Van Hollen Proposes Middle Class Tax Cuts
At an event at the Center for American Progress, House Budget Committee Ranking Member Chris Van Hollen (D-MD) unveiled an "Action Plan" to broadly cut taxes for the middle class. The reported $1.2 trillion cost of the plan would be offset with revenue from high earners and the financial sector. The details of the plan have not been completely spelled out yet, but it is encouraging that Van Hollen is committed to paying for the full costs. However, using increased revenues to pay for a middle class tax cut will make future deficit reduction more difficult.
Here are the major elements of Van Hollen's plan, including four parts that would cost money and three proposals to raise money.
Paycheck Bonus Tax Credit
The plan's centerpiece is a Paycheck Bonus Tax Credit, which would provide a $1,000 credit for single earners and $2,000 for couples. The credit would phase out at incomes of $100,000 and $200,000 indexed for inflation. Van Hollen indicated that the credit was not refundable, meaning that people with no income tax liability would not benefit, but that he intends to consider changes to make it at least partially refundable, which would be more expensive and provide more benefit to lower-income households. This credit is the plan's most expensive, potentially making up four-fifths of the plan's cost, depending on the exact details.
If taxpayers put at least half of their tax credit into a tax-preferred savings plan, they would qualify for an additional $250 Savers' Bonus credit.
Child and Dependent Care Credit
The Child and Dependent Care Tax Credit (CDCTC) provides a 35 percent non-refundable credit for up to $6,000 of child care expenses ($3,000 for one child). Van Hollen notes that the credit is poorly designed, because it phases down starting at very low incomes, so virtually no one can take the full value of the credit. The credit is reduced for taxpayers making more than $15,000 until it reaches 20 percent for people earning $43,000 or more. The plan would increase the amount of eligible expenses to $8,000 for one child and $16,000 for two or more children, set the credit at a flat rate of 20 or 25 percent, phase out the credit at $200,000, and make it refundable so more low-income people can take advantage of it.
Second Earner Deduction
The plan would also bring back the second earner deduction, which existed for a short period prior to the 1986 Tax Reform Act. This version would give a secondary earner with dependents a 20 percent tax deduction on up to $60,000 of income. In other words, a secondary earner making $40,000 could deduct $8,000 from their income for tax savings of $1,200 if they were in the 15 percent tax bracket. This policy was also proposed last year by then-Senate Budget Committee Chair Patty Murray (D-WA). The Hamilton Project estimated this proposal would cost $8.2 billion annually, which would be approximately $90 billion over 10 years.
The plan would give credits to businesses that establish apprenticeships or "other job training partnerships," but does not provide any specifics.
Financial Transactions Tax
The plan's first pay-for is a 0.1 percent financial transactions tax (similar to one being adopted by the European Union), which the plan describes as a way to raise revenue for tax relief and curb financial speculation. CBO estimated that a 0.01 percent tax would raise $180 billion over ten years, but a 0.1 percent tax would not raise ten times as much since it would also curb trading. Most likely, this proposal would raise hundreds of billions of dollars.
Stock Option and Bonus Deduction Limit
Another revenue-raising proposal would limit the deductibility of CEO stock options and performance bonuses if certain conditions aren't met. Currently, the tax code limits deductions for the highest-earning employees' salaries to $1 million but stock options and performance-related pay are exempted from the limit so they can be deducted. The proposal, introduced last year as the CEO-Employer Payroll Tax Fairness Act would eliminate those deductions for performance-pay unless the company's workers get pay increases that reflect inflation and productivity. Van Hollen also suggested that proposal could be modified to encourage employee ownership and profit-sharing. This proposal will raise less than $50 billion, which is the amount from eliminating deductions over $1 million all together.
Tax Expenditure Reductions
The plan is less specific about this policy, but Van Hollen states the intention to limit tax expenditures for the top 1 percent. This could be done in several ways. For instance, the President's budget limited the value of certain deductions and exclusions to 28 percent to raise almost $500 billion in revenue. However, the President's policy affected a broader group than the top 1 percent (approximately the top 3 percent). If the policy was more narrowly tailored, it would need to be a larger reduction to raise the same amount of revenue. There are also several other policies to broadly limit tax expenditures for high earners that were discussed during the 2012 Presidential campaign and the lead-up to the fiscal cliff. To meet the $1.2 trillion target, this policy would probably need to raise hundreds of billions of dollars.
The plan has some details to be filled in, but it is good to see Van Hollen fully offsetting his proposal, particularly given the amount of revenue involved. However, this plan raises a huge amount of revenue from high earners, and using all this money to pay for a large tax cut would make it more difficult to raise revenue for deficit reduction. Nonetheless, the package shows the virtue of offsetting the cost of new policies: it forces policymakers to see what they are willing to do to offset the costs.