Jacquelyn Martin/AP Photo
Silvestre, 6, of Washington, sleds over a snow bump on the hill at the U.S. Capitol, as schools are closed due to a winter storm, January 16, 2024.
Often in politics, you see politicians from opposing parties explain the compromises they make with one another differently to different audiences. But I’m not sure I’ve seen anything quite as stark as the tax deal reached Tuesday by House Ways and Means chair Rep. Jason Smith (R-MO) and Senate Finance Committee chair Sen. Ron Wyden (D-OR). What they separately describe in the announcement of the agreement does not sound like the same deal.
Wyden highlights how “fifteen million kids from low-income families will be better off” from an expansion of the Child Tax Credit (CTC), as well as a change to the Low-Income Housing Tax Credit that “will build more than 200,000 affordable housing units.” Smith doesn’t mention either of these specifically, but has much to say about how the deal “locks in over $600 billion in proven pro-growth, pro-America tax policies.”
It’s to be expected that Democrats and Republicans, talking about a deal that trades a Democratic priority (Child Tax Credit expansion) for a Republican priority (business tax cuts), would highlight the particular partisan victories. But let’s go back to what Smith said about locking in $600 billion. That doesn’t match the topline reporting about the deal, which has a total cost of $78 billion, fully offset by curtailing the pandemic-era Employee Retention Credit.
It does, however, resemble the Joint Committee on Taxation score of the deal, which was released last night. And when you read that, you can understand why some progressives, including some of the biggest backers of an expanded CTC, are opposed to this deal. Because it is aggressively tilted in the direction of corporate tax breaks.
The final version of the Tax Relief for American Families and Workers Act was pretty close to the expectation. There are some additional bells and whistles in addition to the main CTC-for-corporate-tax-cut swap, including about $6 billion to expand the developer tax credit for low-income housing, $5 billion to make payments to victims of the East Palestine, Ohio, train disaster tax-exempt, and roughly $1.5 billion to raise the threshold for businesses to report 1099-NEC or -MISC income (a straight denial of information to the IRS which could also increase the trend of misclassification that strips part-time workers of benefits). But the main event here is the trade that negotiators have been trying to make for a year.
The changes to the CTC—and I explained this all last week before it was released, so you can go read that for the details—mostly improve the refundability of the credit, meaning the ability for families with no tax liability to receive it. Multi-child families with more than $2,500 in annual income will be better off, and while that means the lowest-income families are left out, it does get more of the credit to, as Wyden said, more than 15 million children.
But reporting like this piece from Vox, which claims that after 2025 “poor taxpayers get the same $2,000 credit as everyone else,” is incorrect. The CTC expansion in this deal is only operative for three tax years. You can see this quite clearly in the JCT score, where the CTC costs a total of around $33.5 billion in 2024-2026, and then stops abruptly after that.
In fact, what we know is that, after the expiration of the Trump tax cuts in 2025, the CTC is scheduled to go back to only $1,000, without these changes to refundability. So the fate of the CTC after this modest three-year boost (about $11 billion per year) will be dependent on the 2024 elections.
On the business tax side, there are four main benefits: a full credit for domestic research and development, added business deductions for depreciation and amortization costs (in general, a gift to private equity firms by subsidizing debt), an immediate deduction for capital expenses known as bonus depreciation, and an increase in “Section 179” small-business capital expensing. That last one is made permanent, though it’s relatively minor (about $2.5 billion in the first ten years).
Settling for less now makes an unequal trade more likely in a future under divided government.
The other three are quite a bit bigger but generally phase out at the end of 2025 (although the R&D credit is made retroactive all the way back to 2022, and partial bonus depreciation is kept on for a couple years more). And the JCT score lays out exactly how expensive this all is, and why Jason Smith is talking about $600 billion in tax credits.
In the years when these three credits are mostly operative, between 2024 and 2026, they cost the government $177 billion, outstripping the cost of the CTC expansion in that period by more than 5 to 1. Because a credit like bonus depreciation, which allows for immediate expensing rather than waiting for the value of the capital expenditure to depreciate, pulls forward tax deductions that would be taken later, the JCT score has the effect of bringing in government revenue after 2025. The same is true of the score of the R&D tax credit and the depreciation and amortization credit.
As the Institute on Taxation and Economic Policy explains, “Since many of these provisions deal with the timing of when tax liabilities occur, extending them temporarily means that the government reaps back some of the losses after the extensions expire.” But of course, Congress rarely lets a business tax credit expire. If extended again, they will pull forward more tax credits, and so on. So the revenues never really get realized.
These business tax credits were actually eliminated to help “pay for” the Trump tax cuts. Republicans knew all along that they could get them back down the road, and that they wouldn’t pay for anything.
That’s why Smith can boast about $600 billion. He knows that these credits are unlikely to go away, and previous JCT estimates for making them permanent put it at more than $500 billion. That’s what you’re trading for a three-year, $33 billion CTC fix that is positive in trend but modest in impact, even if extended.
The point is that, while the claim is that there is “parity” between the short-term CTC expansion and the business taxes, that is an artifact of the way things are scored. The true cost of the business tax cuts are hidden by the short-term expiration. In the time period when all the tax credits are actually in place, the business tax changes are five times more costly than the CTC changes.
Maybe people think that giving millions of poor families with kids help in exchange for a far larger benefit for corporations is worth it. Maybe they think investment tax credits are good, and this is all win-win. (In my view, subsidizing debt over equity has really boosted private equity’s pernicious presence in the nation, and the kind of “research” that is deducted in the R&D tax credit is frequently not research at all.)
But the problem with the lack of parity is all about the Trump tax cut expiration. As I said last week, settling for less now—much less, as the JCT score makes clear—makes an unequal trade more likely in a future under divided government, which is quite possible. After 2025, the CTC is chopped in half. If this deal becomes a “tax extender” precedent, in 2026 Republicans would get their favorite business tax credits and Democrats would get a little more refundability on a $1,000 CTC. Democrats would have to give up more to get the CTC back to its previous level; in fact, the Trump campaign has a bunch of other corporate tax cuts in mind should they win the election.
Who knows if this deal can pass in time to take effect in the upcoming 2023 tax season, if ever. Sen. Mike Crapo (R-ID), the ranking Republican on the Senate Finance Committee, is already asking for changes to make it even more generous to businesses. That’s in part a function of the dissembling that there is “parity” in the deal. The truth is that this is not an equal trade. And it may extend that inequity well into the future.
