(Archived document, may contain errors)
December 11, 1995
BALANCED BUDGET TALKING POINTS #5: CLINTON'S $300-PER-CHILD TAx CUT PLAN DENIES TAX RELIEF To 23 MILLION CHILDREN
Scott A. Hodge Grover M. Hermann Fellow in Federal Budgetary Affairs
Now, what the Congress wants to do is to roll back that workingfamily's [Earned Income Tax Credit], in a way that will impose a tax increase averaging S500 afiamily on families least able to pay it. This is a tax hike that literally will push many working families back into poverty. - President Bill Clinton, October 7, 1995
The White House charged in October that Congress's balanced budget and tax cut plan would raise taxes on families earning below $30,000, because of the proposed congressional reforms in the Earned Income Tax Credit (EITC). Yet a comparison of President Clinton's j ust- released budget (with its provision for a $300-per-child tax credit for dependent children below age 13 in families with annual incomes below $75,0001) and the Balanced Budget Act vetoed by Clinton on Wednesday (with its $500-per-child tax cut for all children in families earning up to $110,0002) shows that the congressional plan would benefit 5.4 million more low-income working families with children than the Clinton plan. This is so even after accounting for the changes in the EITC in the Balanced Budget Act. The group especially hit under the Clinton budget are many families with children earning below $24,000 per year, who would be denied the $300 child credit under the Clinton plan (receiving only the EITC) and who would be eligible for both the $500 child credit and the EITC under the congressional plan. 9Y I # 781-95
The Administration's $300 per-child credit begins phasing out for families with incomes above $60,000 and reaches zero at $75,000 in family income. The credit increases in value to $500 per child after 1998. 2 For taxpayers filing jointly with incomes above $110,000 the credit phases out at a rate of $25 for each $1,000 above the threshold (a range of $20,000), thus fully phasing, out at $130,000 in income. For families with two children, the two credits this family is eligible for are fully phased out at $150,000 in income. For single filers, the credit begins to phase out at $75,000 in income.
Overall, the $500- Table I per-child tax credit in Congress's balanced Income at Which Family Becomes budget and tax cut plan Eligible for Tax Cut would benefit 23 million Congressional Clinton more children than the Family Struture $500 per Child $300 per Child Administration's $300- per-child credit. .1 Parent LChild $11,500 $18,500 Congress's plan would 2 Parents, I Child 14,000 20,000 give tax relief to 10.4 2 Parents,`,I.Childnin ..17,000,@ "24,000 million families with . ....... . ... children who would receive no tax relief under the Clinton plan. In addition, there would be millions of families in which at least one sibling would receive tax relief under Clinton but other siblings would not. Taken together, the total number of children not qualifying for any tax relief under Clinton would be 23 million less than under Congress's plan. These children would receive $15.4 billion in tax relief under Congress's plan but nothing under Clinton's plan. There are three major reasons why the Clinton tax cut plan ends up denying tax relief to so many families with children:
Reason #1: Clinton's tax cut only benefits families with children under age 13. Since roughly 25 percent of all children are over age 12, millions of families are denied a tax cut just when the cost of raising that child becomes more expensive. This provision alone denies tax relief to the ... ........ . . . . . ......... .. .. ... Charti families of at least .... ...... 2.8 million Tax Savings From Competing per-Child children earning under $30,000 per Tax Credit Plans: Married Couple with Two Children year. This Tax Savings restriction also $3,000 reducesthe average tax cut per 2,500 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - family because many families 2,000 - - - - I . . . . . . . . . . . . . . . . . . . . . . . . . . Congressional Plan: have children Combined Benefits below age 13 and 1,500 -eiintc-n Plan: - - - - - - - - - - - - - - from EITC and $500- Earned Income Tax Credit children age 13 or Tax Credit Only older. Indeed, the 1,000 --- ----- --------- average tax cut per Clinton Plan: 500 - - - - - - - - - - - - - - - - - - - Combined Benefits - - - - - - family under the from EITC and $300 Tax Credit Clinton plan is $442, but the average tax cut 11@ 09 , _IV IN IN _IV N IN N N IN -N % % % % % % % % di % % under Congress's 1996 Income for Marriled Couple with Two Children plan is $856 per (One Under Age 13. One Age 13 or Over) family. C a;;V. ...... . . ........ ........ Reason #2: "At Clinton's tax cut only benefits Tax Savings From Competing per-Child families earning Tax Credit Plans: Single Parent with One Child up to $75,000 Tax Savings per year. While $2,500 some 88 percent Congressional Plan: of all children live Combined Benefits 2,000 - - - - - - - - - - - from EITC and $500 - - - - - - - - - - - - - in families Tax Credit earning below Clinton P'lan: $75,000 per year, 1,500 Earned Income - - - - - - - - - - - - - - - - - - - - - - - - this income Tax Credit Only restriction denies 1,000 ---------------- ---- ------------- $2.6 billion in tax relief to nearly 6 - - - - - - Clinton Plan: 500 - - - - - - - - - - -Combined Benefits million families from EITC and $300 Tax Credit with children, compared with ai@wl. 4wvc). 6@10. V @V "j, 111%, b- A. Congress's plan. %IV %IV 4V %IV %IV %IV Many of these families would by 1996 Income for Single Parent with One Child (Child Under Age 13) no means consider themselves "rich." For example, a federal worker earning $40,000 per year and his school teacher spouse earning $35,000 could easily find themselves denied tax relief under the Clinton plan.
Reason #3: The Clinton plan requires low4ncome families to deduct their EITC benefits from their income tax bill before they can take the $300-per-child tax credit. By contrast, Congress's plan allows a low-income family to take the $500-per-child tax credit first, and then receive the full measure of the EITC on top of the child credit. As the following table shows, as a result of this difference in which the tax credit is taken versus the EITC, a family with two children would have to earn $24,000 annually before becoming eligible for the Clinton credit. By contrast, under the Balanced Budget Act this family would become eligible for the credit at roughly $17,000 in annual income.
Example: Say a married couple with two children earning $23,000 per year pays $908 in income taxes. To calculate how much of a tax cut they would receive under the Clinton plan, this family must first deduct roughly $1,170 in EITC benefits from their $908 income tax bill, which results in zero available income taxes from which to deduct the $600 tax credit they might otherwise be eligible to receive. However, under Congress's $500-per-child tax credit plan, this family would first take a tax deduction of $908 (although their two children would otherwise give them $1,000 tax credit, the value of the tax deduction cannot exceed their income tax liability). Then they would receive, in addition, their full $1,170 in EITC benefits ($1,514 after the congressional reforms).
3
Combined, these three elements of the Clinton plan make it substantially inferior to Congress's $500-per-child tax credit, even considering the reforms in the EITC. Specifically:
\u239\'95 Clinton's $300-per-child tax credit plan would benefit 23 million fewer children, than Congress's $500-per-child tax credit plan. Some 10.4 million families would get no tax relief under Clinton but would under Congress's plan. Millions of other families would receive reduced tax relief because some of their children would qualify under Congress's plan but not under Clinton's. Taken together, these fwnilies would be denied $15 billion per year in tax cuts.
\u239\'95 Compared with Congress's $500-per-child tax cut plan, the Clinton plan would deny tax relief to 5.4 million children in families earning below $30,000 per year in income. Under Congress's plan, these same families would receive $2.3 billion in tax cuts.
\u239\'95 Under the Clinton plan, a single parent with one child would have to earn over $18,500 per year to become eligible for the $300-per-child tax cut. Under Congress's plan, this parent would begin getting tax relief with just over $11,500 in annual income.
\u239\'95 Under the Clinton plan, a married couple with two children would have to make $24,000 per year to become eligible for the $300-per-child tax cut. Under Congress's plan, this family would begin getting tax relief at $17,000 in annual income.
