Tax Compromise Would Extend Improvements for Low-Income Tax Credits
The deal President Obama has brokered with Congressional Republicans is disappointing in a number of respects. Nevertheless, some prominent progressive groups have endorsed it (albeit somewhat reluctantly), because it contains positive measures that are unlikely to be part of any compromise negotiated next year. The progressive elements of the proposed package include a two-year continuation of Recovery Act improvements to three important tax credits.
The tax credits affected by the proposal include the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC), and the American Opportunity Tax Credit (AOTC). These three credits are refundable, which means if the amount of credit exceeds a person’s tax liability, the federal government cuts a check to the person for the difference. An analysis released today by the Center on Budget and Policy Priorities found that extension of the tax credit improvements, coupled with the proposed temporary payroll tax cut, would keep 2.4 million Americans above the official poverty line, and would lessen the severity of poverty for 18.4 million poor Americans, including 6.9 million children, who would be lifted nearer the poverty line.
The Earned Income Tax Credit is one of the most important federal anti-poverty programs. According to the Center on Budget and Policy Priorities, the EITC lifted an estimated 6.6 million people out of poverty in 2009, including 3.3 million children. Under the agreement reached by Obama, two improvements to the Earned Income Tax Credit will be continued for the next two years: a decrease in the marriage penalty, and an increase in the maximum benefit for the largest families. Marriage penalty relief is important to reducing barriers to marriage for low- and moderate-income workers; larger families have greater expenses and need a bigger EITC to lift them above the poverty level.
The enhanced EITC will put money into the pockets of low- and middle-income Wisconsinites. About 117,000 families in Wisconsin have benefited from the expanded version of the EITC so far, including 16,000 two-earner families who would not otherwise have been eligible for any benefit. The Wisconsin Department of Revenue estimates that the enhanced credit will provide eligible families with an average of $506 more from the federal credit in 2010.
Like the EITC, the Child Tax Credit encourages parents to work, helps reduce child poverty, and helps make sure parents who are working full time can support their children. The continuation of the expanded CTC means that a single mother who is working at a full-time, minimum wage job and has two children receives a credit of about $1,800 (rather than $250 without the continued expansion).
The American Opportunity Tax Credit helps students from low- and middle-income families afford college.
Extension of these enhancements to the credits, if implemented, would represent a significant victory on behalf of working families. However, this proposal only extends the expansions, rather than making them permanent. Although we will have to re-visit this debate at the end of two years, and other aspects of the tax plan are hard to swallow, the extension of the tax credit improvements would be an important step towards helping low-and moderate income families who have been negatively affected by the economy.