Editor's note: this blog post was authored by Heather McCulloch, Manager of the Tax Policy Project of the Asset Funders Network. It originally appeared on the ACCESS to Financial Security site and is reprinted here with the author's permission.
It’s tax time, the perfect time to consider how tax code reforms can create an America that lives up to its promise of opportunity for all.
That’s the message of a new national initiative calling for a more inclusive, progressive, and equitable tax code — one that provides fair benefits for all households. Led by a network of grantmakers, the initiative is pulling together asset-building and equity advocates, researchers and tax experts, and organizations with deep roots in communities of color, including PolicyLink, to push for changes in a tax code that has become a driving force behind the nation’s soaring inequality.
Last year, more than half of the nearly $1 trillion that the federal government spent on tax benefits for individual households went to the wealthiest fifth of the country. These benefits — written into the tax code as deductions, credits, and preferential rates — subsidize higher-income households to build wealth, while offering few opportunities for lower-income households and households of color.
These tax subsidies are known to policymakers as “tax expenditures” because they’re a form of spending through the tax code. They have the same effect on the nation’s debt as spending on federal programs (i.e. revenue not collected and revenue spent have the same impact). Yet policymakers’ focus on reducing the national debt has resulted in deep cuts in spending programs, which mostly benefit low- and moderate-income households, while tax expenditures have been left largely untouched.
Tax expenditures are designed to advance worthy goals such as buying a home, encouraging college education, or supporting secure retirement. In other words, they should help build the long-term financial security of American families and contribute to economic stability and growth. But as structured, many tax benefits are out of reach for the people who need them most. If families do not own homes — and fewer than half of all households of color do — they are cut off from the benefits of home mortgage and property tax deductions. If workers do not have access to an employer-sponsored retirement savings plan — and only 40 percent to 50 percent of employees of color do — they cannot take advantage of tax benefits to encourage retirement savings. The list of such disconnects goes on.
Federal policies and investments can create an equitable tax code that helps all taxpayers to invest in themselves, their children, and their communities. Here are six ways to eliminate the inequities, lift families out of poverty, and support all taxpayers to invest in themselves, their children, and their communities. This list includes changes to the existing tax code that would make it more equitable, as well as policies to support wealth-building for low-income families by increasing their access to tax incentives.
1. Replace current home mortgage deduction with tax savings for all low-income households. Tax incentives for homeownership cost the federal government almost $200 billion in lost tax revenue in 2013, but few low-income and households of color benefit. In 2013, 70 percent of these tax benefits went to the wealthiest 20 percent of households and almost nothing to the bottom 40 percent. The majority of people of color don’t benefit because they don’t own a home or they don’t itemize on their tax returns. Turning the home mortgage deduction into a tax credit would make it more equitable as households could claim it, whether or not they itemize. But this doesn’t address the issue that a mortgage credit still encourages families to take on debt rather than build wealth through homeownership. Policies targeted to building wealth for low-income households should be prioritized if we are to address the wealth gap. A comparable credit for renters is also needed to make sure those who can’t afford to buy a home aren’t locked out of receiving wealth-building tax benefits.
2. Target higher education tax incentives to lower-income families. Higher education offers a critical pathway to prosperity for youth by increasing their earning potential. That’s why tax code provisions help families save and pay for college. These tax benefits — not Pell grants — are the largest form of federal student aid, and they go mostly to higher-income students. One exception is the American Opportunity Tax Credit (AOTC), which is accessible to more low- and moderate-income households. Tax code provisions that disproportionately benefit wealthier households should be streamlined, and the savings used to expand the AOTC and make it fully refundable and permanent, in order to reach more youth in need.
Making 529 college savings plans more progressive is another way to help low-income families deal with the rising cost of higher education. 529s were established through federal policy and are administered by states, with savings allowed to grow tax free; but, like other tax expenditures, they primarily benefit wealthier families. State-level innovations include measures to make it easier for lower-income families to enroll and contribute as well as efforts to incentivize savings for lower-income families through seed and/or matching funds.
3. Expand tax-code based incentives that are accessible to working families. In 2012, the EITC lifted 6.5 million people out of poverty. But millions of families may lose their benefits if improvements passed by Congress in 2009 expire in 2017. These improvements must be made permanent and the benefits must be expanded to more people, especially low-income workers who aren’t raising children. What’s more, Congress should pass the Voluntary Income Tax Assistance (VITA) Act. The Act would extend a program that provides reliable, timely tax preparation services at no cost to low-income households, enabling millions to claim the benefits to which they are entitled.