\u239\'95 Even after accounting for reforms in the Earned Income Tax Credit, families with two children earning below $30,000 per year would, on average, receive $132 more each year in tax cuts than under the Clinton plan. Single parents with one child earning below $30,000 annually would receive $187 more tax relief on average than under the Clinton plan. Even this assumes that both of these families have children under age 13 (and thus eligible for the Clinton credit). Since 25 percent of all children are above the age of 12, many of these families would receive far less tax relief on average under the Clinton plan. Congress's plan gives an average of $856 in tax relief per family, whereas the Clinton plan gives an average of $442 per family. FAMILIES AND CHILDREN DENIED TAX RELIEF UNDER CLINTON $300 PER-CHILD TAX CREDIT PLAN
Number of Families Number of Children Amount of Tax Relief The Receiving Tax Relief Qualifying for Tax Relief Families of These Under Congress!s Plan, Under Congress's Plan, Qualifying Children But No Tax Relief Under But Not Under Clinton's Would Receive Under STATE Clinton's Plan Plan* Congress's Plan Alabama 167,619 337,656 $200,308,581 Alaska 27,994 65,389 $44,483,086 Arizona 157,461 312,071 $209,607,828 Arkansas 91,883 195,403 $116,783,516 California 1,259,990 2.852.282 $1,832,657.737 Colorado 116,390 299,573 $214,098,665 Connecticut 149,995 306,258 $207,284.595 Delaware 31.484 65,423 $41.481,069 DC 19,020 36,810 $18,671,719 Florida 480,996 1,016,218 $678.554,3 )61 Georgia 311,409 662,558 $413.187.715 Hawaii 48.758 109.772 $71,914.710 Idaho 40.585 119,969 -$77,253,634 Illinois 459,891 1,130,102 $784.549,950 Indiana 239,120 507,517 $337,635,124 Iowa 99,697 257.303 $180A8,535 Kansas 104,876 228,709 $159.1332,744 Kentucky 146,044 299,464 $204.914,313 Louisiana 175,427 388,689 $239,877.99' ) Maine 45,663 112,566 $77,705.168 Maryland 228,574 440,041 $291.763,713 Massachusetts 259.614 556,677 $' )80.695.719 Michigan 385,074 881,090 $594.279.003 Minnesota 201.702 437.115 Mississippi 79,463 1 186,366 $123.262.847 Missouri 168.677 370,909 $247.840,047 Montana 28,879 69,674 $54.229,514 Nebraska 57,738 153,349 $102,235,553 Nevada 53,237 111,557 $84,807,641 New Hampshire 46,669 106,627 $73,661,338 New Jersey 391,023 860,676 $560.381.354 New Mexico 76,046 162,118 $101.888.871 New York 733.904 1.609.683 $1,052.513,704 North Carolina 305,591 577,635 $381,848.262 North Dakota 23,945 60.255 $39.548,791 Ohio 432,951 990,318 $704,449.974 Oklahoma 147,312 302.086 $191.974.223 Oregon 118,071 274,160 $188,7777116 Pennsylvania 469.142 1.179,040 $798, 13 1.697 Rhode Island 31.032 78,171 $50.179,961 South Carolina 161,532 329,089 $204,056.716 South Dakota 29,727 73.758 $45,219.635 Tennessee 179.510 428,266 $271.587.356 Texas 734,450 1.663.955 $1,041.091.287 Utah 62,308 232,187 $160.292329 Vermont 22.318 44,626 $35,960.357 Virginia 348,092 679,442 $448.176.136 Washington 202.648 475.739 $359.770,405 West Virginia 52,807 125.238 $81,507.963 Wisconsin 201.567 457,518 $329.781.706 Wyoming 20.290 48.945 S35.389.234
jTotal 10,428,195 23,270,042 $15,443,062,997
These numbers include children who receive Heritage Foundation Tax Simulation Model no tax relief under Clinton but are in families Source: US Census Current Population Survey, 1994 5 where a sibling qualifies for tax relief.
