Yesterday, President Obama signed into law the “American Taxpayer Relief Act of 2012,” also known as the fiscal cliff deal. As described in the New York Times and elsewhere, one of the key takeaways about the deal is that although income taxes will only rise for the wealthiest households, the preservation of the tax cut for all other taxpayers will largely be offset by the increase in the payroll tax. Specifically, less than one percent of all households will see their income taxes rise, but all taxpayers will be subject to a 2% increase in the payroll tax; consequently, families making the median income of about $50,000 will break even. However, the new legislation also has a number of implications more specific to asset building and low-income families’ balance sheets. Below, we highlight a few of the key provisions.
Key Tax Credits Preserved
From an asset building perspective, one of the biggest wins in the fiscal cliff debate was the five-year extension of several key tax credits at their Recovery Act levels. The Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will all continue to provide a significant boost to low-income families’ financial security. As the Center on Budget and Policy Priorities has noted, failing to preserve these credits would have had devastating practical consequences: “A married couple with three children with earnings equal to the estimated 2013 poverty line ($27,713) [would] receive $1,934 less in EITC and CTC benefits combined” if Congress had failed to act. These refundable credits not only provide a crucial supplement to income, but also offer a key opportunity to set aside some savings for emergencies and long-term goals like homeownership, higher education and retirement.
Emergency Unemployment Insurance Extended
Unemployment Insurance (UI) is an essential safety net program that helps families stay afloat following a layoff – which is more important than ever following the widespread unemployment brought on by the recession. In 2011 alone, UI kept 2.3 million Americans out of poverty. Moreover, like the Supplemental Nutrition Assistance Program (SNAP), UI benefits provide a significant stimulus to the local economy because recipients tend to spend them quickly.
Congress’ decision to preserve Emergency Unemployment Compensation (EUC) through 2013 is an essential step toward economic recovery and getting Americans back on their feet. EUC allows UI recipients in states with high unemployment rates to receive benefits beyond the standard 26 weeks. The Congressional Budget Office recently estimated that the one-year extension alone will boost GDP by as much as half a percent. Furthermore, access to these benefits will help families avoid spending down all their savings and “hitting rock bottom” while they search for work.
Coverdell Tax Break Made Permanent
Coverdell Education Savings Accounts allow families to deposit up to $2000 a year toward college or private K-12 tuition. While the contributions are not tax-deductible, funds can be withdrawn tax-free as long as they are used for qualifying educational purposes, which can create significant savings over time. The Coverdell tax break was scheduled to expire at the end of 2012, but the fiscal cliff deal made it permanent. This provision could help put higher education in reach for more families.
Estate Tax Break Extended
Another tax implication of the fiscal cliff deal is an extension of the cuts to the Estate Tax, which excludes the first $5 million of an inherited estate from taxation. In 2009, when a mere $3.5 million was excluded, less than three out of every 1000 estate transfers exceeded this threshold and were taxed; even when the excluded value was only $1 million prior to 2001, just 2% of estates were subject to the tax.
As exemplified by the Estate Tax, the tax code remains a vehicle primarily to preserve wealth among those who have it – rather than providing opportunities to build wealth among families in the lower-income brackets. Like the mortgage interest deduction (which will continue to allow tax filers to deduct interest paid even on second homes), the cuts to the Estate Tax also benefit the rich at the expense of the rest. Maintaining the 2011 cuts (a $5 million exclusion and a 35% rate) instead of returning to the 2009 thresholds ($3.5 million exclusion and 45% rate) would cost $119 billion over ten years – with the average taxable estate getting a $1.1 million break. The new law makes a slight improvement to the 2011 rules by increasing the statutory rate to 40%, but the massive exclusion will still benefit only a tiny proportion of families while creating huge costs for the public.
Preservation of the cuts to the Estate Tax won’t have the obvious impact on workers’ take-home pay that some of the other tax provisions will. Nevertheless, it’s emblematic of some of the inequities of the tax code that pose barriers to economic mobility. Initiatives like the Financial Security Credit, which would provide up to a $500 match for low and moderate income taxpayers who save in qualifying accounts, would create more accessible opportunities for saving that would help mitigate these disparities.
Farm Bill Extended
Lastly, the fiscal cliff negotiations yielded a hastily tacked on nine-month Farm Bill extension, enacted largely to prevent milk prices from doubling. This past summer, debates about a new five-year Farm Bill included significant cuts to SNAP – up to $16.5 billion, to be exact. The House version of the bill called for eliminating broad-based categorical eligibility – which would effectively require every state to reinstitute a $2000 asset limit for the program. As we’ve written at length, asset tests pose substantial barriers to both administrative efficiency and program access, without significant cost savings. Congress will surely revisit this debate as the new nine-month deadline approaches.