Congress agreed to yet another package of middle class tax cuts on Thursday, September 24 ( HR 1308 ). Like previous tax cuts passed in 2001 and 2003, the $146 billion the bill was not paid for. The Working Families Tax Relief Act is awaiting the President’s signature.
Three popular middle class tax cuts that would have expired at the end of this year were extended in the bill, along with some corporate tax breaks also due to expire. The legislation:

– Extends for five years the $1,000 per child tax credit;
– Extends tax benefits for married couples through 2008;
– Extends the 10 percent bracket through 2010;
– Extends the current income exemptions for the alternative minimum tax are extended for one more year.
– Accelerates by one year the refundable child tax credit for low-income families.

Who Wins, Who Loses

The Center on Budget and Policy Priorities points out the bill provides only modest help to middle class families. The biggest winners are high-income families. Data from the Tax Policy Center show that households in the top 20 percent of the income spectrum will get 70 percent of the tax cut benefits, while households in the middle 20 percent will get just 9 percent of the benefits. Because lawmakers chose not to pay for the tax bill with offsetting new revenues or spending cuts, middle class taxpayers will pick up the tab in future years when the government will have to spend more to finance the debt at the expense of services such as homeland security or education.

On the other hand, this package does not further expand tax breaks at the high end. An earlier House-passed middle-class tax bill, HR 4359, would have allowed families earning up to $290,000 to claim the child tax credit. The Senate did not consider that bill.

At the same time, HR 1308 does very little for folks at the bottom end of the income scale other than moving up by one year the refundability of the child tax credit. Certain low-income families who would have benefited from a refundable child tax credit at the 15 percent rate originally scheduled to take effect in 2005 will receive the benefit a year earlier (i.e. eligible families will get the refund next spring when they file their 2004 taxes). And while middle class families get marriage penalty relief, low-income couples do not.

Attempts to avoid cutting help to the lowest income working families were thwarted during negotiations. Currently, the amount a parent must earn to qualify for the refundable portion of the child tax credit – at least $10,750 in tax year 2004 – is tied to inflation. When the tax cut was first enacted in 2001, families earning at least $10,000 qualified for the refundable credit. Low-income workers whose wages have not risen with inflation have lost some or all of the credit. While the bill was in conference, Senator Blanche Lincoln (D-AR) offered an amendment that would have lowered the current bottom income threshold for the refundable child credit from $10,750 to $10,000. But Senator Lincoln’s fellow conferees voted down her amendment.

An Exercise in Cynicism

Ultimately, the tax bill was a dubious election-year stunt. First, had the 2003 tax cut been designed differently, this year’s tax bill would not have been needed. Congress held down the total cost of the massive tax cut in 2003 to $350 billion for political reasons. To make that tax cut fit into the pre-arranged price tag, drafters filled it with gimmicks so the most popular middle class tax cuts would expire at the end of 2004. Those gimmicks forced lawmakers to pass this year’s tax break to extend the expiring provisions in order to prevent taxes from going back up. (The 2003 bill allowed tax breaks for the wealthiest families to expire at later dates.)

Second, the tax bill was not paid for – but could have been. The Center on Budget and Policy Priorities notes the $146 billion cost of the bill could have been paid for by closing abusive corporate tax shelters. But House and Senate negotiators declined to close corporate loopholes in this bill, knowing the members would be willing to vote for such popular tax relief in an election year even if it increases the deficit. Instead, members of Congress would like to save closing the corporate tax loopholes to pay for a less popular corporate tax break bill they are trying to pass later this fall.

For More Information:

Senate recorded vote on HR 1308
House recorded vote on HR 1308
CBPP: Middle Class Tax Bill Represents Cynical Policymaking

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