Tax credit proposal has a bipartisan chance

AP News
Posted: Jan 29, 2014 6:07 PM

WASHINGTON (AP) — In his State of the Union address, President Barack Obama gave a shout out to House Speaker John Boehner, hailing him as the successful son of a saloon keeper. It brought the house down. Less noticed, but perhaps more significant, was his hat tip to Sen. Marco Rubio, singling out the Florida Republican's support for expanding tax benefits for low-income workers.

Seeking bipartisan achievement in a divided Congress, Obama may find common ground with his proposal to expand the earned-income tax credit to childless workers, broadening benefits that now mainly go to low-income working parents. The program has support across a broad spectrum of policy analysts, prompting both liberal and conservative economists to embrace it.

Provided as a tax refund, the credit is intended to be an incentive to find work and to help offset Social Security and Medicare payroll taxes. Though childless workers are eligible, the largest part of the credit benefits families.

The idea of expanding the program was the only new legislative proposal in Obama's State of the Union.

Obama believes his proposal goes hand-in-hand with an increase in the minimum wage from $7.25 an hour to $10.10 an hour.

Rubio, a potential Republican presidential candidate in 2016, has put his own spotlight on the tax credit. He has called for replacing the earned income tax credit with a "wage enhancement" tax credit that would incorporate both low-income working families and more childless workers.

The rub? Rubio believes raising the minimum wage is a bad idea. Obama wants both.

The White House and Rubio, separately, are still working out details of their tax credit plans. As a result, significant questions such as cost, levels of benefits, and how to pay for the expansion are unclear.


The first earned income tax credit was signed into law by President Gerald Ford in 1975. President Ronald Reagan, a big fan, signed its expansion in 1986. The idea replaced a late 1960s proposal for a negative income tax that would provide the poor with an income floor. But critics said the negative income tax would be a disincentive to work. The earned income tax credit applies only to working households.


The tax credit has grown to about a $60 billion a year benefit. About 27.5 million low- and moderate-income working families received the tax credit in 2010. The average size of the credit is about $2,800 for a family with children and between $270 and $280 for a family without children. Researchers have found that a majority of recipients receive the tax credit for short periods of time of one or two years, suggesting that their employment improves and their wages rise.


The White House has simply said that Obama wants to raise the maximum tax credit and make the tax credit available to more low-wage workers. White House officials promise more details when the administration releases its budget in March. Some advocates, like Robert Greenstein of the Center for Budget and Policy Priorities, have also called for lowering the eligibility age from 25 so younger workers can qualify for the credit.


Rubio, for one, wants to do away with the tax credit and various federal welfare programs and use the money to pay for a new "wage enhancement" credit. Rubio says his plan would eliminate fraud and overpayments in the current program. Under his plan, the payments would be made in each paycheck, rather than in a lump sum, as they are under the current tax credit.

"The hope is that if you are incentivizing work in the long term, as people are acquiring skills and experience, they are moving up the work force chain, they are making more and more money, I think it could provide a significant savings," he said in an interview.


Some conservative economists, such as former Mitt Romney adviser and Columbia Business School dean Glenn Hubbard, believe the tax credit should be expanded as part a broader overhaul of the tax system. They also see the tax credit as an alternative to raising the minimum wage. "EITC expansion and reform focus subsidies on rewarding work and avoid the job-loss effects of a minimum wage increase," Hubbard said in an e-mail.

"The minimum wage and the EITC complement each other," said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and former adviser to Vice President Joe Biden. "You can't place the full burden of offsetting full wage work on the EITC. Taxpayers won't stand for it."