A Tale of Two Budgets
Last week, the House and Senate Budget Committees each released budget plans for fiscal year 2014. Both chambers are expected to vote on these plans before next week’s district work period.
These two dramatically different budget proposals are purely political documents, with no chance of being combined into one official budget resolution passed by both houses of Congress that would have any effect on legislation. Still, the political theater does help lay out what might happen in other legislation this year. So here are the implications of the two proposals for tax credits for working families.
The House Budget Committee plan and associated documents include no specific proposals on income tax credits or deductions. However, a number of provisions imply that the budget plan implicitly includes changes to the Earned Income Tax Credit (EITC) and the Child Tax Credit. (It is less clear whether it also contemplates changes to the Child and Dependent Care Tax Credit.)
- The plan would significantly reduce both the top income tax rate and the corporate tax rate, as well as cutting other tax rates, and eliminating the Alternative Minimum Tax, all without contributing to the deficit. In order to offset the lost revenue, it would generate new revenues from eliminating or reducing “tax expenditures,” (income exclusions, preferential rates, deductions and credits.) While the budget doesn’t specify which of these expenditures would be cut, (deferring instead to the tax reform process currently underway in the Ways and Means Committee), it appears likely that the EITC and the Child Tax Credit would be targeted as they are two of the major tax expenditures, according to the Congressional Budget Office. Thus, the Committee’s proposal appears to contemplate changes to the credits. Indeed, according to the Bipartisan Policy Center, nearly every tax expenditure would have to be eliminated in order to pay for the new tax cuts proposed in the budget.
- The budget plan specifically refers to recent research by Gene Steuerle on marginal tax rates, which was presented at a Ways and Means committee hearing last year. That research looks at the combined effect across several programs of the phase-out for eligibility as income rises including the EITC, that together create a very high implicit marginal tax rate (meaning that for every new dollar earned, the worker loses almost as much from various benefit programs and tax provisions.) While Mr. Steuerle suggested that Congress minimize this problem by extending the phase-out period of these programs, the House Budget Committee would instead resolve this high marginal tax rate by both eliminating benefit subsidies under the new health law and reducing access to SNAP (formerly food stamps.) This suggests that the plan’s creators would also favor reducing access to the EITC to help solve this problem.
- The plan also calls for caps on mandatory spending, including tax credits, which would almost certainly reduce the amount of money available for working family tax credits.
- Finally, on the process side, the budget proposal calls for setting up a fast track budget process called reconciliation, and includes reconciliation instructions to eight committees (not specified.) If Ways and Means is one of the eight committees to receive instructions, that would make it easier to get controversial tax provisions such as cuts to working family tax credits approved by Congress.
The Senate Budget Committee plan is much more specific. It supports the refundable tax credits, and would make permanent the expansions of the EITC and Child Care Credit that were created in the American Recovery and Reinvestment Act and recently extended until 2017 (see page 53.)
It also calls for nearly a trillion dollars in new revenues, which are intended to come from wealthy taxpayers and corporations. Like the House, the Senate plan authorizes reconciliation, which, if the House and Senate could agree on a single Budget Resolution, would ensure that the tax provisions and other aspects of the budget could pass with only 51 votes in the Senate. Theoretically, if there was a budget resolution, the reconciliation process would require the Ways and Means Committee in the House, and the Finance Committee in the Senate to find a specific dollar amount of new revenues in any way they saw fit, including by limiting these tax credits. The reconciliation process has also been used to expedite tax cut legislation.
While there will undoubtedly be no final budget resolution, and therefore no reconciliation process this year, other major battles could create political forces that might also enable major tax changes to move through Congress. The most likely scenario for another grand fiscal confrontation that could provide an opportunity to force through either the House or Senate approach to tax credits is the need to raise the debt ceiling. (The debt ceiling waiver expires May 18, but apparently for all practical purposes the waiver will operate much as legislation lifting the debt ceiling would have done. That means that Treasury can buy some additional time by moving around necessary payments, and Congress may really have until sometime in July to act.)
Two other possible triggers for a grand fiscal deal are looking less likely. At the moment, it looks like Congress is willing to live with sequestration. As the consequences become more visible, however, this could change, setting up discussions about alternate ways to reach the same level of deficit reduction that could include tax changes. Congress and the Administration have also agreed in principle to complete funding for the rest of this fiscal year (running from April through September), and both the House and Senate are expected to vote on it this week. There remains a possibility, though unlikely, that either the House or Senate could enact amendments that would bog the process down, and tax changes could result from efforts to resolve it.