefit from $1 million to $500,000. Same for the interest paid on home equity loans.

These changes, it says, would save the federal government at least $20 billion a year — maybe as much as $40 billion.

NLIHC wants at least some of the savings — actually additional revenues collected — to provide a funding stream for the National Housing Trust Fund.

Brief summary of my earlier post on why that’s needed.

Congress created the Trust Fund in 2008 to provide federal financial support for affordable housing construction and preservation — mainly rental housing that extremely low-income households can afford, i.e., those with incomes no greater than 30% of the median for their area.

To finance the Fund, Congress allocated a percent of the value of new business generated by Fannie Mae and Freddie Mac.

Then the housing bubble burst. The agency that regulates Fannie and Freddie effectively declared itself their legal guardian because the risky loans they’d made put them at risk of insolvency.

And it told them to indefinitely suspend what, in ordinary times, they would have contributed to the Trust Fund.

So the Fund has remained one of those good ideas on paper only.

The NLIHC proposal is the latest of several to put some money into it — and so far as I know, the only one that would give it an ongoing revenue stream.

Creating a Renters’ Credit

The Center on Budget and Policy Priorities also begins with a revenue-raising conversion of the mortgage interest deduction to a tax credit.

In its proposal, some share of the savings would go to states in the form of tax credits they would then distribute to reduce rental costs for low-income families — mainly those classified as extremely low-income.

The credits would work somewhat like housing vouchers, though the way they’d compensate rental housing owners is different.

They’d generally ensure that beneficiaries paid no more than 30% of their income for rent — the usual standard for affordability. And state agencies administering the credits could do this in several different ways.

They could give the credits — or some of the credits — directly to renters, who’d then find suitable apartments (and willing owners).

The owners would then claim the credits on their tax returns, based on the difference between what the tenants paid and the units’ market rates.

Or they could pass the credits through to their mortgage holders, who’d claim the credits and lower mortgage payments accordingly. This, of course, only if the mortgage holders agree to such an arrangement.

States could also allocate some credits to specific affordable housing projects. In this case also, the owners would claim the credits or pass them through.

Finally, states could allocate credits directly to financial institutions, with the understanding that they’d reduce mortgage payments for owners who agree to rent at affordable rates.

If, as the Center suggests, the total cost of the credits were capped at $5 billion a year, about 1.2 million more very low-income renter households would have affordable places to live.

And the number who are now paying at least half their income for rent would be cut in half. An estimated 700,000 low-income families would no longer have to choose between a roof over their heads and other basic needs.

Like the NLIHC proposal, the Center’s is an innovative approach to our nationwide affordable housing problem — and the disproportionate financial assistance our system now provides to homeowners in the top fifth of the income scale.

As Will Fischer at the Center notes, Congress doesn’t have to choose one or the other. The two could work nicely together.

And with a proper cap on the mortgage interest tax credit, there’d still be money left over to help reduce the deficit that’s apparently top-of-mind for our federal policymakers.


Medicaid Block Grant Not The Only Threat To Health Care For Low-Income People

July 7, 2011

Economist Jared Bernstein reminds us that cost shifting is not cost saving — this in connection with Congressman Paul Ryan’s plan to convert Medicare to a voucher system.

I wonder whether the President and his White House advisors have their minds around this obvious fact — or frankly, how much they care.

What’s got me wondering is a new brief from the Center on Budget and Policy Priorities that takes us through the complexities of a proposal for Medicaid savings that the White House has offered up as part of its deficit reduction plan.

It’s called a blended rate because what it would do is create a single rate for the federal match that each state gets to help cover the costs of insuring low-income adults and children under Medicaid and CHIP (the Children’s Health Insurance Program).

Basically, the federal government now pays a fixed percentage of states’ regular Medicaid costs and a higher percentage for their costs of insuring children enrolled in CHIP.

Under the Affordable Care Act, it will initially pick up the full costs of ensuring people who become newly eligible in 2014, when the minimum federal income cut-off rises in 2014 and childless adults gain a right to coverage. It will then cover somewhat lower percentages, bottoming out at 90% in 2020.

States that expanded Medicaid coverage to childless adults before the ACA was passed will still get a match for them, even though they’re not newly eligible. This match phases in, reaching 100% in 2020.

In short, we’ve got a mix of matching rates — some higher than others. The blended rate would replace them with a single match. Which may sound okay until we learn that states would get significantly less than they would under current law.

Back in April, the White House issued its overall framework for deficit reduction. Savings from Medicaid totaled $100 billion over the first 10 years. CBPP President Robert Greenstein says that as much as $65 billion would have to come from the blended rate.

States would apparently realize some modest savings in administrative costs. But they’d be stuck with the rest of the loss from the replacement of their current and prospective matching rates.