4. Support children’s savings accounts. Research shows that children with savings in their own name are more likely to succeed, particularly children of color and children from low-income families. One promising approach to supporting child savings is the ASPIRE Act, which has been proposed in prior sessions of Congress with bipartisan support. The Act would seed a savings account for every newborn child, providing an initial deposit and progressively matching contributions. Savings would grow tax free and could be used for post-secondary education, homeownership or retirement. Recent proposals by members of the House and Senate suggest an opening to advance child savings proposals. At the local level, cities and counties are already taking the initiative; read our previous story about a new, universal children’s savings program in Cuyahoga County, Ohio.
5. Make retirement savings incentives available to more workers. Millions of American workers are headed toward poverty in retirement because their employers don’t offer retirement plans and they earn too little to save through Individual Retirement Accounts (IRAs). Automatic IRAs are one solution proposed by retirement security advocates, legislators, and the Obama administration. The basic idea is to require all employers who don’t offer a retirement plan for their employees to set up an automatic IRA savings plan that would allow people to access tax benefits for retirement savings. Several states, including California, are pursuing similar approaches.
Workplace-based retirement savings plans give workers access to tax-benefited savings vehicles, but they don’t provide resources to save. The Saver’s Credit, passed in 2001, is designed to subsidize retirement savings among lower-income households, but most eligible households don’t claim it because it’s not refundable (a household can only receive a credit up to the amount of their tax liability). The Savings for America’s Future Act of 2013 would support millions of low-income and households of color to save by making the credit refundable and allowing for federal matching contributions.
6. Provide tax incentives for flexible savings so families can navigate financial emergencies. Families need flexible savings to handle financial emergencies – a broken down car, an unusually high heating bill, or the death of a family member – without going into a downward financial spiral. Flexible savings are particularly important for households of color who are unlikely to have any resources to address short-term emergencies. The Financial Security Credit Act of 2013 offers lower-income households a refundable tax credit (like the EITC) if they deposit their tax refund into an eligible savings account. By helping lower-income families weather financial emergencies as well as save for retirement, education expenses, or a down payment on a home, the legislation, if passed, would enable more families to deal with short-term financial crisis while staying productively engaged in a growing economy.
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It’s tax time, the perfect time to consider how tax code reforms can create an America that lives up to its promise of opportunity for all.
That’s the message of a new national initiative calling for a more inclusive, progressive, and equitable tax code — one that provides fair benefits for all households. Led by a network of grantmakers, the initiative is pulling together asset-building and equity advocates, researchers and tax experts, and organizations with deep roots in communities of color, including PolicyLink, to push for changes in a tax code that has become a driving force behind the nation’s soaring inequality.
Last year, more than half of the nearly $1 trillion that the federal government spent on tax benefits for individual households went to the wealthiest fifth of the country. These benefits — written into the tax code as deductions, credits, and preferential rates — subsidize higher-income households to build wealth, while offering few opportunities for lower-income households and households of color.
These tax subsidies are known to policymakers as “tax expenditures” because they’re a form of spending through the tax code. They have the same effect on the nation’s debt as spending on federal programs (i.e. revenue not collected and revenue spent have the same impact). Yet policymakers’ focus on reducing the national debt has resulted in deep cuts in spending programs, which mostly benefit low- and moderate-income households, while tax expenditures have been left largely untouched.
Tax expenditures are designed to advance worthy goals such as buying a home, encouraging college education, or supporting secure retirement. In other words, they should help build the long-term financial security of American families and contribute to economic stability and growth. But as structured, many tax benefits are out of reach for the people who need them most. If families do not own homes — and fewer than half of all households of color do — they are cut off from the benefits of home mortgage and property tax deductions. If workers do not have access to an employer-sponsored retirement savings plan — and only 40 percent to 50 percent of employees of color do — they cannot take advantage of tax benefits to encourage retirement savings. The list of such disconnects goes on.
Federal policies and investments can create an equitable tax code that helps all taxpayers to invest in themselves, their children, and their communities. Here are six ways to eliminate the inequities, lift families out of poverty, and support all taxpayers to invest in themselves, their children, and their communities. This list includes changes to the existing tax code that would make it more equitable, as well as policies to support wealth-building for low-income families by increasing their access to tax incentives.
