The voices of Tax Policy Center's researchers and staff
Take two tax credits, and call me in the morning. For many politicians that is the tried and true prescription for the economic and social ills that ail our country.
Refundable tax credits encourage work (earned income tax credit or EITC), assist families (child tax credit), and subsidize education (American opportunity tax credit) and health insurance (premium assistance credit). Nearly all the Democratic presidential hopefuls have proposed expansions of existing tax credits, and some support new tax credits for housing, retirement saving, and caregivers.
Yet, there are two holdouts. Senator Bernie Sanders (I-VT) hasn’t proposed any expansions of refundable tax credits, while senator Elizabeth Warren (D-MA) offers just three—a temporary increase in premium tax credits (during the transition to Medicare for All) and two energy-related credits. Their proposals for health care, college, and child care would operate through new spending programs. Other candidates also propose new spending programs; Sanders and Warren are unique in the weight they place on that approach.
Are tax credits always the right medicine for the problems they are meant to cure?
Well, like any treatment, whether a tax credit works depends on the circumstances. My checklist? Check yes if the potential beneficiaries already file tax returns. Check yes if the Internal Revenue Service can verify eligibility for the credit.
But perhaps check the “need more information” category if the eligibility criteria are complicated. And check no if the credit is a reimbursement for an expenditure—such as college tuition or housing—that taxpayers must pay long before they receive a refund check from the IRS.
The EITC prevented political stalemate in a dispute over child care funding
And there is that other consideration—the likelihood of enactment of a tax credit or spending program.
Flashback to 1989 when many Congressional Democrats (and a few Republicans) supported the Act for Better Child Care Services (ABC), a bill that would have provided funds to states to subsidize day-care centers that served families with low and moderate incomes. Looking back, I see similarities between the ABC bill and Warren’s child care proposal.
Incoming President George H.W. Bush countered with a proposal to create a refundable tax credit for pre-school kids. The Bush plan cost less than ABC, but the disagreements between the president and Congressional Democrats ran deeper than money: Bush viewed ABC as too bureaucratic, too paternalistic, and too unfair toward stay-at-home moms. And the Democrats viewed the Bush proposal as too skimpy.
The compromise that emerged in the Omnibus Budget Reconciliation Act of 1990 nearly doubled the size of the average EITC by 1994. The compromise met Bush’s goal of providing assistance to couples with a stay-at-home parent through the tax code. And it met Democrats’ goals by increasing tax benefits to working low-income families.
The enduring appeal of refundable tax credits
Since then, Congress has enacted twelve more refundable tax credits, including several temporary credits enacted during recessions. One reason for the popularity of refundable tax credits—and other tax expenditures—is that their costs are less transparent than spending programs. And a new tax credit can be presented as a tax cut rather than as a new government program. That is the case even for a refundable tax credit where the portion of its cost that exceeds taxes owed is considered an outlay by budget scorekeepers.
Another reason for their popularity is that changes in refundable tax credits can make tax legislation look progressive. But unlike tax credits, changes in spending programs do not show up in the distributional tables released by the Joint Tax Committee and the Tax Policy Center. Including spending programs would be the right analytical thing to do, but that task presents substantial methodological challenges. (The Congressional Budget Office is making strides toward overcoming those challenges, but their reports are retrospective.)
Another flashback: Coming into office in 1993, President Clinton proposed both a broad-based energy tax and another large EITC expansion for families with children—especially for larger families—on top of the 1990 increase. Despite the proposed EITC expansion, the initial distribution tables of Clinton’s overall tax plan showed that very low-income people would pay higher taxes because of the proposed energy tax.
The fix? The EITC was extended to include very low-income workers who didn’t live with children (a “childless EITC” population that includes noncustodial parents). That extension ensured that the lowest-income group shown in the distribution tables had a net tax cut on average, even though the overall legislation significantly boosted tax revenues (including receipts from a gas-tax hike, which replaced Clinton’s proposed energy tax).
Today, many candidates would expand the childless EITC. Doing so would strengthen the social safety net and encourage work. And administering this support through the tax code meets my criteria for a refundable tax credit: simple and administrable relative to a spending program.
Flash forward to either a President Sanders or Warren administration. Relying on spending programs over tax credits would be the better medicine for their goals—health care for all, cheaper college, and affordable child care. But will a future Congress swallow that pill when refundable tax credits are branded as progressive tax cuts?
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.