This doesn’t mean they’d make up the difference out of their own revenues. Anyone who wonders what they’d do need only look at what they’ve already done to reduce their Medicaid costs.

They’d cut payments to health care providers, though current reimbursement rates are already so low that many physicians, particularly specialists won’t treat Medicaid participants.

They’d scale back benefits they don’t have to provide to get federal funds, e.g., dental care, eyeglasses and hearing aids, home health services, organ transplants (!).

The President apparently opposes the House Republicans’ Medicaid block grant proposal. “Not on the table” in the deficit reduction talks, says his top Medicare-Medicaid administrator.

But the impacts of the blended rate could be much the same, though probably less drastic.

The federal government would spend less, but not by reducing the costs of providing the health care that low-income people need. It would save by dumping a bigger portion of the rising costs on the states.

The states would then try to minimize the shifted costs. They too would probably rely more on cuts than on genuine cost-reduction strategies, e.g., better quality control, coordination and preventive care.

Ultimately low-income people, including children, would pay — with their health, in some cases their lives — to reduce the federal deficit.

This, I trust, is not what the President had in mind when he embraced “shared responsibility and shared sacrifice.”

NOTE: This posting and my recent cross-posting from Laura’s Life are part of  a Medicaid blog-a-thon organized by MomsRising — a virtual grassroots community that acts on issues that affect mothers and families.

UPDATE: MomsRising now has an online listing of all the blog-a-thon postings, with links. You can find it here. More member Medicaid stories are available in a story map.


Widely-Reported Flat Poverty Rate May Be Deceptive

February 17, 2011

A New York Times editorial cites one of the Census Bureau’s alternative poverty estimates as evidence that “the safety net, fortified by stimulus” kept the number of people in poverty from rising in 2009.

For this, it relies on an analysis by the Center on Budget and Policy Priorities — the same one I used to arrive at a similar, though more cautious conclusion.

“Sorry,” says Shawn Fremstad, Director of the Inclusive and Sustainable Economy Initiative at the Center for Economic and Policy Research. “Poverty really did increase in 2009.”

True, the expanded food stamp benefits and tax credits that were part of the economic recovery act may have kept poverty from increasing as much as it would have otherwise. But they didn’t offset the impacts of massive job losses and related losses of health insurance.

According to Fremstad, the alternative poverty rate didn’t go up in part because the alternative poverty threshold that produced the no-increase result went down. This, he says, was also true for the threshold used to produce the official poverty rate, but the decline was smaller — slightly over a third of a percent, as compared to 1%.

The gap reflects differences in the data sets Census uses to establish the thresholds.

As I’ve written before, the official threshold is set at three times the early 1960’s cost of the U.S. Department of Agriculture’s Economy Food Plan, adjusted for inflation. The alternative threshold at issue is instead tied to the amount that moderate-income households spend on housing, utilities and food.

When the housing market tanks, as it certainly has, the alternative threshold won’t keep up with the overall inflation rate — even actually decline, as it did in 2009. This could boost some people above the cut-off, though they were as income-poor as those who fell below it were in 2008.

But if their housing costs were actually lower, wouldn’t their resources come closer to covering their basic needs? For the purposes of the poverty measure, that depends on what counts as a basic need.

Which brings us to Fremstad’s second point. The no-increase alternative measure doesn’t fully account for medical costs. Instead, it adjusts only for out-of-pocket medical expenditures, e.g., deductibles and co-pays.

Sounds reasonable enough until you consider what can happen when people lose health insurance, as 4.4 million did in 2009.

Some will be well enough off to pay for essential health care costs, notwithstanding the bigger drain on their resources.They’ll seem to be poorer because the measure picks up their costs.  Others will forgo care. They’ll seem to be relatively better off, though they could well be poorer than those who continue to pay for care.

Fremstad says the Census Bureau actually did publish some alternative poverty measures that include medical expenses, rather than just out-of-pockets. These produced higher thresholds than in 2008 and somewhere between 1.1 million and 1.8 million more people in poverty.

Still less than the 3.74 million in the official estimate, but enough to suggest that the poverty rate didn’t stay flat — if the test is whether people could afford essential expenditures.

Lastly, Fremstad notes that the Census Bureau counted the full value of refundable tax credits as 2009 income, even though “nearly all” the families who gained from the expanded Earned Income Tax Credit and Child Tax Credit got their benefits as a lump sum in 2010, i.e., after they filed their 2009 tax returns.

So they were no less poor in 2009 than they would have been with no refunds at all.

None of this is to say that CBPP erred in finding that major safety net programs, including the expansions effected by the recovery act, kept some millions of people out of poverty. Nor that the Times is wrong in saying that Congress should “take a good look at those numbers … before it commits to any more slashing and burning.”

But it does, I think, show how urgently we need a single, reliable poverty measure to tell us how many poor people there are — and who they are — at any given time and over time.

