August 08, 2007

Anti-Tax Jihad Turns On Itself

Amid all the scurrying about on Capitol Hill last week before Congress left for its August recess, a remarkable story unfolded in the world of anti-tax activists and politicians that has not received enough attention.

Robert Novak tells the story, with great dismay, of how some Republican Senators considered introducing a proposal that would change the way the tax code treats health insurance purchased by individuals (as opposed to obtained through an employer) which is an idea that the President proposed in January. This plan would end the tax subsidy for employer-based health insurance and create one for individually purchased health care, and the net result over time would actually be a tax increase because most people would probably stay in employer-based health care. The proposal was taken up by a group of conservative Senators as an alternative to the bills passed by both chambers to expand the State Children's Health Insurance Program (SCHIP).

But the conservative Senators behind this effort would never dream of increasing taxes. So they included in their proposal a provision making the new tax credit for health insurance refundable for low-income people, making the bill budget-neutral.

Let's put aside for a moment the many, many problems with pushing families onto the individual health insurance market, where the plans offered are more expensive and less generous and probably encourage people to go without needed care. The Center on Budget and Policy Priorities does a good job of
explaining this, so I won't dwell on it.

Let's assume for a moment that we are clueless enough to believe that this is a good proposal from a health policy perspective. Or let's say we don't even care about health care. Let's say we're conservatives who just don't want taxes raised. As conservatives, we might think that this proposal is reasonable because it's budget-neutral. Sure, it raises taxes in some places but it makes up for it by reducing taxes for low-income people who are purchasing health insurance, right? The Heritage Foundation, which is not exactly known for its bleeding heart concern for the poor or its fondness for tax hikes, found this reasoning persuasive and supported this proposal.

But apparently moving the tax burden around so that poor people have less of it constitutes a major sin in the anti-tax scriptures as set forth by Grover Norquist. His organization, Americans for Tax Reform, issued a
statement that this proposal is a tax hike and anyone who signed the group's "Taxpayer Protection Pledge" and then voted for this proposal would be violating the pledge.

The logic ATR uses is that the refundable tax credit payments to people with no federal income tax liability is counted as "spending" in the budget process, so really this bill increases taxes to pay for increased spending.

This is ludicrous. Whether you want to call the refundable tax credit payments new "spending" or new "tax refunds" is really a matter of semantics. The families benefiting are not "non-taxpayers" as ATR's statement calls them. The vast majority of these families has at least one bread-winner who is paying federal payroll taxes (which are extremely regressive) so the refundable tax credits really could be said to offset a portion of payroll taxes. From this perspective, you could say that in most cases refundable tax credits are a "tax reduction" rather than "spending." That is, if you wanted to be that technical.

(Some people say payroll taxes are totally different from income taxes because payroll taxes pay for specific progressive benefit programs, but this is ridiculous. Social Security taxes can be used to pay for any government spending, since there is no "lock-box" that they go into to be truly "saved" for retirees, and the federal government is obviously spending the Social Security surplus right now to keep the government running).

The real problem that ATR has with this proposal is that the responsibility for funding the federal government would be moved slightly from people who can least afford to pay to the wealthy people who have benefited the most from Bush tax cuts. Any movement in that direction is not even worthy of discussion for the anti-tax crowd.

Think for a moment about what this rigid thinking by the anti-tax activists means for them. Imagine the House Democrats finally pass the plan they're developing to eliminate the Alternative Minimum Tax for tens of millions of families and pay for it by scaling back the Bush tax breaks for the richest one percent. ATR is sure to oppose this because it involves "tax increases" on a tiny elite even though the vast majority of families benefit. That sounds like a winning strategy.

The anti-tax people have long benefited from the simplicity of their message of "no tax hikes." But as we move into a time when everyone agrees that the government needs to do more about health care and national security, not to mention make some reforms to the tax code, this rigid, simple no-new-taxes ideology is becoming an albatross for them. Not that I'm terribly concerned for them.


At 11:06 AM, Anonymous Tax Geek Wonk said...

Both Left and Right have always maintained that refundable credits are spending, not tax cuts, first off.

Secondly, to argue that this health refundable credit is a rebate on FICA is absurd.

There are already three refundable credits in the tax code. One of them, the earned income credit, spends money through the tax code to rebate payroll taxes for the poor. In 2006, FICA taxes were reimbursed via refundable credit spending for single people making less than $5400. Single parents with one kid get FICA taxes rebated if income was less than $21,650. Single parents with two or more kids get FICA taxes rebated if income is less than $26,700.

What if you're married? If you're married with no kids, you get FICA rebated if your income is $5250 or less. If you're married with one kid, your FICA is rebated if your income is $23,000 or less. If you're married with two or more kids and your income is less than $28,150, your FICA is rebated.

Above those levels, part of FICA is rebated up to certain limits ($12,100 single no kids, $32,000 single one kid, $36,300 single two or more kids, $14,100 married no kids, $34,000 married one kid, $38,348 married with two kids or more).

But that's not all. The other major refundable tax credit already in the code is the "additional child tax credit." Even if your tax liability is zero, you can still get it spent on you as a refundable credit.

This refundable credit is equal to 15% of income over $11,300 (more for families with three or more children), limited by the size of the child tax credit.

But that's not all. If you have been displaced job-wise because of free trade, or the unions made your pension plan go belly-up, you get the "health coverage tax credit," another refundable credit spending program. This rebates 65% of premiums for taxpayers in this category. Admittedly, most refundable credit for health proposals roll this spending program into itself.

So, it's clear that tax increases to target even more refundable credits on this population is spending, pure and simple. We even know how much the Burr Amendment would have spent on this population: $800 billion over ten years.

Hiding behind FICA payments is as absurd as it is intellectually-dishonest.


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