GOP Seeking to Curb Tax Break for Poor

Republicans in Congress are seeking to restrict a tax break that was designed to keep millions of the working poor above the poverty line, a move that is sparking new charges that GOP budget plans favor the rich.

The proposal, tucked inside a Senate Republican blueprint to balance the budget by 2002, would eliminate an increase in the earned income tax credit scheduled to go to low-income families with children, while tossing out the benefit altogether for workers who do not have children.

“The earned income tax credit has given 15 million hard-working families a tax cut, yet the Republican leadership would like to take it away,” Vice President Al Gore declared Friday at a press conference in which he and other Democrats assailed the GOP for values that “do not match the values of the American people.”

The flap is over a tax credit that enables low-income workers to cut their tax burdens by an average of more than $1,000 a year, based on their incomes and the size of their families.

The credit, assessed on a sliding scale tied to income, goes to households earning up to about $27,000 a year.

On the surface, critics of the tax break argue that it has been widely abused, led to massive errors on tax returns and gobbled up an ever-expanding share of revenues in the manner of other, seemingly out-of-control programs, such as Medicare.

Sen. Don Nickles (R-Okla.) said recently that the credit, which has strong White House support, “is the federal government’s fastest-growing and most fraud-prone welfare program.” Nickles cited studies by the Internal Revenue Service and the General Accounting Office that pointed to errors and abuse related to the credit.

Below the surface, however, a much broader conflict is at play over the issue of sharing the wealth and the government’s proper role in reshuffling income to workers at the lower rungs of the income ladder.

And that debate is occurring as Democrats increasingly accuse Republicans of slashing social programs to finance tax cuts for the privileged. “They want to raise taxes for (the working poor) but they don’t want to raise taxes for corporations,” said a Democratic aide on the Senate Budget Committee.

The credit traditionally has enjoyed support from conservatives as well as liberals for the simple reason that it rewards work. Contrary to welfare programs, it was tailored for employed parents struggling to survive in the working world. Moreover, it targeted a population that, while needy, often does not qualify for welfare benefits.

Living standards for the working poor are further eroded by the 7.5% payroll tax on wages, which is paid by workers at all income levels but which, like a sales tax, hits low-pay employees hardest. For the working poor, the payroll tax often takes a higher toll than the income tax.

Only recently has the benefit landed on the hit list of budget-cutters. Two recent changes, dating back to 1993, are key. One was to phase in expanded benefits for families with two or more children; another was to broaden the program to allow some 4 million low-income workers without children to qualify for credits often in the range of $300 a year.

Those changes were not controversial at the time. But they added another $20 billion to long-term costs--a price tag that is way too big to elude the radar of 1995 budget-cutters. Combined with the reports of errors and abuse, the credit became a target.

“Unfortunately, what began as a small work ‘bonus’ has ballooned into a massive wealth redistribution program,” said Nickles, a member of the Senate Budget Committee, who, along with Sen. Judd Gregg (R-N.H.), wants the program scaled back substantially.

Much of the debate has focused on technical matters. Studies by the IRS and the GAO have pointed to high error rates on tax returns that use the credit. Critics contend that more than 30% of the benefits are wasted through fraud and mistakes, such as taxpayers who falsely claim to have children or jobs.

While the Senate Budget Committee recently voted to restrict growth of the tax credit--limiting the income ceiling and scheduled expansions in the size of the benefit--it survived intact in the House Budget Committee. However, it is hardly secure in that chamber.

House Ways and Means Committee Chairman Bill Archer (R-Tex.) is planning “to take a close look” at the credit in a hearing tentatively set for June, a committee aide said Friday. “It looks like there may be some areas where it’s grown beyond its original intention.”

The Senate proposal, which will be considered as part of the overall budget plan, would reduce future growth by a projected $21 billion over more than five years, according to Treasury Department calculations released Friday. For the 7.8 million beneficiaries with children, the scheduled increase would be reduced by $270 a year. The average increase would be $235 a year lower than planned.

To budget-cutters, restricting the growth of the benefit is hardly Draconian. But defenders of the tax break worry that the proposed limits will force ever-more working families deeper into poverty as they wage a losing race with inflation.