How Tax Credits for Working Families Would Fare Under the President’s Proposed Budget

Our analysis of President Barack Obama’s budget for 2014 released last week  illustrates how challenging it can be to raise tax revenues substantially while protecting low- to middle-income families from tax increases. While certain tax provisions could negatively affect these families, the $3.78 trillion budget primarily targets the wealthy by closing tax loopholes and limiting deductions, and includes permanent improvements to working family tax credits and an increase in funding for community tax assistance in an attempt to mitigate any additional tax burden on low- to middle-income households.

The President’s offer includes a proposal to move from the current Consumer Price Index (CPI) to a “chained CPI.” We blogged about what this switch would mean for tax credits for working families back in December, when a chained CPI was being considered as part of fiscal cliff negotiations.

In short, a chained CPI attempts to account for how people shift their purchases from one area of spending to another when prices rise, resulting in a lower inflation rate than the traditional method of calculating the CPI.  The maximum value of the Earned Income Tax Credit (EITC), as well as the level at which the EITC begins to fade out, and at which the credit can no longer be claimed at all, are all updated for inflation each year. Since the chained CPI produces a lower rate of inflation than the current CPI, this would reduce the value of the EITC over time. The impact on the Child Tax Credit (CTC) is much more complicated; only the threshold at which people can begin to claim the CTC is indexed to inflation, and that threshold is temporarily on hold through 2017 while a $3000 threshold applies.

President Obama’s proposal would also apply the chained CPI to other tax provisions that benefit low and moderate income families, including the personal exemption and standard deduction. Reducing the value of these tax provisions over time would inevitably raise taxes on these families.

While a chained CPI and a proposed tax increase on tobacco products could increase taxes for low and moderate income households, the budget also includes a number of proposals to outweigh any potential burden on these families, so much so that the Washington Post has identified low-income taxpayers as one of the biggest groups of policy “winners” in the proposal.

The President’s offer would make permanent the 2009 improvements to the EITC and Child Tax Credit, which were scheduled to expire in 2017. Under the American Recovery and Reinvestment Act, the EITC was expanded to provide extra support for families with three or more kids, as well as provide relief for married couples from the credit’s so-called “marriage penalty,” and the Child Tax Credit’s income-eligibility threshold was lowered from around $12,000 to $3,000.

The budget also calls for a 50% increase in funding for Volunteer Income Tax Assistance (VITA) programs, from the current $12 million to $18 million, benefiting the millions of working families that rely on VITA sites to help them claim and keep the EITC and other credits, rather than pay these refunds in fees to commercial preparers.

While President Obama’s budget won’t be enacted as is, it’s a great illustration of the goals and priorities of the administration, particularly when it comes to shielding low-income families from harmful tax increases. It offers insight into how the administration will proceed if an opportunity arises to restructure the tax code, or if other opportunities arise to protect and improve working family tax credits throughout the legislative process.