Kamala Harris' Proposed 'Tax Cut' for the Middle Class Manages to Cost Both Money and Jobs
The California senator's plan to create a new refundable tax credit is bad policy, but it says a lot about her politics heading into 2020.
The government may still be shut down, but Congress is finally back in session, and Sen. Kamala Harris (D–Calif.) has seized the opportunity to introduce her latest legislative reform, the awkwardly named Livable Incomes for Families Today (LIFT) the Middle Class Act.
The bill, in brief, would offer all families earning less than $100,000 as much as $6,000 in refundable tax credits.
The details of the proposal were first floated back in October. Its formal introduction into the Senate on Thursday has given Harris the chance to tout her idea as a massive tax cut for the middle class—standing in contrast, she says, to the GOP's habit of just slashing rates for the wealthy.
"Instead of more tax breaks for the top one percent and corporations, we should be lifting up millions of American families," says Harris in a press release. "A real tax cut for middle class families is a good place to start. That is why the 'LIFT the Middle Class Act' is my first priority in the new Congress."
That Harris, a progressive Democrat, would be kicking off this legislative session by touting a huge tax cut is interesting, to say the least. At first glance, her idea might even sound like something libertarians could get behind. But a closer look at the "LIFT the Middle Class Act" reveals an expensive, needlessly complex piece of legislation that has much more to do with boosting the California senator's presidential ambitions than with creating good policy.
Harris' bill works by matching each dollar of earned income—defined either as wages, take-home pay for the self-employed, or Pell grants—with a dollar of refundable tax credit, capped at $3,000 for an individual or $6,000 for a married couple. Because this is a refundable tax credit, people who have no tax liability would still benefit.
That adds up to an eye-popping 10-year price tag of $2.7 trillion.
"Given the vast number of people in the U.S and the fact that the tax credit is refundable, it ends up having a pretty significant fiscal cost," says Kyle Pomerleau of the Tax Foundation. Harris' proposal, he tells Reason, would cost more than similar refundable tax credit programs like the Earned Income Tax Credit (EITC), which offers refundable tax credits to low-income working Americans.
Harris also has made rumblings that she would want her proposal to be revenue-neutral, meaning that this $2.7 trillion in forgone revenue would have to be made up for with tax increases elsewhere.
In addition to the cost, Pomerleau says that Harris' proposal would have a perverse effect on overall labor force participation, thanks to the way it winds down benefits as people begin to earn more.
Harris' $3,000 tax credit for individuals starts to taper off at a rate of 15 percent once a person's income hits $30,000. That means an individual earning $40,000 would only get a $1,500 tax credit, while someone earning $50,000 would get nothing. It's a similar story for married couples, whose tax credit starts declining once they hit $60,000 in income.
"The phase-outs that this credit hits people with are pretty significant and affect a lot of people," says Pomerleau, arguing that this tapering off creates an implicit marginal tax rate, reducing people's willingness to work and costing the economy 827,000 full-time equivalent jobs.
Harris' proposal also faces criticism from the left.
Slate's Jordan Weissman, for instance, criticizes the LIFT credits for showering benefits on people who already have jobs while doing nothing to help the poorest Americans who have no source of income at all.
Weissman also took issue with how similar Harris' proposal is to another federal program, the EITC, writing that "it's not clear why you'd want to add even more complexity to our hard-to-navigate welfare state by creating a totally new benefit rather than modernize and expand the one that already exists."
That would indeed be a flaw in the bill—if Harris' goal is to produce good policy. But if the likely presidential candidate's true purpose is to boost her political profile, the LIFT the Middle Class Act makes perfect sense.
Proposing to expand an existing tax credit does not have nearly the profile-raising potential of creating a whole new credit Harris can promote as her idea alone. That'd be especially true of any attempt to expand the EITC, an idea that's tarred by the endorsements it has recieved from prominent conservatives, like former Rep. Paul Ryan (R–Wis.), or the Heritage Foundation's Stephen Moore.
Starting from scratch has allowed Harris to explicitly frame her bill as a clear alternative to a Republican tax policy while dangling more benefits in front of likely Democratic voters.
In this way, Harris' bill is strikingly similar to her housing reform proposal from July 2018, which likewise offered a bunch of ill-conceived refundable tax credits to cost-burdened renters in high-cost urban areas. That bill, as I argued at the time, would end up spending a lot of money on progressive-leaning voters in blue states while exacerbating existing issues of housing affordability.
This, it seems, is Harris' modus operandi heading into 2020: proposing refundable tax credits to rile up the Democratic base, while leaving the messy business of crafting serious policy for a later date.
