Taxes to rise unless Obama cuts extended

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San Francisco Chronicle
By: Kathleen Pender
October 26, 2010

Even if Congress extends the Bush-era tax cuts, federal taxes for almost all Americans will go up next year unless Congress extends several Obama-era tax cuts that also expire at the end of this year.

Most Americans don't even realize their taxes went down since Obama became president. In a New York Times/CBS News Poll last month, only 8 percent of respondents said they thought the Obama administration has decreased taxes for most Americans.

Although most Democrats in Congress favor extending the Bush tax cuts for couples making less than $250,000 and singles earning less than $200,000, they seem less enthusiastic about preserving all of Obama's tax cuts for individuals.

The cuts were part of the 2009 federal stimulus act, which has been criticized - mostly by Republicans - for failing to energize the economy.

The biggest was the Making Work Pay credit. This credit is worth 6.2 percent of earned income, up to a maximum credit of $400 per person per year ($800 for a married couple), in 2009 and 2010. The credit phases out above $150,000 in income for married couples filing jointly and above $75,000 for everyone else.

The credit started trickling in to most workers' paychecks in April 2009 in the form of reduced withholding for federal taxes. That amounts to about $7.70 a week in 2010, a sum that could be easily overlooked or overtaken by rising health care premiums or state taxes. Self-employed people can claim the credit on their tax return.

During the Bush era, Congress tried to stimulate the economy by sending most Americans a one-time check. But rather than spending it, many people saved their payment or used it to pay down debt and its impact was muted.

Last year, Congress decided that workers would be more likely to spend the money if it dribbled into their paychecks. "The idea was, dribs and drabs are more effective. The problem is, nobody noticed it. Nobody gives Obama credit," says Roberton Williams, senior fellow with the Tax Policy Center.

In his 2011 budget proposal, issued in February, Obama called for extending the Making Work Pay credit for one year at an estimated cost of $61 billion.

But "there is nothing actively moving on it. We haven't seen any interest in it and I think that's because it's associated with stimulus spending," says Clint Stretch, managing principal for tax policy at Deloitte Tax.

Impact on retirees
Because retirees and others without a job don't get the credit, Congress authorized a one-time payment of $250 to recipients of Social Security and certain other federal benefits in 2009, but not in 2010.

A bill in the House, HR5987, would give the same group of people another one-time payment of $250 to make up for the fact that there will be no cost of living increase in Social Security checks next year. Obama supports the bill, and House Speaker Nancy Pelosi, D-San Francisco, plans to bring it to a floor vote in November. But passage of the $14 billion measure, especially in the Senate, is by no means certain. "I think the deficit hawks will oppose it," says Williams.

Other tax cuts
The stimulus act included several other tax breaks for individuals that expire at the end of this year.

It expanded the earned income tax credit for low-income workers by making it more generous for families with three or more children and married couples. It also made the child tax credit (worth up to $1,000 per child) more available for low-income working families.

It replaced the Hope credit for college expenses with the much more generous American Opportunity Credit. This tax credit, unless extended, will revert to the Hope credit next year.

Obama has proposed extending some of these tax cuts for one year and making the others permanent.

Nick Kasprak, a policy analyst with the Tax Foundation, says Democrats "don't want to extend the Making Work Pay credit," but do want to extend most of the others.

Republicans don't want to preserve any of the Obama/stimulus tax cuts, but do want to extend the Bush-era ones, he adds.

Without support from Democrats, the Making Work Pay credit will disappear next year and workers will get a little less in their paychecks. The question is: Will anyone notice?

Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com. Read her blog at sfgate.com/pender.

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This page contains a single entry by CFED published on October 26, 2010 3:53 PM.

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