Sept. 29, 2004 – Both houses of Congress last week voted overwhelmingly to extend Republican-initiated tax cuts set to expire this year. Though the new legislation was billed as a "middle class" tax cut, independent researchers say the cuts will largely benefit people in the highest tax brackets.
After failing to include provisions that would extend some of the tax cuts to low-income families and make up for lost revenues by closing corporate tax loopholes, most Democratic lawmakers caved to election-year pressure and voted for the bill despite vocalized reservations.
The tax cut extensions, which are estimated to further educe federal tax revenues by about $146 billion over the next ten years, breathe new life into various provisions that were set to expire or decrease next year.
Included in the legislation was: an extension of the child tax credit, which gives families a tax credit of up to $1000 per child; an extension of tax breaks for married couples; extension of a rule that allows all taxpayers to pay ten percent taxes on the first $7,000 of their income; and a provision that exempts some high-income earners from the Alternative Minimum Tax.
Also included are $13 billion in miscellaneous tax cuts, the majority of which will go to large corporations.
Not open for debate this week were certain tax cuts specifically geared to benefit the wealthy. In what the Center on Budget and Policy Priorities (CBPP) called a "gimmick," Congressional leaders designed last year’s tax cut bill so that the provisions touted as "middle-class" tax cuts would expire at the end of this year. In contrast, tax cuts catering to high-income households, such as those decreasing the percentage that top earners pay and lowering the capital gains tax, will not expire for several more years.
Congress specifically left out a provision that would have accelerated a tax cut for low-income families by allowing more married couples to claim the earned income tax credit.
"This was done so that Congressional leaders could then push through legislation to extend these ‘middle-class’ tax cuts shortly before the 2004 elections," CBPP, a nonprofit research organization seeking to include the needs of low income people in policy debate, wrote in a press statement. "[Lawmakers] who opposed the measures to extend these ‘middle-class’ tax cuts without paying for them would face the prospect of attack ads branding them as politicians who wanted to raise ordinary families’ taxes."
Faced with the upcoming November 2 election, lawmakers indeed felt pressure to pass the tax cuts, at risk of appearing to raise taxes on the "middle class" but not on the rich. The House approved the cuts with a vote of 339-65 and the Senate voted 92-3 in favor of the legislation.
Analysts at the Tax Policy Center (TPC), a joint project of the Urban Institute and the Brookings Institution, also take issue with claims that the cuts will benefit middle-income households. They say that in actuality, the cuts largely benefit the wealthy and, in the long run, could wind up hurting people with low and moderate income.
"The [tax cuts] have been called middle-class tax relief, but that is a misnomer," wrote Leonard Burman, co-director of TPC in an analysis of the legislation. "With the exception of the expansion of the 10 percent tax bracket, all of these provisions would yield more than half of their benefits to the 20 percent of households with the highest incomes."
Burman’s organization estimates that in 2005, the wealthiest 20 percent of the population will receive 73 percent of the benefits from the tax cuts, while only 27 percent of the money will go to the middle 60 percent. Meanwhile, the bottom 20 percent will receive less than 0.1 percent of the benefits.
As a result, households making $10 to 20,000 will receive an average cut of $23. The average cut for households making $30 to 40,000 will be $167, and for those making $50-75,000 the average cut will be $353.
TPC estimates that households earning $75 to 100,000 will receive $763 in tax cuts, those earning $100-200,000 will get $1,342.
The biggest tax cuts come for households that earn $200,000 to $500,000. They will receive an average cut of $2,390.
As Burman explained, only people with a high enough income can benefit from the child tax credit. Currently, in order to be eligible for any break at all, an individual must make at least $10,750. This number has been rising since the credit was first enacted in 2001 and will continue to rise as it is indexed to inflation.
But because income for poor working people has not kept up with inflation, the cut-off point continues to grow out of reach for an increasing number of needy families. As it stands right now, most single parents working a full time minimum wage job would not be eligible for the child tax credit, according to the Center for Budget and Policy Prioties.
The bill also extends the increased standard deduction that most married couples can claim, keeping it at $9,700, twice the deduction offered to single filers. This aspect of what tax opponents call relief from the "marriage penalty" does help middle-income families.
However, according to TPC, the overall impact of the portions billed as relief from the so-called marriage penalty will be that 71 percent of the relief will benefit the richest 20 percent of households.
In fact, Congress specifically left out a provision that would have accelerated a tax cut for low-income families by allowing more married couples to claim the earned income tax credit.
According to the Tax Policy Center, the only provision in the legislation that primarily benefits middle-income families is one that allows most filers to pay a 10 percent rate on the first $7,000 of each taxpayer’s taxable income. TPC estimates that two-thirds of the benefits of that provision will go to the middle 60 percent of households, but the average household savings in 2005 will be around $41.
The most costly provision in the tax-cut legislation is the expansion of exemptions from the Alternative Minimum Tax, which was itself designed to keep wealthy people from taking so many deductions. The one-year extension of this provision passed by Congress will cost $23 billion, 95 percent of which will go to the richest twenty percent of the population.
At the same time, say analysts at the CBPP, people who are being denied the benefit of these tax cuts will likely be hurt by the decrease in federal revenue when programs for those in need will almost certainly be cut.
Another move by Congressional leadership limited the amount of debate in Congress over individual provisions in the proposed legislation. Instead of following the usual path of going through Congressional committees, then to the floor of both houses and then to joint conference committee where House and Senate bills are reconciled, this legislation came straight out of committee and hit the floor of both the Senate and the House.
Thus, senators could only vote "ye" or "nay" on the entire bill, instead of having a chance to consider various amendments.
Nevertheless, there was some debate in the conference before the legislation was sent to a vote. Some Democrats proposed measures that would have extended the child tax credit to families making as little as $10,000. Concerned about the ballooning deficits caused in part by the cuts, Democrats and some fiscally conservative Republicans also proposed paying for the expansions of the tax credits by closing some corporate tax loopholes.
They failed on both counts, but most of the bill’s critics could not resist the election-year pressure, leading Representative Charles Rangel (D-New York) to comment: "The Republicans have so carefully and cunningly, on the eve of an election, planned several tax cuts in order to try to get the Democrats to vote no."
