Harry Reid joins Republicans in scuttling a long-negotiated tax package, and we can all speculate as to what political game he is playing. Now the White House has stepped in to block the back-up deal Reid was trying to make. But in the end, it won’t matter. Here’s why.
Unless you’re a policy hound, you may not have been following this drama. Legislators have been working for months on a tax bill to reinstate now-expired tax breaks on which millions of middle-class Americans count. There are 55 such tax breaks, which range from a credit for teachers who buy classroom supplies to various business credits. (The home mortgage interest deduction is not at issue in this package.)
Two of the most widely used credits go to filers with lower incomes, however: the earned income tax credit (EITC) and the child tax credit.
The EITC, in particular, functions as a form of subsidy. A filer must have an earned income to qualify for it, but the EITC results in a filer receiving more than he would have had to pay in federal income tax to begin with. The EITC is one of the principal ways nearly half of American tax filers pay no net income tax – but it goes beyond that to yield a net gain to the claimant.
Americans can be ambivalent about the wisdom of the EITC where legal citizens are concerned. But in the wake of Obama’s executive amnesty proclamation, Republicans in both houses have been united in their opposition to making the credit available to millions of newly protected illegals.
This isn’t a small-change issue. In 2008, the most recent year for which I could find numbers, 25 million tax filers received the EITC (out of 142 million total filers). The total payouts in 2008 amounted to $51.6 billion. If even half of the 4-5 million newly protected illegals filed for the EITC, their claims would drive that figure up by as much as 10%.
But there’s an underlying problem to compound our concerns. The EITC has resulted in net payouts of nearly $600 billion over the last decade, and according to an IRS internal audit in 2013, as much as 25% of EITC payouts are bogus. The audit determined that in 2012 alone, $13.6 billion went to bogus claims – a figure bigger, as the Washington Times notes, than the budgets of some high-profile federal agencies like the EPA.
Executive amnesty will undoubtedly have the effect of encouraging a flood of new EITC claims from illegals. Says Politico:
For years, the GOP has railed against undocumented immigrants who claim the child tax credit, and Obama’s immigration order raised the prospect they would begin claiming the EITC, as well. If Republicans agreed to extend them now, it would look like they were voting to expand government benefits to illegal immigrants.
What’s more, the EITC is notorious among Republicans for fraud. It has one of the highest rates of improper payments of any federal program. How would they sell that to rank-and-file Republicans in the House?
Some Democrats worried that the only way Republicans would ever agree to extending the [tax breaks] is if they included tough new rules aimed at preventing illegal immigrants from claiming them. So they dropped the idea, figuring that was better than either risking a crackdown on immigrants trying to claim the breaks or not getting a deal at all.
Republicans and Democrats alike then put aside cherished priorities to try to cobble together a back-up deal in the aftermath of the Obama amnesty. As the Politico story indicates, some of Harry Reid’s Democratic allies were taken by surprise at his willingness to give up even tax credit provisions he had negotiated himself, such as a federal tax credit for state sales taxes (which is of special concern to Nevada, along with other states that have no state income tax).
It seemed that the legislators were making progress on an acceptable back-up deal – until the White House weighed in to quash it with a veto threat.
Now Congress has a couple of weeks to figure out what to do. It doesn’t want to let 2014 expire without the tax breaks reinstated. And that is no doubt the key to all the political shenanigans; as Politico puts it (emphasis added):
Many lawmakers in both parties want to renew by the end of the year, amid warnings from the IRS that failing to act would disrupt the upcoming tax filing season.
It would indeed disrupt the upcoming tax filing season, for millions of tax filers. Which is why congressional Democrats are going to stand aside and let this be an Obama-versus-Republicans confrontation – and why Republicans are going to quietly knuckle under and accept the prospect of more millions of illegals filing for EITC handouts, secure in their protection from the Obama administration.
That’s the outcome described by Politico’s tag line:
Both sides agree the most likely outcome is the one neither want: A simple one-year status quo extension of all the breaks.
Neither Republicans nor Democrats will get movement on their preferred policy pushes (such as a package of tax cuts the GOP had been making headway on in earlier negotiations). But Obama will get what he wants: de facto benefits for his protected illegals.
Government is so up in our Kool-Aid, with all its provisions, incentives, disincentives, and “breaks,” that it can’t twitch the smallest muscle without rewarding some and punishing millions of others. If you want to know why Obama’s got it like that – why he can do anything he wants – it’s because of that. It’s because government has you, with your little income tax return and your wearying struggle to keep up with rule changes, over a barrel.