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White House Puts Human Face on Child Tax-Credit Debate

Budget: Clinton holds session with low-income workers. GOP lawmakers say $500-per-child benefit is for middle class.

July 11, 1997|RONALD BROWNSTEIN and JANET HOOK | TIMES STAFF WRITERS

WASHINGTON — They are working people one and all, but they make so little money that they pay little or no federal income taxes. Some are teachers, some are young police officers, others are blue-collar workers, and they earn about $24,000 a year or less.

These are the people who will be at the center of a huge argument between President Clinton and congressional Republicans as negotiators gather today to begin ironing out their differences over the details of the first major federal tax cut in 16 years.

Many issues divide the two sides, but one of the most politically explosive is a dispute over whether the bill's cornerstone benefit--a $500-per-child credit for families--should go to a large swath of the lower-middle class.

That dispute, which the White House escalated Thursday with an event spotlighting some of those who would lose the credit under GOP tax plans, thrusts to center stage the hard-pressed families who have been the most volatile voters in U.S. politics through the 1990s. And it underscores the most basic, politically charged question about the emerging tax bill: Who should benefit?

Republicans generally say the children's tax credit should go only to families who pay federal income taxes. Clinton staunchly opposes that idea because it would deny the credit to low-income working families who, while they may pay no income taxes, do pay substantial amounts in the payroll taxes that support Social Security and Medicare.

Gingrich Rejects Idea, Calls It New 'Welfare'

The issue is already inspiring some of the sharpest rhetoric of the tax debate. Republican leaders, such as House Speaker Newt Gingrich (R-Ga.), have accused Clinton of seeking to provide a form of "welfare" by allowing families with no income-tax liability access to the tax credit.

"We don't think a tax cut bill designed to help people who pay taxes should be turned into a welfare bill," Gingrich has declared.

The administration insists that argument is demeaning to low-income families who define themselves by the fact that they do work. To underscore this point, Vice President Al Gore and Democratic congressional leaders appeared at a news conference Thursday with working people--including a police officer, a medical technician and a receptionist--who would not be eligible for the children's credit under the GOP plan.

"These are the families that should have been first in getting a tax cut, not the ones that get left behind," Gore said.

To Democrats who argue that the working poor need relief from payroll taxes, Sen. Phil Gramm (R-Texas) argues that those taxes are different because they finance future benefits--health care and pensions in their old age--to the taxpayers.

"Those are not taxes, that is social insurance," Gramm said. "No one gets better return on payroll taxes than very low-income people."

This dispute, which will play out as House and Senate negotiators try to produce a compromise between their two versions of measures to cut taxes by $85-billion over the next five years, echoes the historic arguments between the parties over the "fairness" of tax legislation. But it revolves most precisely around the nature of the federal tax liability for millions of lower-income working families.

Low-Income Families' Burden Is Payroll Tax

While upper-income Americans pay most of their federal taxes in the form of income taxes, most of these low-income working families pay little in income taxes. That's partly because working poor families already have their federal income tax liability reduced, or eliminated, by the earned income tax credit, a 20-year-old federal tax break for low-income workers.

The result is that these low-income families pay a much higher share of their total federal tax burden in the form of the payroll tax, the 7.65% levy on all wages.

That fact is at the core of the argument. House Republicans focus on families who pay federal income taxes; in their version of the bill, a family with one child could take the $500 credit only if it had an income tax liability of at least that amount.

What's more, for families receiving the earned income tax credit, the House plan would require them to subtract that benefit before determining whether they have any income-tax liability. If families owe no income tax after that calculation--and many low-income families do not--they could not receive any benefit from the children's tax credit.

That means that under the House plan, a two-parent family with two children would not benefit from the children's credit unless the family's income was more than $24,385; they would receive the credit's full benefit only with income of $27,158 or more, according to calculations by the Center on Budget and Policy Priorities.

"It's hard to give tax relief to those who have already been forgiven from the burden of paying taxes," House Ways and Means Chairman Bill Archer (R-Texas) said at a Wednesday news conference.

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