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Democrats seek tax perks for slices of middle class

But how will they pay for the bevy of credits and deductions?

March 05, 2007|Joel Havemann and Molly Hennessy-Fiske | Times Staff Writers

WASHINGTON — After years of complaining that Republicans were cluttering the tax code with provisions that enriched the wealthy, leading Democrats in Congress now want to add tax credits and deductions to benefit narrow groups of largely middle-class constituents.

Among potential beneficiaries: people with elderly parents in nursing homes, new parents, college students, volunteer firefighters and organ donors.

All these goodies raise questions about how the Democrats can give away tax revenue while keeping their pledge not to deepen the government's deficit.

"A lot of these provisions may be well-intentioned," said Leonard Burman of the Tax Policy Center, a nonpartisan think tank. "But they drain the government of precious resources," thus aggravating the deficit or forcing Congress to raise taxes on everybody else, he said.

Sen. Charles E. Schumer (D-N.Y.) offered an expansive package of tax credits last month, designed to deliver $80 billion in tax savings to middle-class families during its first four years.

Schumer's legislation would double the $1,000 tax credit for children younger than 2 and expand the dependent-care tax credit to families with seniors living in institutions. The maximum credit -- 35% of expenses, capped at $3,000 for one dependent and $6,000 for two or more -- would be available to families with incomes of up to $75,000, not just $15,000 as now.

His bill also would give undergraduate and graduate students $2,500 more in tax credits.

The legislation's most expensive provision involves extending through 2008 the exemption of about 20 million people -- those with incomes of roughly $75,000 to $100,000 -- from the alternative minimum tax, a tax originally aimed at the very wealthy.

Schumer's bill was modeled on proposals by Third Way, a liberal Washington think tank that President Clinton helped found. Jim Kessler, the group's vice president for policy, said the goal of the tax credits was to help families with incomes of $40,000 to $120,000.

That group includes "people who are too wealthy to benefit from government grant programs and entitlement programs but are not earning enough so they can realistically afford paying for college and caring for kids and elderly parents without a lot of hardship," Kessler said. "These are families that are working and are generally successful, but they've got some huge humps to get over that put enormous pressures on their lives."

Democrats are also sponsoring a bill to provide a tax credit of up to $5,000 for costs associated with organ donation, including lost wages during convalescence from an operation, and another to make benefits paid to volunteer firefighters and emergency medical personnel tax-free.

Budget watchers such as Burman consider "tax expenditures," as they call tax breaks for targeted groups, the equivalent of government spending. To parents, a $1,000 tax credit for baby-sitting expenses isn't much different from a $1,000 check from the government. And the government's bottom line is the same whether $1,000 is deducted from revenue or added to spending.

"Tax expenditures" do carry one significant political advantage for lawmakers: Because they don't increase government spending outright, supporters can't easily be labeled "tax-and-spend" liberals.

But opponents say the tax credits do nothing to address the growing budget deficit.

"To take water out of one part of the bathtub and pour it into another part of the bathtub ... is not a way to solve the problem," said Grover Norquist, president of Americans for Tax Reform, a conservative group.

Schumer's proposal has been criticized as larding the tax code with credits that don't necessarily help middle-class families.

"All of these tax credits -- it confuses people. And it's not certain they provide the intended relief," said Robert Bixby, executive director of the Concord Coalition, a Washington group that lobbies for spending controls.

Some of the tax breaks might be counterproductive, Bixby added. Raising education tax credits, for example, might produce little more than higher tuition.

The Schumer package also could run afoul of Congress' "pay-as-you-go" rule, under which legislation that reduces revenue or increases spending must be offset, usually by provisions that cut spending elsewhere or raise taxes.

But the House can skirt its version of pay-as-you-go budgeting by mustering a bare majority to waive the rule. The Senate, which adopted so-called "paygo" two years ago, ruled that any tax cut, no matter what its impact on the deficit, was all right if it fit within the budget that Congress is supposed to adopt each spring. And even if it violated the budget, the provision would pass if it got the votes of 60 senators.

Schumer's staff said he planned to pay for the tax package by "eliminating the billions of dollars in tax breaks for the oil industry," closing the so-called tax gap by collecting delinquent taxes and raising tax rates for those earning more than $400,000, effectively repealing Bush tax cuts for the wealthy.

"We may not need to raise it back to pre-Bush levels," said Eric Schultz, Schumer's communications director. "But that rate should be higher so that we can provide some relief to the middle class instead."

Budget experts say it would be difficult to close the "tax gap" and to repeal tax breaks to oil companies.

Kessler of Third Way concedes that the most realistic funding source is the repeal of Bush's tax cuts, which he said would cover the cost of the tax credits and most of the cost of extending relief from the alternative minimum tax.

joel.havemann@latimes.com

molly.hennessy-fiske@latimes.com

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