According to new Tax Policy Center estimates, the refundable tax credit for low- and middle-income households proposed by Sen. Kamala Harris (D-CA) would cut taxes in 2019 by an average of about $3,200 or 1.8 percent of after-tax income. However, her plan would be extremely costly. Unless Congress agrees to offset the expense with other tax increases, her plan would reduce federal revenue by nearly $3 trillion over the next decade and by $3.4 trillion over the following ten years.

Harris, a likely Democratic candidate for president, calls her bill the LIFT (Livable Incomes for Families Today) the Middle Class Act. It is a refundable tax credit that would:

• Match the first $3,000 of earnings for people who are not married; $6,000 if married;
• Phase out at a rate of 15 percent for single workers without children in the range from $30,000-$50,000. For married couples the credit would phase out from $60,000-$100,000, and for single workers with children it would phase out from $80,000 to $100,000.
• Could be delivered on a monthly basis; and
• Would be in addition to any other tax credits (such as the Earned Income Tax Credit or Child Tax Credit).

Her credit would provide generous assistance to low- and middle-income workers. About half of households would get a tax cut and nearly all the benefit would go to those making $87,000 or less.

Who would get a tax cut?

Households in the lowest 20 percent of the income distribution (who make $25,500 or less) would receive an average tax cut of $3,200, or 12.6 percent of their after-tax income. About 56 percent of that group would get a tax cut. Many of those who would not are older adults who have no wage income.

Two-thirds of those making between $25,500 and $50,000 would get a tax cut, averaging about $3,200 or about 6.3 percent of their after-tax income. The plan would cut taxes for about half of middle income households (making between $50,000 and about $87,000), by an average of about $3,500, about 3 percent of their after-tax income.

The plan would be easier to administer than today’s EITC because it would be based on the filing status of the tax unit (single, head of household, or married) instead of the number of children living in the home. Thus, in cases where children live in different households during a year (say with divorced parents or with grandparents) taxpayers won’t have to calculate where each child lives for the majority of the time—a test for EITC eligibility.

Economic effects   

The very high phase-in rate provides a large incentive for some to enter the workforce – and also delivers the full credit to almost everyone who qualifies, including very low-income workers. Most people who work earn at least $3,000.

The bill’s economic effects will depend crucially on whether, and how, it is financed. Harris says she wants to fully pay for the plan. However, the two ideas she has proposed—repealing provisions of the Tax Cuts and Jobs Act that benefit taxpayers with income in excess of $100,000 and an unspecified tax on large financial institutions—would fall far short of that goal.  

Revenue offsets

TPC estimates that, without offsetting revenue increases, the bill would boost the economy over the first few years by putting more money in the hands of low- and moderate-income people likely to spend it. Its work incentives also are likely to increase the number of low- and moderate-income people looking for employment or the number of hours they work. However, because the credit would phase out, it would raise the effective marginal tax rate on higher-income people, which could encourage them to work less.

Because Harris’s tax cuts would add significantly to the budget deficit, the bill would crowd out private investment and, over the medium and long term, slow economic growth.

If the bill is paid for with offsetting tax hikes, it would generate much less short-term stimulus but also be less of a drag on longer-term growth.

Harris’ bill is extremely ambitious and, in many ways, an improvement over the today’s EITC. But it also would be very expensive at a time when next year’s budget deficit is expected to top $1 trillion.