Part III: Plan B

Economic-RecoveryPart III: Plan B

Yesterday, Speaker John Boehner introduced a “Plan B” approach to addressing the Fiscal Cliff.  As the December 31, 2012 deadline approaches the President and the Speaker’s teams are negotiating an agreement to keep the nation and our economy from going over the looking “fiscal cliff.”

The Speaker’s Plan B proposal seeks to avoid tax hikes on individuals with incomes over $200,000 and family households over $250,000.  Below are bullets of what Plan B offers as well as estimates of what it would mean.

The Tax Proposals in Plan B would:

  • Raise $300 billion from high-income households;
  • Provide households with incomes over $1 million a tax cut averaging $50,000 per year;
  • Be less than $400 billion in high-income revenue compared to the Senate middle-class tax cuts bill;
  • Make current estate tax levels permanent;
  • Raise taxes by an average of $1,000 on 25 million working families with children and students because it doesn’t continue the American Opportunity Tax Credit or improvements to the Child Tax Credit and Earned Income Tax Credit;
  • Discontinues tax incentives for business, like the Research & Development credit, energy incentives, and temporary measures like bonus depreciation.

Consequences of Moving To Plan B Include:

  • The $300 billion raised in Plan B is less than one third of the initial Republican offer and based off preliminary estimates that show it is $400 billion less than what would have been raised by repealing all of the 2001/03 tax cuts for incomes over $1 million;
  • 0.3 percent of households making over $1million would get tax cuts averaging $50,000 because they would get a tax cut on their first million rather than the first $250,000 and avoid reductions in tax benefits due to the Personal Exemption Phaseout (PEP) and the Itemized Deduction Phaseout (Pease) provisions.  The average tax cut for households with incomes between $200,000 and $500,000 would be $360;  (see Table Below)

Income Group

Average Annual Tax Cut Relative to the President’s Approach

Share   of Additional

Tax Cuts

Below $200,000

$0

0%

$200,000-$500,000

$360

6%

$500,000-$1 million

$11,000

25%

Above $1 million

$50,000

69%

Estimate of what the tax cuts mean by income bracket based on the President’s Plan.

  • Seventy percent of the $400 billion lost by increasing the expiration threshold from $250,000 to $1 million compared to the Senate bill would go to households with incomes over $500,000;  that number grows to ninety percent when including incomes between $250,000-$500,000
  • Leaves in place a sequester (budget cuts) that threaten education, research, and national security;
  • Pushes 2 million Americans off unemployment insurance benefits starting in January;
  • At Christmas time, Plan B would cut off benefits for 2 million workers searching for jobs, something Congress has never done before when unemployment was still 7.7%;
  • Cuts reimbursements for doctors seeing Medicare patients by 27 percent;
  • 70 percent of the $400 billion lost by increasing the threshold from $250,000 to $1 million would go to households making more than $1 million.  More than 90 percent would go to households with incomes over $500,000;
  • Provides a tax cut of $1 million per estate for the wealthiest 3 in 1,000 estates, all valued at more than $7 millio  n per couple. Would spend $120 billion over the next 10 years on additional tax cuts for the wealthiest 3 in 1,000 estates. The large majority of that amount would be spent on the 1 in 1,000 estates valued at more than $5 million.
  • Less than 0.5 percent of the benefits of Plan B would go to business and farm estates valued at less than $5 million: The Tax Policy Center estimates that only 40 businesses or farms in the entire country that are valued at less than $5 million would owe any estate tax under the President’s proposal. Less than 0.5 percent of the additional tax cuts under the Plan B estate tax plan would go to these farms and businesses.
  • Raises income taxes on 25 million middle-class families making less than $250,000 by an average of $1,000 apiece. This includes:
    • College: Eliminates a tax incentive for college education for 11 million families, raising their taxes by an average of $1,100.
    • Child Tax Credit: Reduces the refundability of the child tax credit for 12 million working families, raising their taxes by an average of $800.
    • Earned Income Tax Credit: Eliminates the increase in the EITC for larger families and increases the EITC marriage penalty, together raising taxes on 6 million families by an average of $500.

Plan B would not continue critical tax incentives for businesses and doesn’t extend key provisions that Congress routinely passes with strong bipartisan support, such as tax credits for clean energy and the Research and Development Tax Credit.

These incentives would not be available in 2012 or 2013 under Plan B.  In addition, it would not extend the 50 percent bonus depreciation that was in effect in 2012 and is a cost-effective temporary measure to support investment and growth. Plan B also:

  • Does not address other elements of the fiscal cliff that include the expiration of emergency unemployment insurance benefits, the Sustainable Growth Rate (SGR) for Medicare or the sequester (across the board budget cuts). In addition, it does not do anything for jobs, or significant deficit reduction;
  • Would mean 2 million Americans will lose their emergency unemployment benefits in January because it doesn’t extend emergency unemployment insurance (UI) for Americans looking for jobs.
  • A 27 percent cut in doctor’s pay in Medicare.  Plan B doesn’t fix the Sustainable Growth Rate formula (SGR) or “doc fix,” continuing uncertainty for doctors and patients.  Doctors will face a payment cut equal to $14 billion.  This would jeopardize the care for 50 million people with Medicare;
  • Keeps the nation on course to default our debt, heightening uncertainty for businesses and families.
  • Does not replace the defense sequester, which includes a 9 percent across-the-board spending cuts which amounts to about $500 billion in cuts;
  • Leaves in place the 8 percent cuts for non-defense discretionary spending, which would impact research and education.  The Office of Management and Budget (OMB) forecast that the sequester would cut domestic non-defense spending by about 8 percent.  This would mean:
    • About 100,000 children would lose access to Head Start;
    • Some 10,000 special education teachers and related staff would be out of jobs;
    • Close to 700,000 women and children would lose the nutrition assistance they need;
    • And research and development would have about 700 fewer new grants from the National Institutes of Health and up to 1,500 fewer grants from the National Science Foundation.
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