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A questioner at our forum on the candidates’ tax plans asked about the portion of Senator Obama’s tax proposals that would go to households with no tax liability. I did not have the answer then, but Jeff Rohaly has since crunched the numbers. He estimates that the refundable portion of tax credits (other than for healthcare) would increase by $648 billion over ten years in the Obama plan. The new credits would also increase the percentage of households that do not owe income tax in 2009 from 38 percent under current law to 48 percent in the proposal, although that percentage will decline over time as real incomes grow.
By budget scorekeeping convention, the refundable portions of tax credits are treated as outlays—that is, the same as direct spending—rather than as tax reductions. Under current law, outlays on the earned income tax credit and the child tax credit (and several much smaller refundable credits) will total $406 billion from 2009 to 2018; Senator Obama’s proposals would increase the total to $1,054, or almost 160 percent.
There’s an interesting debate about refundable tax credits. On the one hand, some critics argue that “tax cuts are for taxpayers,” meaning that refundable tax credits should not be part of the tax cut agenda. The Wall Street Journal editorial page once famously opined that people with incomes too low to owe income tax were “lucky duckies,” undeserving of tax relief.
On the other hand, a lot of what we call tax cuts are really spending programs in disguise. Does it really make sense to provide subsidies for health care, homeownership, saving, education, etc., in such a way that the people who most need assistance—those with low incomes—are automatically disqualified? For that reason, Lily Batchelder, Fred Goldberg, and Peter Orszag have argued that all tax subsidy programs should be converted to refundable credits.
While this debate rages, there seems to be general agreement that refundable credits are the way to go to expand health insurance coverage. President Bush proposed refundable credits several times before switching to his standard deduction for health insurance. Senator McCain’s proposal is basically the president’s, but provided as a refundable tax credit instead of a deduction. This is likely to be much more effective in targeting assistance to those who need help affording insurance. And Senator Obama’s subsidy scheme is also fully refundable, and even more targeted at those with low incomes.
I’ll post an estimate of the refundable portion of the health tax credits for both proposals next week.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
President Barack Obama signing a bill Thursday, Dec. 10, 2015, in Washington. Photo by Evan Vucci/AP