H.R. 4853x: Middle Class Tax Relief Act

H.R. 4853x

Middle Class Tax Relief Act

Sponsor
Rep. Sander M. Levin

Date
December 3, 2010 (111th Congress, 2nd Session)

Staff Contact
Communications

Floor Situation

The House is scheduled to consider H.R. 4853 under a closed rule on Thursday, December 02, 2010.  The rule provides one hour of debate equally divided, without the opportunity to offer a motion to recommit, and suspension authority through Friday, December 3, 2010.  This legislation was introduced by Rep. Sander Levin (D-MI) on December 1, 2010.

Bill Summary

H.R. 4853 would extend many provisions contained in the 2001 and 2003 tax relief legislation, but would fail to prevent tax increases on those small business owners and families with incomes of greater than $250,000.  The bill would permanently extend the child tax credit, the earned income tax credit, and a two year alternative minimum tax [AMT] patch.  Finally, the bill would continue to spend an additional $100 billion on stimulus provisions through tax welfare subsidies

Title I—Middle Class Tax Relief Made Permanent

The bill would permanently extend the 10 percent, 25 percent, 28 percent and 33 percent tax rate brackets originally signed into law in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which are set to expire on December 31, 2010.  The bill would allow the 35 percent tax bracket on incomes of $200,000 (single filers) / $250,000 (joint filers) and over to revert back to the 39.6 percent tax rate.  According to the Joint Committee on Taxation this provision would reduce revenue by $655.686 billion over 10 years

Member Concerns:  Some members may be concerned that increasing taxes on upper income households and small business owners could further weaken the sluggish economy.  According to economist Mark Zandi, “I worry that these aren’t normal times and that even this income group [those making more than $200,000 single filers / $250,000 joint filers a year] may be sensitive,” noting that the top 3 percent of households account for a quarter of all personal spending, which could very well trigger further economic decline.

In addition, many members may be concerned that according to AEI’s Alan Vaird, IRS data proves that more than 48 percent of the net income of those that file at the individual rate; sole proprietorships, S corporations, and partnerships reported on tax returns went to households with incomes above $200,000 in 2007

H.R. 4853 would provide a permanent extension of the child tax credit.  The 2001 tax relief provision increased the child tax credit from $500 to $1,000, and allowed the credit to be claimed against the AMT.  The Democrats’ failed stimulus increased the subsidy by allowing taxpayers to claim the refundable tax credit against tax liabilities once the taxpayer received $3,000 of earned income.  The bill would permanently extend both provisions included in the 2001 EGTRRA tax law, as well as the Recovery Act.  According to the Joint Committee on Taxation this provision would reduce revenue by $432.748 billion over 10 years.

The bill would preserve the 2001 tax relief provisions that prevented a marriage penalty by increasing the standard deduction for joint filers to twice the amount available to single filers.   According to the Joint Committee on Taxation this provision would reduce revenue by $85.713 billion over 10 years.

The bill would make permanent certain educational tax incentives originally adopted in the 2001 tax relief bill,  including the deduction of student loan interest (maximum of $2,500) for single filers with incomes up to $75,000 and married couples of up to $150,000.  This provision would also include an allowance of up to $2,000 in contributions per beneficiary to tax-preferred Coverdell education savings accounts. Finally, the bill would extend certain bond-financing options for educations facilities.  According to the Joint Committee on Taxation this provision would reduce revenue by $18.741 billion over 10 years.

H.R. 4853 would permanently extend the reduced capital gains and dividend income for taxpayers with incomes below $200,000 (single filers)/$250,000 (joint filers).  The tax rate for those select taxpayers would remain at 15 percent.  Those taxpayers with incomes of $200,000 (single filers)/$250,000 (joint filers) and above, the capital gains tax rate would increase from 15 percent to 20 percent, and the dividend tax rate would increase from 15 percent to 39.6 percent.  According to the Joint Committee on Taxation this provision would reduce revenue by $99.113 billion over 10 years.

Member Concern:  Some members may be concerned that a large portion of income paying seniors who rely on capital gains and dividend income as a means for support will be subject to the increased taxes on investments.

