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Tax Credits and Incentives

Senate Republicans Target Tax Credit Program Spending

Tim Shaw  

Tim Shaw  

Tax credit programs designed to primarily assist low- and middle-income taxpayers are under scrutiny of several Republicans in the Senate, who cite concerns over increased government spending and design complexity.

The COVID-19 pandemic prompted Congress to pass hefty legislative packages featuring temporary expansions to existing tax credit regimes. One such program was the premium tax credit (PTC), which lowers the cost of health insurance premiums through the Healthcare.gov marketplace. Originally created by the Affordable Care Act (ACA), the PTC was amended by the American Rescue Plan Act of 2021 to be worth more and reach taxpayers with incomes over 400% of the federal poverty level (FPL), who were not previously eligible.

ARPA changes to the PTC are set to expire at the end of 2022. Colorado Democratic senators Michael Bennet and John Hickenlooper have called for the expanded PTC to be made permanent. They argued that economic factors such as inflation justify disallowing the PTC to revert to its pre-pandemic state. See Democratic Senators: Extend Health Care Premium Tax Credit Changes (6/15/2022).

In its Budget and Economic Outlook for 2022-2032, the Congressional Budget Office estimated that due to increased enrollment in ACA healthcare plans as a result of the PTC’s increased value and availability, the program will cost $89 billion in 2022, which is $18 billion (24%) higher than the previous year. Although projected outlays are expected to drop by 30% because of the ARPA provisions’ end-of-year sunset, CBO estimates that “related spending would rise by 76 percent over the projection period, increasing from $60 billion in 2023 to $105 billion by 2032.”

This has some conservative lawmakers wary of possible budget deficit increases if the expanded PTC were kept in place. In response to the projections, a group of Republican senators requested a cost estimate from the CBO and the Joint Tax Committee (JTC) for making the ARPA changes permanent. The petition came in a  July 8 letter by Idaho Sen. Mike Crapo, ranking member of the Senate Finance Committee; North Carolina Sen. Richard Burr, ranking member of the Senate Health, Education, Labor, and Pensions Committee; and South Carolina Sen. Lindsey Graham, ranking member of the Senate Budget Committee.

“Our Democrat colleagues passed ARPA quickly and in partisan fashion, with little time for public scrutiny and virtually no opportunity for feedback or input, including with respect to the legislation’s potential to exacerbate inflationary pressures and force monetary policy responses involving interest rate hikes that significantly raise federal financing costs,” wrote the Senate Republicans.

The CBO and JCT were asked to, by July 15, produce a “comprehensive accounting of the true costs of extending the expanded PTCs.” This includes five- and 10-year budget estimates; the number of those who would no longer be covered by employer-sponsored healthcare; costs broken down by enrollee incomes; the average PTC value for new enrollees; and the interplay of a proposed IRS reg regarding the employer-sponsored plan affordability standard.

“Dramatically increasing spending on PTCs would intensify the economic harm imposed on future generations saddled by the federal debt,” read the letter. The CBO did not respond to Checkpoint’s request for comment as to whether it plans to comply with the Republicans’ request.

Burr and Montana Republican Sen. Steve Daines have signed on to a “pro-family, pro-life, and pro-marriage” plan that would reform both the child tax credit (CTC) and the earned income tax credit (EITC). Dubbed the Family Security Act 2.0, the plan is the latest iteration of a proposal by Mitt Romney, a Republican senator from Utah, to overhaul both credits and consolidate them under a simplified benefit. the Family Security Act 2.0 would function as a monthly cash payment of $350 per child under age 6 and $250 per child aged 6-17. Expecting parents would be eligible to receive $700 per month each of the last four months of pregnancy.

To qualify, a family would need to have earned $10,000 in the prior year. The benefit scales downward for incomes under $10,000, meaning non-earners are not eligible for any amount (a key difference from Romney’s initial proposal from early 2021). Notably, the Social Security Administration, and not the IRS, would be responsible for administering the credits, as “legal and physical custodial” parents and every claimed child would need a Social Security number. A max of six children could be claimed in a year, and parents would have the option to receive entitled amounts in a lump sum annually.

The plan is paid for, according to a summary document, by trimming “overlapping and often duplicative federal policies.” The EITC would be heavily modified and offer less than under current law to taxpayers with children. The state and local tax deduction would be eliminated, as would the head of household filing status. Finally, the child portion of the child and dependent care credit would be removed. These spending offsets would total $92.9 billion annually, according to plan’s one-pager.

While the Family Security Act 2.0 has enjoyed praise from various conservative and religious groups, the Center on Budget and Policy Priorities, a progressive policy thinktank, found that the severe cuts to the EITC would counteract increased CTC amounts for many taxpayers.

“The cuts are so deep that about 7 million families making less than $50,000, with about 10 million children, would end up worse off under the Romney plan than under current law, with the typical (median) loss exceeding $800 per family,” the CBPP wrote in a July 6 report. The group also criticized the income requirement and partial credit for those making under $10,000, arguing that the proposal would most harm those who rely on the CTC and EITC in their current forms.

Without the “harsh” offsets, the CBPP said, the Republicans’ modifications to the CTC are a step in the right direction. They illustrate, however, that half of the CTC expansion is paid for in half ($46.5 billion) by EITC cuts. An estimated 2.6 million children would be lifted out of poverty, but “roughly half of these children” would be under the FPL again by the proposed offsets, according to the CBPP.

Romney said in a press release that the plan is designed to help “working families” and would incentivize taxpayers to seek and retain employment.

 

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