1. Replace current home mortgage deduction with tax savings for all low-income households. Tax incentives for homeownership cost the federal government almost $200 billion in lost tax revenue in 2013, but few low-income and households of color benefit. In 2013, 70 percent of these tax benefits went to the wealthiest 20 percent of households and almost nothing to the bottom 40 percent. The majority of people of color don’t benefit because they don’t own a home or they don’t itemize on their tax returns. Turning the home mortgage deduction into a tax credit would make it more equitable as households could claim it, whether or not they itemize. But this doesn’t address the issue that a mortgage credit still encourages families to take on debt rather than build wealth through homeownership. Policies targeted to building wealth for low-income households should be prioritized if we are to address the wealth gap. A comparable credit for renters is also needed to make sure those who can’t afford to buy a home aren’t locked out of receiving wealth-building tax benefits.
2. Target higher education tax incentives to lower-income families. Higher education offers a critical pathway to prosperity for youth by increasing their earning potential. That’s why tax code provisions help families save and pay for college. These tax benefits — not Pell grants — are the largest form of federal student aid, and they go mostly to higher-income students. One exception is the American Opportunity Tax Credit (AOTC), which is accessible to more low- and moderate-income households. Tax code provisions that disproportionately benefit wealthier households should be streamlined, and the savings used to expand the AOTC and make it fully refundable and permanent, in order to reach more youth in need.
Making 529 college savings plans more progressive is another way to help low-income families deal with the rising cost of higher education. 529s were established through federal policy and are administered by states, with savings allowed to grow tax free; but, like other tax expenditures, they primarily benefit wealthier families. State-level innovations include measures to make it easier for lower-income families to enroll and contribute as well as efforts to incentivize savings for lower-income families through seed and/or matching funds.
3. Expand tax-code based incentives that are accessible to working families. In 2012, the EITC lifted 6.5 million people out of poverty. But millions of families may lose their benefits if improvements passed by Congress in 2009 expire in 2017. These improvements must be made permanent and the benefits must be expanded to more people, especially low-income workers who aren’t raising children. What’s more, Congress should pass the Voluntary Income Tax Assistance (VITA) Act. The Act would extend a program that provides reliable, timely tax preparation services at no cost to low-income households, enabling millions to claim the benefits to which they are entitled.
4. Support children’s savings accounts. Research shows that children with savings in their own name are more likely to succeed, particularly children of color and children from low-income families. One promising approach to supporting child savings is the ASPIRE Act, which has been proposed in prior sessions of Congress with bipartisan support. The Act would seed a savings account for every newborn child, providing an initial deposit and progressively matching contributions. Savings would grow tax free and could be used for post-secondary education, homeownership or retirement. Recent proposals by members of the House and Senate suggest an opening to advance child savings proposals. At the local level, cities and counties are already taking the initiative; read our previous story about a new, universal children’s savings program in Cuyahoga County, Ohio.
5. Make retirement savings incentives available to more workers. Millions of American workers are headed toward poverty in retirement because their employers don’t offer retirement plans and they earn too little to save through Individual Retirement Accounts (IRAs). Automatic IRAs are one solution proposed by retirement security advocates, legislators, and the Obama administration. The basic idea is to require all employers who don’t offer a retirement plan for their employees to set up an automatic IRA savings plan that would allow people to access tax benefits for retirement savings. Several states, including California, are pursuing similar approaches.
Workplace-based retirement savings plans give workers access to tax-benefited savings vehicles, but they don’t provide resources to save. The Saver’s Credit, passed in 2001, is designed to subsidize retirement savings among lower-income households, but most eligible households don’t claim it because it’s not refundable (a household can only receive a credit up to the amount of their tax liability). The Savings for America’s Future Act of 2013 would support millions of low-income and households of color to save by making the credit refundable and allowing for federal matching contributions.
6. Provide tax incentives for flexible savings so families can navigate financial emergencies. Families need flexible savings to handle financial emergencies – a broken down car, an unusually high heating bill, or the death of a family member – without going into a downward financial spiral. Flexible savings are particularly important for households of color who are unlikely to have any resources to address short-term emergencies. The Financial Security Credit Act of 2013 offers lower-income households a refundable tax credit (like the EITC) if they deposit their tax refund into an eligible savings account. By helping lower-income families weather financial emergencies as well as save for retirement, education expenses, or a down payment on a home, the legislation, if passed, would enable more families to deal with short-term financial crisis while staying productively engaged in a growing economy.
Heather McCulloch is the Manager of the Asset Funders Network's Tax Policy Project.