CHN: Child Tax Credit Improvement in House AMT Bill

On November 9, the House passed a major tax bill that provides a one-year Alternative Minimum Tax (AMT) ‘patch,’ a one-year extension of certain tax credits that would otherwise expire on December 31st, temporary improvements to the Child Tax Credit, and a new tax deduction to homeowners who pay property taxes but do not itemize their deductions.  H.R. 3996, the Temporary Tax Relief Act, passed 216-193 with all voting Republicans opposing the bill, all but 8 Democrats supporting the bill, and 24 members who did not vote.  (See how your Representative voted here.)
The House legislation adheres to the budget rule adopted by Congress this year requiring tax cuts to be paid for with tax increases or cuts to entitlement programs.  The $82.5 billion cost of the tax package would need to be paid for by other revenue increases or spending cuts unless action is taken to waive the requirement.  The cost of the bill is offset by changes in the corporate income tax structure and by a provision to require individuals who provide investment management services to pay at the regular income tax rate instead of the lower capital gains rate they currently pay.  The capital gains rate is supposed to be reserved for investors who risk their own financial capital, something that fund managers do not do.  These managers have come to light recently because their work for the investment funds known as ‘hedge funds’ has garnered multi-millions for many, with their uniquely low tax rate causing them to be treated differently from others doing similar work and resulting in the loss of billions in tax revenues.

The most expensive provision in the bill is the AMT ‘patch’ which reduces revenue by $50.6 billion in FY 2008.  By setting higher exemption amounts for 2007, the bill keeps 21 million more taxpayers from being subject to the higher tax liability of the AMT.  These taxpayers will instead owe less through the regular income tax system.   Less than 15 percent of AMT patch benefits go taxpayers with incomes between $50,000 – $100,000; 50 percent of the benefits go to households earning $100,000 – $200,000; and 35 percent of benefits go to households earning $200,000 – $500,000.

H.R. 3996 extends several expiring tax provisions for one year, including the research and development credit for businesses, the new markets credit, favorable depreciation rules for some retail stores and restaurants, and the deduction for state and local sales taxes.

The Child Tax Credit provides up to $1,000 per children under age 17.  However, a family earning less than $12,050 in 2008 would earn too little to be eligible for any CTC when it files taxes.  Current law indexes this threshold for inflation so that each year families must earn more to receive the same amount of credit.  Low-income workers with children can receive a partial CTC for earnings above the set threshold, even if their income is not high enough to owe federal income taxes.  H.R. 3996 temporarily lowers the threshold at which a partial CTC is calculated to $8,500.  This change would allow 2.9 million more children in working poor families to benefit from the credit next year and provides more CTC to an additional 10 million children.

In general, Democrats view H.R. 3996 as a tax cut for the many who would be kept from being subject to the AMT in 2008.  As a matter of fairness, they have extended the CTC benefit to working families with very low incomes. Further, they believe that it is fiscally responsible to pay for the tax cuts so that future generations are not left with paying for the added debt.  Most Republicans remain ideologically opposed to paying for tax cuts by increasing taxes elsewhere in the system.  The President joins them in opposition, and has threatened to veto the bill if it reaches his desk.

The Senate will not consider this legislation until December.  Indications are that it will be very difficult to secure the 60 votes that will be needed to pass legislation similar to H.R. 3996 in the Senate.  There is consensus that Congress will pass an AMT patch and the tax cut extenders, with or without offsets, before it adjourns.  Less certain is the outcome of the CTC improvements.

(For more information, see the Center on Budget and Policy Priorities’ Families Helped by the Child Tax Credit Expansion Work Hard in Low-Paying Jobs (

tax policy