Democrats consider tax cuts and credits for middle class

Critics question how government would pay for proposed benefits

March 05, 2007|By Joel Havemann and Molly Hennessy-Fiske | Joel Havemann and Molly Hennessy-Fiske,LOS ANGELES TIMES

WASHINGTON -- After years of claiming that Republicans were cluttering the tax code with provisions that enriched the wealthy, leading Democrats in Congress want to add more tax credits and deductions to benefit narrow groups of largely middle-class constituents.

Among potential beneficiaries: people with elderly parents in nursing homes, new parents, college students, volunteer firefighters and organ donors.

But all these goodies are raising questions about how the Democrats can give away tax revenues while keeping their pledge not to deepen the government's deficit.

"A lot of these provisions may be well-intentioned," said Leonard Burman, co-director of the nonpartisan Tax Policy Center. "But they drain the government of precious resources," he said, thus aggravating the deficit or forcing Congress to raise taxes on everybody else.

Last month, Sen. Charles E. Schumer, a New York Democrat, offered the most expansive package of tax credits, designed to deliver $80 billion in tax savings to middle-class families during its first four years.

Schumer's legislation would double the $1,000 tax credit for children under 2 and expand the dependent care tax credit to families with elderly dependents living in institutions. The maximum allowable credit - 35 percent of expenses, capped at $3,000 for one dependent and $6,000 for two or more - would be available to families with incomes up to $75,000, not $15,000 as it is now.

His bill also would give undergraduate and graduate students another $2,500 in tax credits.

The legislation's most expensive provision involves extending the exemption of about 20 million people - those with incomes of about $75,000 to $100,000 - from the alternative minimum tax, or AMT, through 2008, and blunting the tax's impact on those with higher incomes.

Schumer's bill was modeled on proposals by Third Way, a liberal Washington-based think tank that former President Bill Clinton helped found. Jim Kessler, Third Way's vice president for policy, said the goal of the tax credits is to help families with incomes of $40,000 to $120,000.

That group includes "people who are too wealthy to benefit from government grant programs and entitlement programs but are not earning enough so they can realistically afford paying for college and caring for kids and elderly parents without a lot of hardship," Kessler said. "These are families that are working and are generally successful, but they've got some huge humps to get over that put enormous pressures on their lives."

Democrats also are sponsoring such bills as one to provide a tax credit of as much as $5,000 for costs associated with organ donation, including lost wages during convalescence from an operation, and another to make benefits paid to volunteer firefighters and emergency medical personnel tax-free.

Budget watchers such as Burman consider "tax expenditures," as they call tax breaks for targeted groups, the equivalent of government spending. To parents, a $1,000 tax credit for baby-sitting expenses is no different from a $1,000 check from the government. And the government's bottom line is the same, whether $1,000 is deducted from revenue or added to spending.

"Tax expenditures" do carry one significant political advantage for lawmakers: Because they don't increase government spending outright, supporters can't easily be labeled as "tax-and-spend" liberals.

But opponents of the tax credits point out that they do nothing to address the growing budget deficit.

"To take water out of one part of the bathtub and pour it into another part of the bathtub ... is not a way to solve the problem," said Grover Norquist, president of Americans for Tax Reform, a conservative group.

Schumer's proposal also has drawn criticism for larding the tax code with added credits that don't necessarily help middle-class families.

"All of these tax credits - it confuses people. And it's not certain they provide the intended relief," said Robert Bixby, president of the Concord Coalition, a conservative Washington-based group that lobbies for spending controls.

The Schumer package also could run afoul of Congress' pay-as-you-go rules, which say legislation that reduces revenue or increases spending must pay for itself, usually through provisions that cut spending elsewhere or raise taxes.

But the House can skirt its version of pay-as-you-go budgeting by mustering a bare majority to waive the rule. The Senate, which adopted "pay-go" two years ago, ruled that any tax cut, no matter what its impact on the deficit, was all right if it fits within the budget that Congress is supposed to adopt each spring. And even if it violated the budget, the provision would be passed if it received the votes of 60 of the 100 senators.

Schumer's staff said he plans to pay for the tax package by "eliminating the billions of dollars in tax breaks for the oil industry," closing the so-called "tax gap" by collecting more delinquent taxes and raising tax rates for those earning more than $400,000, effectively repealing Bush tax cuts for the wealthy.

Budget experts say it would be difficult to recoup much additional from closing the tax gap, and Democrats would face an uphill battle trying to repeal tax breaks to oil companies.

Kessler at Third Way concedes the most realistic funding source is the repeal of Bush's tax cuts, which he said would cover the cost of the tax credits and most of the cost of extending AMT relief.

Joel Havemann and Molly Hennessy-Fiske write for the Los Angeles Times.

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