Some Working Americans Are Left Out of Bush’s Tax Cut Proposal

WASHINGTON -- President Bush likes to note that his new tax cut plan would spread its benefits among some 92 million taxpayers. But one group is conspicuous in its absence: several million working families whose wages are so low they qualify for “refundable” tax credits.

When Congress passed Bush’s first tax cut package two years ago, it made sure those people were included. Under the tax initiative he presented to lawmakers this week, many would get left behind, or take a back seat to better-paid Americans.

“It’s ironic,” said Len Burman, co-director of the independent Tax Policy Center. “The people they’re excluding are the ones who basically epitomize conservative values. They’re working. They’re marrying. They’re low-income people who are trying to get ahead.”

The policy shift affects people scheduled to receive future benefits under two provisions of the 2001 act: a bigger refundable child credit and a more generous earned income tax credit for married couples. (The earned income tax credit is the government’s main assistance to low-income workers.)

The president’s new plan would not take back the benefits approved two years ago; they would still be implemented in increments from 2005 to 2008. But Bush left them off the list of future tax cuts whose implementation he wants to accelerate to this year to boost the economy and reward working Americans.

Tax experts say about 9 million taxpayers are excluded from the president’s new tax plan.

Including them would cost the government an estimated $9 billion over the next decade, relatively small change in a tax cut initiative with a 10-year price tag of $1.3 trillion.

The immediate impact on affected taxpayers would be much bigger: the loss of an additional benefit averaging $390 this year for families with incomes from $10,000 to $36,000. The maximum additional benefit would top out around $1,000, for a family of four earning $23,000.

The White House offers no apologies for the omission: It says it wants to provide immediate relief only to those Americans who pay income taxes.

“For every American paying income taxes, I propose speeding up the tax cuts already approved by the Congress, because Americans need that relief today,” Bush said in his budget message to lawmakers.

But some tax authorities question the president’s reasoning. Refundable tax credits may wipe out the income tax liability of low-income workers, but these credits don’t necessarily recoup the Social Security and Medicare payroll taxes those workers send to the U.S. Treasury with every paycheck. That money gets used just like income taxes to pay for government programs that benefit both rich and poor.

More than 80% of Americans pay more in payroll taxes than they do in income taxes, analysts say. They also pay sales and excise taxes to federal, state and local governments. To exclude some of them from a tax relief initiative, some experts say, is fundamentally unfair.

“The child credit is supposed to help families with children pay their bills,” Burman said. “They put a spending program in the tax system, and then they use the fact that it’s administered through the income tax as an argument for withholding it from the people who need it most. It makes no sense.”

The debate reflects a basic divide between those who view refundable tax credits as a key tool for alleviating poverty and rewarding work, and those who see them as a surrogate welfare system that disguises a big spending program as tax policy.

Regardless of intent, their use is growing. Last year, 19 million tax filers reduced their tax liability or received refund checks totaling $32 billion from the earned income tax credit alone.

This credit provides low-income wage earners -- a family of four with an income of roughly $10,000 to $14,000 a year -- with tax credits of as much as $4,140. If the amount of the credit is greater than a family’s income tax liability, the government sends a check for the difference.

The 2001 tax bill raised the qualifying income range for married filers. But it did so in three steps, and the last two are not scheduled to take effect until 2005 and 2008. Accelerating the effective date to 2003 would increase the EITC benefit for affected families by as much as $422 for some families this year.

The child credit provides all taxpayers with a tax benefit of $600 for each dependent child. Under the 2001 tax bill, the credit will rise to $700 in 2005, $800 in 2009 and $1,000 in 2010.

Bush wants Congress to make the full $1,000 available immediately, but he does not want to accelerate an accompanying expansion of the limit on refunds, set to go up in 2005. If that provision were accelerated, some low-income families could boost their refunds by $500 or more this year.

Robert Greenstein, executive director of the liberal Center for Budget & Policy Priorities, said there is more than fairness at stake.

If the goal of the president’s tax program is to give the U.S. economy a jolt, Bush is excluding the very people who would provide the most bang for the buck, he said. That’s because poor people are most likely to immediately spend any additional income they receive.

“If you want to stimulate the economy, and you provide an average tax cut of $90,000 to people making more than $1 million a year and zero to families making $15,000 or $20,000, you’d better go back and take Economics 101,” Greenstein said.

Not all economists agree. Dan Mitchell, a fellow at the conservative Heritage Foundation, said the premise that government can stimulate the economy in the short term by transferring money from savers to spenders is based on a discredited tenet of Keynesian economics. He said the economy benefits over the long term from tax cuts that increase the incentive to invest, and rich people are the biggest source of investment capital.

But Mitchell thinks more than ideology is at work in the president’s choice of tax benefits. The White House may be deliberately withholding support for provisions sought by Democrats for use in future tax package negotiations.

“If push comes to shove, would they go ahead and do some of this additional stuff to get their tax plan through?” he asked. “Of course.”