As the Times editorial indicates, this is not just of interest to economists and others of a wonkish bent. It’s got real world consequences for policymaking and for a still-unknown number of poor people affected by the policies made.


Deficit Double-Talk

February 1, 2011

About 10 years ago, arch-conservative Grover Norquist revealed the impetus behind the Bush tax cuts. “My goal,” he said, “is to cut government … down to the size where we can drag it into the bathroom and drown it in the bathtub.

I cite this fine display of candor because it’s notably absent from what Congressional Republicans are saying now. But it’s nonetheless applicable to the course they claim reflects the will of the American voters

First, they adamantly insist that all the Bush tax cuts must be extended. Also that even more wealth must be exempted from the estate tax. These measures, of course, increase the deficit — though the “middle class” tax cut extensions the President also wanted made up the largest part of the impact.

Then the Republican-controlled House adopts new rules that will exempt further tax cuts from budget discipline. At the same time, it subjects all spending increases to new constraints, requiring that they be offset only by spending cuts.

A good way to “cut the government down to size,” but no way to reduce the deficit.

The House Republican leadership also reaffirms its pledge to roll back federal spending to the pre-Recovery Act level. At this point, that  would seem to entail $60 billion in immediate cuts, plus an additional $40 billion beginning in October — assuming Congress passes a Fiscal Year 2012 budget on time.

Not good enough, says the Republican Study Committee, representing a majority of Republican House members. We want discretionary spending, i.e., the spending Congress annually approves, rolled back to the 2006 level and frozen there until 2021. Except for Defense — the single biggest chunk of discretionary spending.

The Center on Budget and Policy Priorities reports that the RSC plan would ultimately cut non-defense appropriations 42% below what the Congressional Budget Office says would be needed to maintain the Fiscal Year 2010 funding level, with adjustments for inflation.

No way this much could be cut without decimating key government programs — especially because it’s a sure bet that not all programs would get hit with that 42%.

Such drastic spending cuts aren’t needed to address the long-term deficit. Nor would they do so. As this nifty interactive pie chart shows, all non-defense discretionary spending accounted for just 15% of the Fiscal Year 2010 budget.

Nearly 60% was mandatory spending, i.e., spending that Congress doesn’t vote on each year. And nearly 70% of that was for Social Security, Medicare and Medicaid.

Enter Congressman Paul Ryan’s Roadmap for America’s Future. As the Economic Policy Institute explains, the Roadmap aims to “dismantle Medicare and Medicaid,” replacing them with vouchers that would increasingly fall short of health care costs.

Also cut Social Security benefits while partially privatizing the system. This, says EPI, would mainly benefit wealthier Americans, who would also gain from drastic shifts in the tax burden — so drastic that millionaires would pay taxes at lower rates than middle-class families.

Death knell for what’s historically been our progressive federal income tax system.

These are not deficit-driven conservative proposals. They’re as revolutionary as the Tea Party’s name. Because they would radically define what we the people — well, most of us people — have come to understand as the federal government’s responsibility “to promote the general Welfare.”

The depth of the cuts, combined with the re-engineering of social insurance programs would shift that responsibility to state and local governments. But they have neither the resources nor the budgetary flexibility to assume it — even if they want to. And current evidence suggests some don’t.

Bottom line is that the House Republican majority, seconded by Republican leaders in the Senate, would roll up the safety net and roll back the clock to the nineteenth century, when poverty, education, public health and the like just weren’t any of the federal government’s business.


New Angles On How Many Poor People There Are In The U.S.

January 20, 2011

I remarked some time ago that we didn’t know how many poor people there were in the U.S. We still don’t because the Census Bureau is still working on a measure that would take account of many factors the official measure ignores.

As part of the process, it’s been releasing annual alternative poverty estimates based on recommendations the National Academy of Sciences made back in 1995. The latest set came out in early January — three multi-columned spreadsheets, each with many, many figures.

I couldn’t make heads or tails of them, though I could see that the poverty rate for 2009 might be as low as 12.8% or as high as 17.1%, depending on which NAS recommendations were applied. So  there could have been as relatively few as 39 million people in poverty or as many as 52.5 million.

Fortunately, a new brief from the Economic Policy Institute gives us non-economist the big picture — though not an answer to how many poor people there are.

As EPI explains, the alternative estimates make different kinds of adjustments in the poverty threshold, i.e., the dollar cut-off for counting people as poor, and/or in what’s counted as income.

The official threshold is three times the food budget at the time the official poverty measure was developed, with adjustments for inflation based on the Consumer Price Index for All Urban Consumers.

The Census Bureau produces alternative thresholds by adjusting for out-of-pocket medical expenses, cost-of-living differences in different parts of the country and a different measure of consumer price inflation — the Consumer Expenditure Survey.

