CHN: Comprehensive Tax Reform Bill Introduced
On October 25 Ways and Means Committee Chairman Rangel (D-NY) introduced a plan that makes significant changes in the current tax system. The bill he refers to as “the mother of all tax bills” repeals the Alternative Minimum Tax (AMT), makes improvements in the Earned Income Tax Credit and Child Tax Credit, changes the rules for taxing compensation of hedge fund managers, reforms the corporate tax system, and extends for one year many predominantly business-related tax credits. The $1.3 trillion 10-year cost of this ambitious tax package is fully paid for, with tax cuts offset by revenue raisers elsewhere in the tax system in a way that makes the system more progressive.
Repealing the AMT loses the most revenue, an estimated $796 billion. To offset this loss, wealthier individuals would pay a new surtax of up to 4.6 percent on their income. The second largest revenue loser comes from reducing corporate tax rates from 35 percent to 30.5 percent. Closing loopholes, deductions, tax havens and other business-related provisions in the tax code would offset the cost. This legislation, the Tax Reduction and Reform Act of 2007, H.R. 3970, will not be voted on this year, but sets the stage for the larger tax debate that will occur next year and beyond. However, parts of the bill dealing with tax provisions that expire on December 31, 2007 and the AMT’s impacts in 2007 will be addressed in a smaller bill that Chairman Rangel will introduce within the next few weeks.
Both the House and Senate are almost certain to pass a smaller tax package addressing the AMT and so-called ‘tax cut extenders’ this year. For the past several years, Congress has passed an AMT ‘patch’ to shield certain taxpayers from paying more in taxes under the AMT than they would in the regular income tax system. The AMT was enacted in 1969 to assure that the very wealthy would not completely avoid paying taxes. The AMT was not indexed for inflation, so the ‘patch’ raises the exemption level to prevent the AMT from capturing a larger share of taxpayers. While some taxpayers earning less than $100,000 pay the AMT, typically the biggest beneficiaries of the AMT patch is a family with children earning $250,000 a year. Without a patch taxpayers subject to the AMT would jump to 23 million in 2007, up from 4 million in tax year 2006. The one-year patch for 2007 will cost $50 billion in lost revenue.
The tax cut extenders are popular tax credits that are renewed each year. Unless renewed they will expire on December 31. These include the research and development tax credit, the new markets credit, favorable depreciation rules for some retail stores and restaurants, and the deduction for state and local sales taxes. This one-year ‘extender’ package would cost $15 billion.
Low-income advocates are asking that the package also include improvements in the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC). The CTC 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 next files taxes. Current law indexes this level 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 that level, even if their income is not high enough to owe federal income taxes. Over 16 million children are in families that receive no or only partial CTC because they are too poor. Chairman Rangel’s comprehensive bill lowers the threshold to $8,500 and would not raise it annually for inflation.
Under current law low-income childless adults aged 25-64 will receive a maximum EITC credit of $438 in 2008. They are the only group of workers who begin to owe federal income taxes before their incomes reach the poverty line. Under the Rangel bill, these poor workers would no longer owe federal income taxes. According to the Center on Budget and Policy Priorities, their federal tax burden from income and payroll taxes combined would decline from 8.3 percent to 1.8 percent of their income. (For further details on the CTC and EITC see the letter to Congress signed by nearly 900 organizations in May: http://www.chn.org/pdf/2007/ctceitcletter.pdf.)
A question yet to be answered is whether the Democratic majority will continue to demand the self-imposed fiscal discipline they enacted at the beginning of the 110th Congress in the tax bill this year – that is, by requiring tax cuts to be paid for. House Ways and Means Chairman Rangel is committed to proposing an AMT/extenders package that is paid for. Senate Finance Committee Chairman Baucus (D-MT) seems less committed to paying for the bill. The Senate would need 60 votes to proceed with a bill in which the cost of tax cuts is not offset by other revenue.
(For more information, see the Center on Budget and Policy Priorities’ Improving the Refundable Child Tax Credit(http://www.cbpp.org/10-24-07tax.htm ) and Ways and Means Committee Chairman Charles Rangel’s Proposed Expansion of the EITC for Childless Workers: An Important Step to Make Work Pay (http://www.cbpp.org/10-25-07tax.htm).