Cuts, Credits, & Compromises

With a national deficit near $1 trillion, a national unemployment rate of 9.8%, and a growing wealth gap that places the survival of the middle class at risk, Congress was tasked with deciding what will happen to the expiring Bush Era tax cuts and the Recovery Act tax credits. Above all things, NCTC advocated for a permanent expansion of the Recovery Act Tax Credits - including the EITC, Child Tax Credit, the Making Work Pay Credit, and American Opportunity Tax Credit. However, given the need for fiscal responsibility and ever increasing wealth inequality, NCTC also supported allowing the tax cuts on the top 2% of income earners to expire and a significant strengthening of the estate tax.

However, failing to act before the November elections, Congress left this decision to the lame duck session and a more difficult political environment. The tax package that they now have before them came from negotiations between President Obama and the incoming Republican leadership. NCTC was happy to see that the package includes:

Extension of Recovery Act Credits

The package provides a two year extension of the EITC, Child Tax Credit, American Opportunity Tax Credit. Learn more about these credits.

Extension of Unemployment Benefits

Unemployment benefits will be extended at their current level for 13 months. The Council of Economic Advisers estimates that this will create 600,000 jobs and impact an estimated 7 million workers.

Payroll Tax Holiday

The agreement includes a 1 year reduction of 2% in the payroll tax. This will impact over 155 million workers and cost $120 billion over the next year.

While the proposed package includes important benefits for middle- and low-income workers, it also includes pieces that will result in long-term challenges for middle and low-income workers as they bare the burden of the growing deficit:

Loss of the Making Work Pay Credit

While the proposed package includes a payroll tax cut, workers lost the far more effective Making Work Pay Credit. According to the Tax Policy Center, "single working people with earnings below $20,000 and married couples with earnings below $40,000 are worse off under the payroll tax cut proposals in the compromise between the President and the Republicans."

Under the Making Work Pay Credit, these workers receive $400 when they earn at least $6,452 a year while married couples with earnings above $12,900 receive $800. The compromise package cuts the Social Security payroll tax from 6.2% to 4.2%. This means that a couple wold have to earn $40,000 to receive a $800 tax benefit. Every working-class couple earning less than that will get receive less than $800. Meanwhile, higher earners benefit under this change. A worker earning $106,800, the maximum amount of income subject to Social Security tax, stands to save $2,136 in payroll taxes. A married couple with both spouses making over $100,000 will actually save $4,272.

Extends Bush Era Tax Cuts

The proposed package extends tax cuts for households above $250,00. According to the Center on Budget and Policy Priorities, this is an average tax cut of $100,000 for households whose income exceeds $1 Million.

Shrinks the Estate Tax

The proposed package also shrinks the estate tax beyond 2009 levels. It will provide an estimated $20 billion in tax reductions over the next 2 years for the top one-quarter of 1 percent of estates. These estate will receive an average tax break of $1 million each.

While the compromise is not perfect, the inclusion and the protection of vital tax credits is key as we look to next year. Congress is expected to take up major tax reform, using the Fiscal Commission Report as their basis.The report maintains these credits, and NCTC must continue to advocate for their improvement, expansion, and simplification.