Looking only at the alternative thresholds, the share of the population in poverty seems higher than the official 14.3% rate the Bureau reported in September. Hence a high-end estimate of poor people so much greater than the official 43.6 million.

The income adjustments tell a different story.

The official measure counts only cash income, i.e., wages and cash benefits like Social Security and unemployment insurance.

The alternative measures take account of non-cash benefits like food stamps, housing vouchers and Medicaid and of tax credits like the Earned Income Tax Credit and the Child Tax Credit.

With these included, the poverty rate is lower than the official estimate, even when taxes are factored in. As with the thresholds, how much depends on which adjustments are made.

The Center on Budget and Policy Priorities also crunched the numbers. It came to basically the same conclusions about the income adjustments, though with a more political slant aimed at justifying the temporary new and expanded tax credits and benefits in the economic recovery act.

According to CBPP, the recovery act improvements kept 4.5 million people out of poverty. An additional 11 million were lifted above the poverty threshold by the regular versions of five of the programs — the Earned Income and Child Tax Credits, unemployment insurance and food stamps.

And, as EPI also shows, the biggest anti-poverty impact came, as it has in the past, from Social Security retirement benefits. CBPP says these kept more than 20 million people out of poverty. Looking at its table on program impacts as a whole, the number seems more like 21.4 million.

In short, the major federal anti-poverty programs are doing what they’re supposed to do. Without them, a vastly larger number of people would have been poor enough to be counted as such.

I don’t suppose I need add that these programs are at high risk — if not of annihilation, then of significant retrenchments.


Republican House Leadership Aims For More Tax Cuts, Not Deficit Reduction

January 4, 2011

Just before Christmas, the House Republican leadership announced new procedural rules to govern tax and spending legislation when it takes control. They confirmed big time two of the lessons Washington Post blogger Ezra Klein found in last month’s tax cut deal.

  • No one really cares about the deficit.
  • The Republicans really, really, really care about tax cuts for rich people.

As the Center on Budget and Policy Priorities explains, the new House procedural rules pave the way for more tax cuts — and possibly big increases in the deficit.

I say “possibly,” as CBPP doesn’t, because the Republicans may well use the potential deficit increases to justify even more drastic spending cuts than they’ve already promised.

These spending cuts would almost certainly focus on programs that benefit moderate and low-income people because large spending areas, e.g., defense and security, would probably be exempt, as they are in the spending pledge for next fiscal year.

One rule embodies something Senate Minority Leader Mitch McConnell said awhile ago. The deficit “isn’t because we are taxing too little…. [I]t’s because we’re spending too much.”

Incoming House Majority Leader John Boehner obviously agrees, since instead of the existing “pay as you go rule,” the House will operate under a “cut as you go rule.”

Under the so-called PAYGO rule, any spending increase had to be offset by a spending cut, a revenue increase or a combination of both. Henceforward, spending increases will have to be offset only by spending reductions. And tax cuts will require no offset at all.

This rule will inevitably erode a wide range of federal programs their costs rise, even if they’re not expanded.

Consider Section 8 housing choice vouchers, for example. They cover rental costs over 30% of the voucher holders’ incomes. Rents go up. So vouchers cost the federal government more. This is why President Obama’s proposed budgets would have provided just about enough to renew all existing vouchers, even though the proposed funding levels were higher.

Another new rule changes the reconciliation process. Basically, this process creates a bundle of budget-related measures, which are then subject to a single up-or-down vote, with limited opportunities for amendment.

In the good old days, before the Bush administration and the Republican Congressional majority decided to push through their tax cuts, the process could be used only for legislation that reduced the deficit.

Going forward, the House can use the reconciliation process to fast-track deficit-increasing packages, so long as they’re tax cuts. The process can’t be used for legislation that results in even a minimal net spending increase.

At this point, the reconciliation rule may not make much difference. The Senate still has a deficit reduction-only rule. And the process is more important there because reconciliation packages can’t be filibustered. But the new rule still shows which way the wind is blowing.

Lest there be any doubt, another new rule authorizes the Chairman of the Budget Committee to ignore rules for enforcing budget cost limits when dealing with measures to extend or make permanent all the Bush-era tax cuts — including, of course, the top tax brackets and the egregious estate tax giveaway.

Budget discipline could also be waived for a hefty new tax cut for small businesses — or rather for individuals who file tax forms indicating business income. Howard Gleckman at the Tax Policy Center explains the difference.

If past is prologue, the tax break in the offing would benefit a lot of high-earning filers we generally don’t think of as small businesses, e.g., doctors, lawyers, partners in investment firms, movie stars, major league athletes and owners of large local retail chains.

New York Times columnist/blogger Paul Krugman says the new House rules show that Republicans who claim to be deficit hawks are “frauds” — that their “self-styled … deficit hawkery is just a stick to beat down social programs.”

Strong words, but hard to disagree, I think.


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