CHN: House-Passed Child Tax Credit Will Help 13 Million Low-Income Children; Senate Tax Bills at a Standstill

Three tax issues that Congress will need to resolve this year are interwoven House and Senate tax bills: an Alternative Minimum Tax (AMT) ‘patch’, the renewal of expiring annual tax credits often referred to as ‘extenders’, and improvements in the Child Tax Credit.  There is bi-partisan support for each of these.  At issue is a commitment by the House to offset the cost of paying for these tax provisions by raising revenues elsewhere in the tax system and the reluctance of the Senate to agree.
In May the House passed the Renewable Energy and Job Creation Act (H.R. 6049) –  which extends dozens of temporary tax cuts that expired December of 2007 or will expire December 2008 – including the research and development tax credit, a deduction for property taxes for non-itemizers, the deduction for tuition expenses, an optional deduction for state sales taxes and a package of energy-related tax credits. The bill also made important changes to the Child Tax Credit that would make three million working poor families newly eligible for a refundable Child Tax Credit and result in larger credits for another 10 million low-income families who already receive a partial Child Tax Credit.  The House bill provides this help by making families with earnings of $8,500 or more eligible for at least a partial credit although they don’t earn enough to owe federal income taxes (called a “refundable” credit).  Now, families with earnings less than $12,050 are ineligible for the CTC. The House fully covered the costs with two revenue-raising offsets: one would prevent certain executives and some hedge fund managers from delaying taxes on compensation by using offshore arrangements; the second would delay implementation of rules that give multinational corporations more flexibility in how they allocate interest expenses.

Congress created the AMT in 1969 to ensure that the wealthiest Americans would not be able to avoid paying any income tax by taking advantage of legal loopholes in the system.  The AMT exemption level was not indexed for inflation so gradually more middle-income taxpayers would be subject to the higher AMT tax instead of paying the regular income tax if Congress failed to act.  In recent years annual AMT ‘patches’ have been enacted which raise the exemption level in order to limit millions more taxpayers from being subject to the tax.  Although referred to as a middle-class tax cut, according to Citizens for Tax Justice two-thirds of the benefits go to the best-off 10 percent of taxpayers.  See Citizens for Tax Justice paper here.

The House addressed the AMT patch by passing H.R. 6275, the Alternative Minimum Tax Relief Act of 2008 by a vote of 232-189 on June 25.  The $61.5 billion cost is fully paid for with provisions that would require private equity managers to tax their income at the ordinary income tax rate instead of the lower 15 percent capital gains rate; deny major oil and gas companies from claiming a deduction for domestic manufacturing; require information reporting to the IRS by banks and credit card companies of the total amount of charges at individual merchants; and limiting benefits to foreign-owned companies that use U.S. tax treaties with third countries.  For the first time 10 Republicans joined Democrats in supporting an AMT patch bill that was paid for by other sources of revenue.

The Senate failed twice, on June 10 and 17, to achieve the 60 votes necessary to proceed with the House bill to extend expiring tax breaks (H.R. 6049). Legislation introduced on June 12 by Senate Finance Committee Chairman Max Baucus (D-MT), the Energy Independence and Tax Relief Act of 2008 (S. 3125), provides a less generous improvement in the CTC that would leave out about 1.5 million children helped by the House version, extends the tax credits in the House bill and adds more credits, and provides an AMT patch.  Like H.R. 6049, the Baucus bill offsets the cost of the extenders and the CTC improvements, but does not pay for the AMT patch.  See Human Needs Report for June 13 for more details.

The House has made it clear that they will not accept an extenders bill that is not paid for with revenue-raisers.  Pressure is mounting on the Senate to accept the offsets in H.R. 6049.  Many businesses are making it clear that passing the tax benefit extensions is more important to them than losing the tax breaks that pay for the extensions.  The House has been less insistent that the AMT patch be paid for.  Congress will likely pass an unpaid- for AMT patch as it did at the end of 2007.

Advocates are concerned that, while those who have the most continue to enjoy generous tax breaks, millions of poor children and their families continue to be denied the CTC as they were in 2007 when improvements were dropped from the AMT bill.  They are pressing Congress to reduce the minimum amount for the refundable CTC to $8,500, as H. R. 6049 does, and end annual threshold increases.

tax policy