By Marshall Fitz and Sarah Jane Glynn
By next month Congress must extend the 2012 payroll tax cut to help boost our nation’s economic recovery. In 2011 this tax cut resulted in 122 million American households boosting their take-home-pay worth to the total tune of $120 billion. The extension and expansion of the payroll tax holiday through 2012 would put an average of $1,426 in the pockets of U.S. households and could create more than 1 million new jobs.
Some members of Congress, however, are looking to offset the lost revenue in callous and counterproductive ways so that they don’t have to raise taxes on millionaires by a single penny. A disturbing number of conservatives are proposing that American-born children in low-income immigrant families should be the ones to foot the bill. Their proposal is economically self-defeating and smacks of the class warfare conservatives deride.
First the facts. Congress enacted the Child Tax Credit in 1998 to help keep America’s children from falling into poverty by allowing families with children to reduce the amount of federal taxes that they owe. Because the objective of the credit is to protect children in low-income families, Congress only requires the Internal Revenue Service to ensure that the child being claimed is a U.S. citizen or legal resident alien.
Immigrant parents of American-born children can claim the Child Tax Credit using an Individual Taxpayer Identification Number, which enables immigrants who are not eligible for Social Security numbers to file and pay federal taxes. In practice, this means that undocumented workers whose wages are taxed and who file federal income tax returns are eligible to claim the credit on behalf of their U.S.-citizen children.
Conservatives now want to help pay for the payroll tax holiday by stripping the ability of these Individual Taxpayer Identification Number tax filers to claim the credit. Rep. Sam Johnson (R-TX) has introduced a bill with 36 Republican co-sponsors titled the “Refundable Child Tax Credit Eligibility Verification Reform Act,” which would require taxpayers to provide their Social Security numbers in order to claim the portion of the Child Tax Credit that is refundable. In other words, it would disqualify low-income American children of undocumented parents from receiving this economic relief.
How the Child Tax Credit works
Low-income families often owe less in federal income taxes than the amount of child tax credits they can claim. In these cases they may be eligible for the Additional Child Tax Credit—the portion of the credit that is refundable. The refundable amount is designed to incentivize hard work by linking the credit to earnings: The more the parent earns from working, the larger the available credit. As of 2009 the value of the Additional Child Tax Credit refund is equal to 15 percent of earnings above $3,000 and cannot exceed $1,000 per child.
Imagine a single mother with two children, working full time for minimum wage with a yearly income of $15,000. Federal, state, and local payroll taxes are withheld from her paychecks, but her income is too low to owe federal income tax. (Filers who are not liable for federal income tax have usually paid other federal taxes such as Social Security and Medicare payroll taxes, as well as state and local taxes.) The Additional Child Tax Credit, however, makes her eligible for a $1,800 ($15,000 minus $3,000, times 0.15 = $1,800) refund to help defray the costs of raising her two children. A similar parent working in a higher-wage job who has sufficient federal income tax liability would be able to claim the full $1,000 per child.
If this woman were an undocumented worker whose children are U.S. citizens, when she filed her taxes using an Individual Taxpayer Identification Number, or ITIN, she would be eligible to receive this refund under current law. According to a report by the Treasury Department’s inspector general, in 2010 there were about 2.18 million taxpayers like this woman who filed with ITINs and claimed a refund. That means millions of American children rely on these parents’ refunds to put food on the table, buy school books and clothes, and shelter them.
Approximately $4.2 billion in refundable credits were issued in 2010 to ITIN filers, representing about 15 percent of the total Additional Child Tax Credit refunds paid. These same 2.18 million filers also contributed more than $7 billion in federal taxes toward Medicare and Social Security, programs from which they will never recoup benefits, meaning the U.S. Treasury still comes out ahead.
Harsh and counterproductive consequences
The average household income for ITIN filers claiming Additional Child Tax Credit refunds in 2010 was about $21,240. This is less than half the 2010 median household income in the United States of $49,445, and would mean that a family of four with two children was living below the poverty line. Latino children are more likely to live in poverty than any other racial or ethnic group, and more than half of the 6.1 million Latino children in poverty are the U.S.-born children of immigrants.
These are the more than 2 million families threatened by this assault on the ACTC—hard-working families with children who are U.S. citizens. This tax increase could harm as many as 4 million of these American children already living on the economic margin. At a time when our nation has the largest number of people living in poverty since data were first collected 52 years ago after the deepest recession since the 1930s, tipping the scales against low-income children is not only immoral but also bad economic policy.
Federal assistance to lower-income families has a stimulating effect on our economy because these families are more likely to spend these funds on the necessities of daily life rather than saving them. Every dollar spent on a payroll tax cut generates $1.25 of economic growth. According to the Congressional Budget Office, refundable tax credits to low- and middle-income families have the second-highest positive impact on the economy out of all the current fiscal policy options. Only increased aid to the unemployed provides a bigger economic boost.
Tax refunds for lower-income families and payroll tax cuts are both important fiscal policy strategies. Terminating one policy to pay for the other is like robbing Peter to pay Paul and will cause more harm to our economy in the process. While Congress considers ways to offset the cost of extending the payroll tax cuts, denying tax credits to the parents of American children should not be among the options.
It makes zero economic sense to raise taxes on those who are already disproportionately likely to be living in poverty and who are certain to pour those additional resources back in to the economy.
An obvious alternative
The payroll tax cut extension is expected to cost $120 billion, while by his own admission Rep. Johnson’s “Refundable Child Tax Credit Eligibility Verification Reform Act” is expected to save at best only $24 billion over 10 years. What if, instead of singling out a subset of American children to take food out of their mouths, we asked millionaires to pay their fair share in taxes?
America’s millionaires currently pay an average tax rate that is significantly lower than what it was in the mid-1990s. Senate Democrats have proposed a 1.9 percent surtax on adjusted gross income more than $1 million, which would generate $155 billion over 10 years. A paltry 0.2 percent surtax on millionaires would result in the same savings as denying Additional Child Tax Credits to the citizen children of immigrant parents.
Congress should be asking themselves who benefits from keeping taxes low for millionaires (answer: no one but the millionaires in question), and who will benefit from the payroll tax cuts (answer: the entire economy through increased incomes and job creation). In spite of the political rhetoric, immigrants and their children contribute positively to the economy and will continue to do so in the future. Asking poor children to bear the brunt of these costs while millionaires continue to enjoy tax breaks is cruel and poor public policy.
Marshall Fitz is Director of Immigration Policy at the Center for American Progress. Sarah Jane Glynn is a Policy Analyst with the Economic Policy team at the Center.