President Barack Obama and some of his allies are trying to transform an ugly piece of tax legislation into something that gives critical help to millions of low-income Americans.
The gambit hasn't gotten much attention until now. But if it works, the resulting commitment of resources would arguably represent the biggest anti-poverty effort of Obama’s second term.
The legislation is a big bundle of tax breaks that could be worth somewhere between $700 billion and $800 billion over the next 10 years, depending on how negotiations go. To put those numbers in perspective, the high end of that range would approach the projected cost of the Affordable Care Act in its first decade. The package has no offsetting spending cuts or revenue, which means that, at least on paper, it would increase the federal deficit.
Most of the tax breaks are for corporations, and while some have dubious justification, some have no justification at all. Probably the worst and most notorious among them is one that became law relatively recently -- a “bonus depreciation” provision that lets companies write off the full cost of new equipment right away, rather than spreading it out over time. This provision became law in 2009, as part of the Recovery Act, and it was supposed to encourage businesses to invest in production equipment and then hire more workers. There’s no good reason to think it did.
In theory, this and the rest of the business tax breaks are temporary. In reality, they haven't been. Whenever they expire, or are about to expire, corporations demand that Congress extend all of them, and Congress complies. Republicans vote yes. Democrats vote yes. Nobody worries what it does to the deficit. Approval of the “extenders,” as they’ve come to be known, has actually become something of a holiday ritual, since it usually happens just before Congress adjourns for December -- and the Internal Revenue Service is getting ready to print the next year’s tax forms.
The renewals have become so routine that corporations assume they will become law and make financial plans accordingly. But companies still wish they didn’t have to wait for Congress to act and their biggest allies, in the Republican Party, have other reasons to make the tax cuts permanent. By enshrining them in the tax code now, the thinking goes, it will be easier to pass other tax reforms later. To make the business tax cuts permanent, Republicans need votes from congressional Democrats and, of course, they need a signature from the president. That has given liberals, including the one in the Oval Office, a little leverage -- and now that leverage may produce some results.
Back in 2009, when Congress was trying to pump up the economy, it didn’t just create that bonus depreciation tax cut. It also expanded the Child Tax Credit, which gives relief to families with children, and the Earned Income Tax Credit, or EITC, which basically makes small paychecks bigger.
The EITC may sound familiar, because it has a well-deserved reputation as one of the most effective anti-poverty measures around. And while it generates antipathy from some Republicans, who allege (incorrectly) that the program is prone to fraud, it also has a history of moderate bipartisan support -- largely because, to claim the credit, you have to have an income. To Ronald Reagan, probably its best known champion, that made the EITC the antithesis of a welfare giveaway.
Like the bonus depreciation cut, the EITC and Child Tax Credit enhancements were also temporary, though Congress has since extended them twice. All along, Obama, the Democratic leaders in each house, and key allies like Sen. Sherrod Brown (D-Ohio) and Rep. Rosa DeLauro (D-Conn.), have been agitating to make these cuts permanent. In the past, they’ve proposed offsetting the lost revenue with higher taxes on the rich.
That’s not happening in this Congress, so Democrats have also offered what amounts to a trade. They’ll sign off on a package that extends some of corporate tax breaks permanently, as long as it limits or winds down the less defensible ones while making those tax cuts for the working poor and middle class permanent. (The package would likely include a tax credit for education costs, in addition to the enhancements of the Child Tax Credit and EITC.)
The impact for the people who get these tax credits would be considerable. According to calculations by the Center on Budget and Policy Priorities, expiration of the tax credits for the working poor would put 16.4 million people, about half of them children, into or deeper into poverty. And while the improvements are not set to expire for another two years, waiting means risking the outcome of the next election. If Republicans win control of the White House and Congress, they may demand a much higher ransom for extending the EITC and Child Tax Credit. Or they could refuse to do so at all.
The officials and advisers trying to put this deal together from the left aren’t wild about extending the corporate tax cuts, particularly without offsetting spending cuts or revenue. But, they reason, the alternative is to continue the existing charade, with Congress approving these tax cuts year after year -- and adding to the deficit anyway. If the deal works out as some promoters hope, some of the largest and least attractive tax cuts, like bonus depreciation and some shelters for multinational corporations, would remain temporary and require new acts of Congress to extend.
That last part is important. Since the more egregious cuts would no longer come up for renewal as part of much larger packages, with more defensible features, Congress would be more likely to let them expire. That would produce savings, relative to what Congress would do absent a deal. Bonus depreciation alone accounts for more than one-third of the total value of the business extenders.
Or so the argument goes. Groups like the Committee for a Responsible Federal Budget take a very different view, and they have company on both sides of the aisle. They argue that the deal would reaffirm a double-standard conservatives have long favored, in which new spending requires offsets but new tax cuts don't. These critics of the deal also worry that the package will get worse in negotiations, accumulating more corporate giveaways, while making future deficits worse.
Those concerns may still cause negotiations to unravel. So could arguments among the bill’s supporters. Congressional Democrats, for example, want the bill to include postponement of the Affordable Care Act’s “Cadillac tax” -- a levy on expensive health insurance policies that economists say helps to hold down health costs, but that is highly unpopular with just about everybody else. The White House opposes that. Tea party Republicans could still stage a revolt, since tax breaks for poor people, even the ones who work, are not especially popular with their supporters.
Still, negotiations over this bill have gotten farther than many people ever expected. Legislation could still pass. And whatever else its effects, that would mean bolstering two programs for the working poor -- at a time when the working poor can use all the help they can get.
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