The bill’s authors tout it as offering something for both sides, and they’re right: It would boost many U.S. companies’ bottom lines by restoring several tax breaks that would otherwise have expired, a Republican goal; and it would deliver significant new assistance for millions of low-income families, via an increased child tax credit, as Democrats wanted. Even so, the bill received a tepid reception from Republican and Democratic lawmakers and the White House, based on the fact that it did not do even more for their respective policy priorities.
Congress is already struggling to work through a lengthy to-do list. To avoid a partial government shutdown, lawmakers must pass a short-term funding bill by this weekend. There’s still no agreement on aid for Ukraine or measures to secure the southern border. The federal government is nearly one-third of the way through the fiscal year ending in September, but there’s still no actual budget for this year. (Congress keeps extending 2023 funding levels in stopgap deals.) While leaders from both parties recently agreed on 2024 top-line spending figures, the details aren’t finalized.
And yet there isn’t much time to act on the $80 billion deal: The bill’s tax benefits are supposed to apply to tax years 2023, 2024 and 2025. Tax-filing season begins Jan. 29. Waiting too long to pass this legislation would make it confusing at best and useless at worst for 2023 tax-filers because too many will have already submitted their returns.
The best parts of the deal, hammered out between House Ways and Means Chairman Jason T. Smith (R-Mo.) and Senate Finance Chairman Ron Wyden (D-Ore.), are its provisions increasing the value of, and expanding eligibility for, the child tax credit. Nearly 16 million children would benefit, according to an analysis by the left-leaning Center on Budget and Policy Priorities.
The current credit is $2,000 per child, but many lower-income families do not receive the full amount because they owe little to no federal income tax. A household must earn at least $2,500 a year to qualify for any credit. A maximum of $1,600 is refundable — meaning families that don’t owe income tax can receive money back from the government. The new legislation would lift the refundable amount to $1,800 per child for 2023 and $2,000 (or more, depending on inflation) by 2025. This would be a substantial financial boost to larger families of modest means. Families still have to earn at least some income from work to qualify, but that work could be from the year for which they are filing or the previous one. Overall, it’s not as generous as the 2021 child tax credit expansion that lifted nearly 3 million kids out of poverty. But this latest compromise would help about 400,000 kids out of poverty, the budget center estimates.
The price of this aid for poor children is business tax benefits. The bill would allow immediate deduction of any U.S.-based research and development spending. (Under current law, the deduction has to be spread over five years.) It also restores companies’ ability to deduct the entire cost of certain equipment or capital expenditures and makes it easier to deduct interest expenses. These tax breaks were in the 2017 GOP tax bill, but they had largely ended by a quirk of the 2017 bill’s design. Their extension in this measure confirms that there is nothing so permanent in Washington as a temporary tax cut. Republicans are already talking about extending them beyond 2025.
That’s reason to doubt the ultimate price tag will be “just” $80 billion. The Committee for a Responsible Federal Budget estimated the true figure would be more like $500 billion over 10 years if the policies are made permanent without further offsetting spending cuts or revenue increases. Still, the cost through 2025 is fully offset, mostly by curtailing the employee retention credit, a pandemic-era small business subsidy whose cost has quadrupled from the $55 billion originally estimated, largely because of abuse and fraud.
As Washington compromises go, this is a typically unlovely one, but it’s redeemed by a tangible improvement in life circumstances for the working poor.
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