Stimulative Tax Cuts: Included in Final Package (But Scaled Back Slightly)

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CTJ has long argued that some tax cuts could have a chance of effectively stimulating the economy -- if they are extremely targeted to poor and working class families. Several tax credits meeting this criterion were included in the House and Senate stimulus bills, although the details differed. CTJ released state-by-state fact sheets showing how families with children would be impacted by these tax cuts, and in many states families would gain between $800 and $1,000 in 2009 alone. The conference agreement does include these provisions, although some of them are scaled back somewhat.

1. Making Work Pay Credit (MWPC)

This was originally proposed by Barack Obama during his presidential campaign as a refundable tax credit of $500 for working people, or $1,000 for couples. Technically, the credit would be capped at 6.2% of earnings up to $8,100 (or twice that for married couples), meaning this credit would be the equivalent of a refund on Social Security taxes paid on that amount of earnings. The House and Senate bills both included this and only differed on the income limits and some other details. The conference agreement, however, limits the MWPC to $400 for singles and $800 for married couples. The credit will also be dribbled out over time through a reduction in withholdings, since some policymakers have decided that simply issuing checks (as was done with the rebate checks sent to households last year) results in families saving the money, which will not stimulate the economy immediately.

2. Expansion in the Earned Income Tax Credit (EITC)

Currently, low-income workers with no children can sometimes receive a very small EITC equal to a maximum of 7.65 percent of eligible earnings, while the maximum EITC for families with children is 34 percent for those with one child and 40 percent for those with two or more children. Under the House and Senate bills, families with three or more children could receive a benefit equal to a maximum of 45 percent of eligible earnings. The maximum benefit under current law is phased out at an income level that is higher for married couples than for singles. The bills would increase that difference, further reducing the "marriage penalty" in the EITC. These changes are included in the conference agreement. The total cost of these changes to the EITC is about $4.7 billion, which is much less than the cost of other provisions and this probably accounts for their survival in the final agreement.

3. Making the Refundable Portion of the Child Tax Credit (CTC) More Readily Available for Poor Families

Currently a parent who earns less than $12,550 in 2009 is too poor to benefit from the $1,000 per-child credit. People who pay federal payroll taxes but earn too little to pay federal income taxes do not benefit from a tax credit unless it is refundable. Currently the refundable portion of the CTC is limited to 15 percent of earnings above $12,550 in 2009 (this threshold is indexed for inflation). The House-passed bill would have removed this earnings threshold so that the refundable portion of the CTC would be equal to 15 percent of any earnings (the maximum credit would remain unchanged at $1,000 per child). The Senate-passed bill settled on a less generous provision retaining the earnings threshold but lowering it to $8,100.

Citizens for Tax Justice released a one-page fact sheet on Tuesday night showing how families in each state would be affected by the House and Senate provisions and how many more children would be helped by the House version compared to the Senate version. The conference agreement steers a little closer to the House version, setting the earnings threshold at $3,000.

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