President Bush’s two major tax cuts in 2001 and 2003 have removed nearly 4 million taxpayers from the income tax rolls, so that nearly 30 percent of all income-tax filers pay nothing.
Thanks to the 2001 $1.35 trillion tax cut and last month’s $350 billion tax cut, 39.6 million families will have no income tax liability in 2003, according to numbers by the Tax Foundation and Citizens for Tax Justice.
Such families owe nothing because they don’t earn enough to pay income taxes or because they will have more credits from government programs than they owe in income taxes.
The figures apply even before Congress acts on a bill to provide 6.5 million families, who are already off the tax rolls, with up to another $400 per child, bringing the total per-child tax credit to $1,000. The bill would extend the full $1,000-per-child credit to married couples making up to $150,000, eliminating the eligibility “marriage penalty.”
Yesterday, the Senate agreed to a conference to work out differences between the Senate-passed and House-passed tax credit bills. The House bill extends the tax credits for a longer period than the Senate bill.
The number of families that have fallen off the tax rolls has more than doubled since 1980, when there were 18.6 million — about 20 percent of those filing — who had no liability, according to numbers from the Tax Foundation.
“Every bill since at least 1986 has taken a few more million off the rolls,” said Chris Edwards, director of fiscal policy at the Cato Institute.
The threshold for filers who have no tax liability has also increased to where a family of four earning nearly $40,000 might well pay no income taxes, depending on the exact situation.
Income transfers happen through two basic credits: the per-child tax credit and the Earned Income Tax Credit. In 1999, the EITC transferred more than $31 billion to low-income families, according to IRS statistics.
But Robert S. McIntyre, director of Citizens for Tax Justice, said the Bush tax cuts haven’t done as much for low-income families, though they have done plenty for middle-income families, those in the middle quintile making between $28,000 and $45,000.
More than half of the families dropped from the rolls thanks to the Bush tax cuts — 54 percent — have come from that group. Another 26 percent were in the second-highest quintile, making between $45,000 and $73,000.
The tax cuts caused only about 100,000 families in the lowest quintile, with incomes below $16,000, to drop off the rolls, and just 500,000 families in the second-lowest quintile.
Now, 77 percent of those in the lowest-income quintile have no income tax liability, while 49 percent of those in the $16,000 to $28,000 group don’t pay income taxes. And even in the second-highest quintile, 7 percent of those making between $45,000 and $73,000 have no income tax liability.
Mr. Edwards of Cato said the number of families off the rolls has changed the politics of tax cuts.
He said Democrats can no longer call for income-tax cuts for poor families because there are so few who pay, so instead they push for “refundable credits.” Such credits, rather than subtracting from a qualifying family’s tax liability, pays money to them outright since they owe nothing.
Democrats and some Republicans say the credits are appropriate because low-income individuals do pay many other taxes — “property taxes, sales taxes, payroll taxes, excise taxes, 8 percent of their income,” said Rep. Rosa DeLauro, Connecticut Democrat.
She and other Democrats argue that those other taxes are rarely cut, so a transfer through the income tax is one way to compensate. Democrats want the House to accept the Senate bill.
But House Majority Leader Tom DeLay countered with a chart showing that for a single mother of two children making $20,000, her money from the EITC and the child tax credit would actually cover all of her tax liability, including those state and local taxes and the payroll taxes that are designated for Medicare and Social Security funds.
She gets nearly $750 more now than she would have without Mr. Bush’s two tax cuts.
The issue splits Republican lawmakers, and the administration seems to have changed its position in the weeks since the initial bill passed.
“This administration recognizes that people who pay income taxes should receive income tax relief, and that when you reach a point where people pay absolutely zero in income taxes, you’re being very fair to all income-tax payers,” said White House Press Secretary Ari Fleischer, when first asked about the issue.
But less than two weeks later Mr. Fleischer endorsed the Senate proposal and the concept of redistribution of income through tax law.
“It is the reality of how our tax code works,” he said. “The president supports these measures because the president thinks that for people who are struggling to make it from lower income into lower-middle income and into middle income, this is a helpful way to help them to work up the economic ladder.”
Senate Republicans overwhelmingly embraced the expanded program, with all but two of them joining Democrats in passing the bill. But House Republican leaders flatly refused to bring up just the Senate bill, with Mr. DeLay simply noting that it “ain’t going to happen.”
The Texas Republican and others said income-tax cuts should go to those who pay income taxes — a position House conservatives have also embraced.
Conservative House Republicans last week sent a letter to Republican leaders suggesting they change the name of the EITC to LISAP, the Low-Income Subsidy and Assistance Program, and the name of the refundable child tax credit to CRISAP, the Child-Rearing Income Subsidy and Assistance Payment.
“The problem is that welfare payments are being mislabeled as tax rebates,” said Rep. Ernest Istook, Oklahoma Republican. “To end the confusion, we should stop putting the ‘tax refund’ label on government checks that are actually public assistance.”
Mr. Istook said beyond the concerns over policy, the IRS has estimated that about a third of the EITC payments — between $8 billion and $12 billion in tax year 1999 — were fraudulent.
The question of tax credits and families falling off the income tax rolls also sparks a philosophical debate about whether that’s healthy.
“If a third of Americans don’t pay taxes, then they’re voting for government that’s too big,” Mr. Edwards at Cato said.
But Mr. McIntyre said those people have little political clout and are “probably a good counterweight” to those on the other end of the income spectrum clamoring for special exemptions.