TAX RELIEF DENIED TO FAMILIES EARNING BELOW $30,000 UNDER CLINTON PLAN
Children in Families Earning Below $30,000 Tax Rel ief These Fain i I ies Not Qualifying for Tax Would Get Under State Relief Under Clinton Plan Congress's Plan Alabama 137,853 $46,457,494 Alaska 11,557 $5,340.927 Arizona 100,630 $41,678,905 Arkansas 84,069 $34,057,245 California 649.655 $269,977.3 18 Colorado 76,396 $35,617.667 Connecticut 40,383 $20,706.756 DC 14,334 $5.842.660 Delaware 15.326 $5,502.418 Florida --309,951 $128.281,662 Georgia 178,844 $75,501.089 Hawaii 20,560 $7,752,955 Idaho 22,380 $9,356.513 Illinois 205,553 $103,202,942 Indiana 113,009 $49.469.708 Iowa 68,323 $34,554,199 Kansas 63,393 $23,885,298 Kentucky 62,737 $36,037,25@- Louisiana 102,349 $44,422,373 Maine 35,244 $14,866,233 Maryland 104,645 $38,401,509 Massachusetts 75,485 $33,868.723 Michigan 190,534 $77,043,897 Minnesota 61.177 $27,151.656 Mississippi 65AII $27,478,846 Missouri 106,433 $37,138,477 Montana 16,805 $9,263,216 Nebraska 33,263 $12,295,636 Nevada 31,284 $14,148,952 New Hampshire 27,056 $11,149.796 New Jersey 130,932 $62,446,131 New Mexico 48,036 $16,309,844 New York 363.200 $156.411.546 North Carolina 167,171 $75,915,133 North Dakota 11.927 $4,446,928 Ohio 212,323 $98.351,276 Oklahoma 120.686 $46,833.370 Oregon 54.097 $27,644,625 Pennsylvania 191,791 $91,660.889 Rhode Island 21,885 $9,699,586 South Carolina 100.190 $34.489.776 South Dakota 20,538 $7,410,588 Tennessee 105.302 $43.259.282 Texas 427..275 $196,537.354 Utah 35.043 $15,219,397 Vermont 15.016 $7,201.848 Virginia 154.738 $75.738.033 Washington 42.429 $27.154.759 West Virginia 41.339 1 $17,078.628 Wisconsin 82.320 $35.147.891 jWyoming 9.552 $5,479.166 ITotal 5,380,419 $2,334,888,376
Source: US Census Current Heritage Foundation Tax Simulation Model 6 Population Survey. 1994
CLINTON PLAN VS. CONGRESS'S PLAN: MARRIED COUPLE WITH 2 CHILDREN, 1 CHILD OVER AGE 12
Clinton's $300 Per-Child Tax Credit Plan Congress's $500 Per-Child Tax Credit Plan
Combined Amount of Tax Combined Gross Earned Amount of Tax Benefits from EITC Benefits in Relief from Benefits from Income for a EITC Benefits in Relief from EITC and $300 1996 After Congress's $500 EITC and $500 Family of Four in 1996 Under Clinton $300 Per- Per-Child Tax Congressional Per-Child Tax Per-Child Tax 1996 Current Law Child Tax Credit Credit Reforms Credit Credit $11,000 $3,564 $0 $3,564 $3,564 $0 $3,564 $11,500 $3,564 $0 $3,564 $3,564 $0 $3,564 $12,000 $3,486 $0 $3,486 $3,486 $0 $3,486 $12,500 $3,381 $0 $3,381 $3,380 $0 $3,380 $13,000 $3,275 $0 $3,275 $3,275 $0 $3,275 $13,500 $3,170 $0 $3,170 $3,170 $0 $3,170 $14,000 $3,065 $0 $3,065 $3,065 $0 $3,065 $14,500 $2,960 $0 $2,960 $2,959 $0 $2,959 $15,000 $2,854 $0 $2,854 $2,854 $0 1 $2,854 $15,500 $2,749 $0 $2,749 $2,749 $0 $2,749 $16,000 $2,644 $0 $2,644 $2,643 so $2,643 $16,500 $2,538 $0 $2,538 $2,538 $0 $2,538 $17,000 $2,433 $0 $2,433 $2,433 $8 $2,4@0_ $17,500 $2,328 $0 $2,328 $2,283 $83 $2,365 $18,000 $2,222 $0 $2,222 $2,123 $158 $2,281 $18,500 $2,117 $0 $2,117 $1,954 $233 $2,186 $19,000 $2,012 $0 $2,012 $1,784 $308 $2,092 $19,500 $1,907 $0 $1,907 $1,615 $383 $1,90'7 $20,000 $1,801 $0 $1,801 $1,445 $458 $1,903 $20,5100 $1,696 $0 $1,696 $1,276 $533 $1,808 $21,000 $1,591 $0 $1,591 $1,106 $608 $1,714 $21,500 $1,485 $0 $1,485 $981 $683 1 $1,664 $22,000 $1,380 $0 $1,380 $856 1 $758 $1,614 $22,500 $1,275 $0 $1,275 $731 $833 $1,564 $23,000 $1,169 $0 $1,169 $606 $908 $1,514 $23.500 $1,064 $0 $1,064 $481 $983 $1,464 S24,000 $959 $99 $1,058 $356 $1,000 $1,356 $25,000 $748 $300 $1,048 $106 1 $1,000 $1,106 $1,000 $1,000 .6,000 $538 $300 $838 so $27,000 $327 $300 $627 $0 $1,000 $1,000 $28.000 $116 $300 $416 so $1,000 $1,000 1_1V.UU() $0 1 $300 $300 so $1,000 $1,000 01 $0 $300 $300 $0 $1,000 $30.00 1.000
Heritage Foundation Calculations 7
CLINTON PLAN VS. CONGRESS'S PLAN: SINGLE PARENT WITH 1 CHILD UNDER AGE 13
Clinton's $300 Per-Child Tax Credit Plan Congress's $500 Per-Child Tax Credit Plan
Combined Amount of Tax Combined Gross Earned Amount of Tax Benefits from EITC Benefits in Relief from Benefits from Income for a Single EITC Benefits in Relief from EITC and $300 1996 After Congress's $500 EITC and S50i) Parent with One 1996 Under Clinton $300 Per- Per-Child Tax Congressional Per-Child Tax Per-Child Tax Child in 1996 Current Law Child Tax Credit Credit Reforms Credit Credit $11,000 $2,156 $0 $2,156 $2,156 so $2,156 $11,500 $2,156 so $2,156 $2,156 $68 $2,2 $12,000 $2,096 so $2,096 S2,096 $143 $2.239- $12,500 $2,017 $0 $2,017 $2,017 .18 $2,23 4 $13,000 $1,937 $0 $1,937 $1,937 $293) $ 2,2 2 9 $13,500 $1,857 $0 $1,857 $1,857 $368 s 2), 2) 2 4 $14,000 $1,777 $0 $1,777 $1,777 $443 $2.219 $14,500 $1,697 so $1,697 $1,697 $500 -$2.197 $15,000 $1,617 $0 $1,617 $1,611 $500 $2.111 $15..500 $1,537 $0 $1,537 $1,511 $500 $-),Oil $16,000 $1,457 $0 $1,457 $1,411 $500 $1,911 $16,500 $1,377 $0 $1,377 $1,311 $500 $1,811 $17,000 $1,297 $0 $1,297 $1,211 $500 $1,711 $17,500 $1,218 so $1.218 $1,111 $500 $1,611 $18,000 $1,138 $0 $1,138 $1,011 $500 $1,511 $18,500 $1,058 $60 $1,118 $911 $500 $1,411 $19,000 $978 $215 $1,193 $811 $500 $1,311 $19,500 $898 $300 $1,198 $711 $500 $19211 $20,000 $818 $300 11,118 $611 $500 $1,111 $20,500 $738 $300 $1,038 $511 $500 $1,011 $21,000 $658 1 $300 $958 $411 $500 $911 $21,500 $578 $300 $878 $311 _$500 $811 $22,000 $498 $300 $798 $,1, 11 $500 $711 $229500 $419 $300 $719 $111 $500 $611 $23,000 $339 $300 $639 $11 $500 $511 $23,500 $259 $300 $559 $0 $500 $500 $24,000 $179 $300 $479 $0 $500 $500 $25,000 $19 $300 $319 $0 1 $500 $500 $26,000 so $300 $300 so $500 $500 $27,000 $0 $300 $300 so $500 $500 $28,000 $0 $300 $300 so $500 $500 $29,000 so $300 $300 1 so $500 $500 $30,000 $0 $300 1 $300 so $500 $500
Heritage Foundation Calculations 8