Large companies, particularly C corporations, are vulnerable to increases in the individual income tax rates (including capital gains and dividend taxes), as corporations represent entities that are comprised of individual shareholders.  Therefore, in addition to an increase in the top marginal tax rate, taxes on capital gains and dividends will negatively impact those businesses seeking to expand business investments.  When these tax rates increase, individuals have less incentive to allocate their savings and investments to these businesses; instead, they shift their funds into less economically beneficial, tax–exempt (or less taxed) investment vehicles.

IRS data shows that taxpayers with incomes of more than $200k receive 47 percent of taxable interest income, 60 percent of dividend income, and 84 percent of net capital gains income, respectively.  This data is evidence that this particular income group provides a large amount of capital that is utilized by corporations to finance operations (including payrolls) or to increase investments.

The bill would permanently extend the personal exemption phase-out (PEP) and Pease repeal for certain taxpayers.  Based on an individual or families income, certain limitations prior to 2010 prevented the full value of itemized deductions (Pease limitation) and personal exemptions (PEP limitations) from reducing tax liability.  Both the PEP and Pease limitations were fully repealed in 2010.  The bill would provide a partial repeal, only exempting those income earners under $200,000 (single filer)/$250,000 (joint filers).  According to the Joint Committee on Taxation this provision would reduce revenue by $10.158 billion over 10 years

H.R. 4853 would make permanent a 2001 tax relief provision that would allow families to claim a maximum $13,170 adoption tax credit, the employee tax credit for child care, and the increased dependent care tax credit.  According to the Joint Committee on Taxation this provision would reduce revenue by $6.314 billion over 10 years.

The bill would also make permanent the earned income tax credit provision included in the Democrats’ stimulus that increases the beginning point of the phase-out range for joint filers by $1,880.  According to the Joint Committee on Taxation this provision would reduce revenue by $54.969 billion over 10 years.

Possible Member Concerns:  Some members may be concerned that this provision would continue the policies of the Democrats’ failed stimulus bill, which continues to provide welfare through the tax code by issuing government checks to individuals who have zero tax liability. 

In addition, members may be concerned that this tax credit adds to the complexity of the tax code.  The General Accountability Office estimates that only 75 percent of those eligible for the tax credit even claim the benefit due to a failure to understand how to claim it, or simply because taxpayers are unaware that they are eligible for the credit.  Finally, the IRS estimates that more than 30 percent of the earned income tax credits are claimed erroneously because of filer confusion or fraud; over-claim rates are estimated to be between 27 and 32 percent, or between $8.5 and $9.9 billion.

Title II—Expensing by Small Businesses of Certain Depreciable Assets

The bill would make permanent the small business expensing amounts to allow small business taxpayers to write-off the cost of capital expenditures in lieu of recovering these costs through depreciations schedules.  The bill stipulates that small business taxpayers would continue to be allowed to write-off up to $125,000 of capital expenditures, limited by a phase-out once those capital expenditures exceed $500,000.  According to the Joint Committee on Taxation this provision would reduce revenue by $25.693 billion over 10 years.

Title III—Extension of Alternative Minimum Tax Relief

Finally, the bill would provide a two alternative minimum tax patch.  The bill would extend AMT relief for nonrefundable personal credits and increases the AMT exemption amount to $47,450 (single filers) / $72,450 (joint filers).  According to the Joint Committee on Taxation this provision would reduce revenue by $134.609 billion over 10 years.

Member Concerns:  Some members may be concerned that providing a two year AMT patch with the same exemptions rates in both years will likely ensnare additional middle-income families in 2011 in comparison to the number of taxpayers who will subject to the AMT in 2010.

Member Concerns:  This bill does nothing to protect small businesses and family farms from the return of the death tax.  The death tax which is currently repealed for 2010 will increase significantly with a top rate of 55 percent and a low exemption amount of $1 million beginning January 1, 2011. 

Cost

According to the Joint Committee on Taxation this legislation would reduce revenues by $1.505 trillion over the 2011-2020 periods.